Narrow definition of interest under the Interest Tax Act excludes overdue compensation on discounted bills of exchange.

Overdue amounts received by banks on delayed payment of discounted bills of exchange are not "interest" under the Interest Tax Act, 1974. The Court held that section 2(7) uses a restricted definition confined to interest on loans and advances, with discounting transactions treated separately, so the taxable nexus must be direct with a loan or advance. Amounts arising after default in payment of a discounted bill are compensation under the Negotiable Instruments Act, not interest on a lending transaction. Mere accounting treatment or description cannot change the true character of the receipt, and such amounts are therefore outside interest tax.

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Issues: Whether compensation or overdue interest received by banks on delayed payment of discounted bills of exchange is "interest" chargeable to tax under the Interest Tax Act, 1974.

Analysis: Section 2(7) of the Interest Tax Act, 1974 defines "interest" in a restricted manner as interest on loans and advances, while separately including discount on promissory notes and bills of exchange. The statutory scheme shows that loans and advances are distinct from discounting transactions, and the use of the word "on" requires a direct nexus with a loan or advance. Amounts received after default in payment of a discounted bill arise from the statutory liability to compensate under Section 32 of the Negotiable Instruments Act, 1881, and not from any loan or advance made by the bank. The wider definition of interest under Section 2(28A) of the Income-tax Act, 1961 reinforces that the Interest Tax Act uses a much narrower taxable event. Mere accounting treatment or description of the receipt as interest does not alter its true character.

Conclusion: Such overdue amounts are not "interest" within Section 2(7) of the Interest Tax Act, 1974 and are not liable to interest tax; the issue is answered in favour of the assessee and against the Revenue.

Ratio Decidendi: Under the Interest Tax Act, 1974, only receipts having a direct nexus with loans and advances are taxable as interest, and compensation arising on default in payment of discounted bills of exchange is outside that definition.

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