Liquidated damages on discounted bills treated as interest under the Interest-tax Act and included in chargeable interest.

Liquidated damages received for delay in payment beyond the grace period on discounted bills of exchange were treated as interest under the Interest-tax Act, because the statutory definition of "interest" includes interest on loans and advances as well as discount on bills of exchange. The Court held that discounting of bills operates in substance as an advance or loan, so any recovery for delayed payment under that arrangement remains interest despite the label used. The existence of an agreement for overdue interest on delay reinforced that characterisation, and the amount was held includible in chargeable interest.

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Issues: Whether liquidated damages received by the assessee for delay in payment beyond the days of grace on discounted bills of exchange constituted interest includible in chargeable interest under the Interest-tax Act, 1974.

Analysis: The definition of "interest" under section 2(7) of the Interest-tax Act, 1974 includes interest on loans and advances and discount on bills of exchange. Amounts received for delayed payment on discounted bills were treated as compensation for use of money and, in substance, as interest. The Court agreed with the view that discounting of bills is a form of advance or loan and that any amount recovered for delayed payment under such arrangement remains interest, irrespective of the label used. The existence of an agreement to pay overdue interest on delay further supported the conclusion.

Conclusion: The amount of liquidated damages was interest chargeable to interest tax and was includible in chargeable interest. The question was answered against the assessee and in favour of the Revenue.

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