Export subsidy is not interest under the Interest-tax Act when it compensates loss of earnings, not a lending transaction.

Export subsidy paid by the Reserve Bank of India to compensate for shortfall in interest earnings under an export credit scheme was held not to constitute "interest" under section 2(7) of the Interest-tax Act, 1974. The statutory definition applies to interest on loans and advances and related lending transactions; here, no loan or advance was made by the assessee to the Reserve Bank of India, and the receipt was not referable to any lending arrangement. A compensation or subsidy for loss of interest does not become interest merely because it is linked to interest earnings under the scheme.

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Issues: Whether export subsidy received from the Reserve Bank of India was chargeable as interest under section 2(7) of the Interest-tax Act, 1974.

Analysis: The statutory definition of "interest" covers interest on loans and advances made in India, along with specified inclusions and exclusions. The amount in question was paid by the Reserve Bank of India to compensate the assessee for the shortfall in interest earnings under the export credit subsidy scheme. No loan or advance was made by the assessee to the Reserve Bank of India, and the receipt was not referable to any lending transaction between them. A compensation or subsidy for loss of interest does not become "interest" merely because it is linked to interest earnings under the scheme.

Conclusion: The amount received as export subsidy was not chargeable as interest under section 2(7) of the Interest-tax Act, 1974, and the question was answered in favour of the assessee.

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