Interest-tax recovery cannot be grossed up or rounded beyond statutory authority, and regulatory approval cannot cure the illegality.

Section 26C of the Interest-tax Act was treated as an enabling provision allowing banks to recover only the interest-tax actually payable from borrowers; it did not authorise grossing up or rounding the burden to the next higher 0.25 per cent., so the challenged recovery method was unlawful. Maintainability objections based on locus standi, delay, and the contractual form of the loan relationship failed because the dispute concerned a continuing, publicly significant illegal recovery. The Reserve Bank's approval under section 35A of the Banking Regulation Act could not enlarge the scope of the taxing statute or cure a recovery beyond statutory authority. The impugned method was rejected and the appeals were dismissed.

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Issues: (i) Whether section 26C of the Interest-tax Act, 1974 authorised banks to round up the enhanced interest rate to the next higher 0.25 per cent. while passing on the burden of interest-tax to borrowers; (ii) whether the challenge to the banks' action was defeated by absence of locus standi, delay, or the contractual nature of the dispute; and (iii) whether the Reserve Bank of India could validly approve or authorise the impugned rounding off under section 35A of the Banking Regulation Act, 1949.

Issue (i): Whether section 26C of the Interest-tax Act, 1974 authorised banks to round up the enhanced interest rate to the next higher 0.25 per cent. while passing on the burden of interest-tax to borrowers.

Analysis: Section 26C was treated as an enabling provision meant only to permit recovery of the tax burden from borrowers to the extent of the interest-tax actually payable. The statute did not authorise the banks to load the tax on a grossed-up basis by adding further interest and then rounding off the resulting figure. A taxing statute must be construed strictly and reasonably, and no tax or tax-like recovery can be imposed without parliamentary authority. The court held that the banks had misread the provision, put the cart before the horse, and created a self-generated computational difficulty. The rounding off produced an amount beyond what was lawfully recoverable under the Act.

Conclusion: The impugned rounding off was illegal and unauthorised. The issue was decided against the appellants and in favour of the borrowers.

Issue (ii): Whether the challenge to the banks' action was defeated by absence of locus standi, delay, or the contractual nature of the dispute.

Analysis: The matter was entertained as public interest litigation because the impugned recovery affected a large class of borrowers and involved a legal wrong of public significance. The relaxed approach to locus standi in public interest matters applied. The contention based on delay and laches was rejected in view of the continuing nature and magnitude of the alleged illegal recovery. The contractual label of the loan relationship did not validate a recovery lacking statutory authority.

Conclusion: The objections to maintainability failed. The issue was decided against the appellants and in favour of the respondents.

Issue (iii): Whether the Reserve Bank of India could validly approve or authorise the impugned rounding off under section 35A of the Banking Regulation Act, 1949.

Analysis: The Reserve Bank's power under section 35A was confined to the statutory purposes stated in the Banking Regulation Act, 1949. It could not interpret or enlarge the scope of the Interest-tax Act, 1974, nor could it authorise banks to recover sums not permitted by that Act. Any approval granted on a mistaken understanding of the taxing provision was ineffective. The bank's conduct remained beyond jurisdiction, and the approval could not cure the illegality.

Conclusion: The Reserve Bank's approval was without jurisdiction and did not legitimise the rounding off. The issue was decided against the appellants and in favour of the respondents.

Final Conclusion: The legality of the banks' recovery method was rejected, the impugned judgment was affirmed, and the appeals were dismissed with directions that the excess sums be channelled into the mechanism created for the benefit of persons with disabilities.

Ratio Decidendi: An enabling provision for recovery of a statutory tax burden cannot be expanded by administrative approval or contractual devices to authorise grossing up and rounding off beyond the amount lawfully recoverable under the taxing statute.

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