TaxTMI 
TaxTMI 
2005 (5) TMI 264
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....follows. The assessee in the present case is a Nationalized Bank, which filed its return of interest for the years under consideration declaring chargeable interest as follows: Asst. Year Amount chargeable interest AY 1997-98 Rs. 17,34,14,55,400.00 AY 1998-99 Rs. 17,49,56,36,400.00 AY 1999-2000 Rs. 19,28,68,80,310.00 AY 2000-01 Rs. 22,31,16,96,170.00 4. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has computed the interest tax liability by multiplying gross interest by 2/102 (3/103 for assessment year 1997-98). It was explained on behalf of the assessee that interest collected by it from the borrowers was inclusive of interest tax and therefore, interest tax liability was worked out by applying a factor of 2/102 (3/103 Reassessment year 1997-98) and not 2/100 (3/100 for assessment year 1997-98).....
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....est tax recovered from the borrowers. The facts that no interest tax has separately been charged from the customers or declared in the accounts also becomes clear from a perusal of statement of interest earned. Thus, there is no question of allowing any deduction on account of payment of any alleged interest tax. Even if any interest tax was actually received by the appellate company, even then no deduction on this account can be allowed as no such deduction has been provided for in the Interest-tax Act. The argument that interest tax would not form part of interest earned by the appellant company also cannot be accepted because any interest earned by the appellant company either as interest or any tax paid by the client would form part of the interest earned. If any liability of appellant company is discharged by its customers, it would certainly form part of total amount earned. This view finds support from the Supreme Court decision in the case of Mcdowell & Co. Ltd. v. Commercial Tax Officer 154 ITR 148. Relevant portion is reproduced below: 'Head, affirming the High Court, that under rule 76 of the Distillery Rules, as amended in 1981, the liability for payment of excise du....
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....to reimburse themselves the interest tax levied by making necessary adjustments in the interest rates charged from the borrowers. Reliance was placed by him on the decision of the Hon'ble Supreme Court in the case of Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 wherein it was held that the nature of obligation is required to be seen and if by such obligation, income is diverted before it reaches to the assessee, it is deductible. He also relied on the decision of Hon'ble Madras High Court in the case of Bank of Madura Ltd. wherein it was held in the similar facts and circumstances that the amount collected by the assessee bank from its borrowers on account of interest tax having immediately gone to coffers of the Government, the same would not fall under the definition of "interest" as defined in section 2(7) of the Interest-tax Act, 1974. He also invited our attention to a copy of circular issued by the bank prescribing interest rates chargeable on various advances placed at pages 67 to 87 of the Paper Book to point out specifically that a footnote was given in the said circular making it clear that interest tax was chargeable at the rate of 2 per cent on the ex-tax interest....
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....n merits. He also contended that the decision of the Hon'ble Madras High Court in the case of Bank of Madura Ltd. fully supports the assessee's case and the assessee, therefore, deserves the relief on this count without even referring to the aforesaid speech of the Finance Minister. 8. We have considered the rival submissions and also perused the relevant material on record. Before us reliance has been placed by the ld. counsel for the assessee on the budget speech of Finance Minister for the year 1991-92 and it would be worthwhile to reproduce the relevant paragraph Nos. 97 and 98 of the said speech hereinunder for the benefit of this order. "97. In view of the binding fiscal constrains and the need to mobilize resources, I propose to revive the interest tax which was first introduced in 1974 and withdrawn in 1978, reintroduced in a modified form in 1980 and finally withdrawn in 1985. I am enlarging, slightly, the coverage of this tax. The new tux will be levied on the gross amount of interest received by all banks, financial institutions and non-banking financial companies in the corporate sector on loans and advances made inIndia. These institutions would reimburse themsel....
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....ely recovered by stating the interest rate as at the specific rate plus interest tax being charged separately. The following instances of interest rates mentioned in the aforesaid circular fortifies this position: (i) Loans to Smaller Road Transport Operators up to 10 vehicles 15.50% + interest tax. (ii) Education loan 15% + interest tax. (iii) Trading advances PLR + 2.50% + interest tax. (working capital) (iv) Working Capital up to PLR( 12%) + interest tax. Rs. 2 lakhs The aforesaid instances of interest rate being charged by the assessee lo its borrowers clearly show that interest tax was being charged and collected separately and although a footnote was given in the relevant circular stating that "interest tax is to be charged at the rate of 2 per cent on the extra tax interest amount", ....
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....nt on the amount advanced by it to its borrowers. The amount of seven per cent, collected from the borrowers is for the purpose of paying tax under the Interest-tax Act. In fact, the collection of these amounts has no nexus with the amount advanced by the assessee bank to its borrowers. In reality, it is interest on interest. It is stated that there is an oral contract between the borrowers and the bank for the payment of seven per cent, on the borrowed amount. The amount collected at seven per cent by the bank was paid as tax under the Interest-tax Act, 1974. The assessee bank is also offering this seven per cent, collection for income tax purposes and income-tax was levied thereon. The assessee bank has to pay advance tax every three months. Therefore, the amount collected by the assessee bank, though it reached its hands, ultimately went into the coffers of the Government. The assessee bank is not appropriating the said amount for its own benefit. Under the law there is no prohibition for such collection. Thus, considering the facts arising in this case in the light of the judicial pronouncements cited supra, we hold that the Tribunal was correct in holding that seven per cent a....