2006 (9) TMI 109

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....received by the assessee by way of compensation on account of delay in payments beyond the days of grace is not interest includible in the chargeable interest for the calculation of interest tax?" 2. The assessee is a subsidiary of State Bank of India and is assessed under the Interest-tax Act, 1974 (for short, "the Act"). The assessee purchased bills of exchange drawn by its constituents and in some cases on account of delay in payment beyond the days of grace received liquidated damages by way of compensation. The assessee claimed that the said amount represented "damages" and not "interest" and thus, were not exigible to tax under the Act. The Assessing Officer held that the amounts involved amounted to interest and had been shown as ....

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.... "When the bank discounts a bill, what happens is that the drawee gets a credit from the bank to the extent of the amount covered by the bill. This position has been explained in Law of Banking by Paget, 9th edition, at page 415, thus 'The discount of a bill is the purchase of it with, normally, a right of recourse and for a sum less than its face value. The discounter is free to deal with the instrument as he pleases. Discount is a negotiation. Other things being equal, there is no practical or legal distinction between the ordinary negotiation of a bill and its being discounted except in the sum paid on it. Discounting is a means of lending as is pledge.' It is stated in Byles on Bills of Exchange (24th edition), at page 282, as f....