Income Tax Appellate Tribunal - Delhi
Punjab National Bank vs Dcit on 4 May, 2005
Equivalent citations: [2006]280ITR270(DELHI), (2005)98TTJ(DELHI)411
ORDER
P.M. Jagtap, Accountant Member
1. These four appeals preferred by the assessee against four separate orders- of the Id CIT (A) -XVII, New Delhi dt 28.22003 involve common issue and the same are, therefore, being disposed off by a single order for the sake of convenience.
2. The solitary effective ground raised by the assessee which is common in all these appeals reads as under:-
"That the Id CIT(A) was not justified in confirming the additions made by AO in respect of interest tax recovered by the Appellant Bank from its borrowers in the chargeable interest as it does not form part of interest. It is accordingly prayed that interest tax @ 2/102 (3/103 for AY 97-98) is to be charged instead of 2/100 (3/100 for AY 97-98) from the Bank"
3. The relevant facts of the case giving rise to these appeals are as 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 1999-00 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 AO that the assessee has computed the interest tax liability by multiplying gross interest by 2/102 (3/103 for AY 97-98). 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 for AY 97-98) and not 2/100 (3/100 for AY 97-98). It was also submitted that interest tax included in the interest amount charged by the assessee from its borrowers was collected as an agent and the same having been paid over to the Government, it did not form part of its interest income. The explanation of the assessee was not accepted by the AO and he proceeded to work out its liability towards interest tax by applying a factor of 2/100 (3/100 for AY 97-98) to the gross interest earned by it. Aggrieved by the same, the assessee preferred its appeals before the Id. CIT (A) and it was submitted on its behalf before him that interest on various loans was being charged to the borrowers as per RBI guidelines issued from time to time and since a note was given at the end of the lending rate structure as "interest tax is to be charged @ 2% (3% for AY 97-98) on the ex-tax interest amount", the interest tax which was included in the interest amount did not have the character of chargeable interest right from its inception. It was also submitted that as per the agreement between the bank and the borrower, the borrower was to bear the burden of interest tax and accordingly the gross interest income earned by the bank on its loans and advances was inclusive of the interest tax recovered. It was therefore, contended that the amount credited to the interest account in reality was 102% & 103% (100% interest plus 2% & 3% inertest tax) and therefore a multiplication factor of 2/102 (3/103 in A.Y. 97-98) was rightly applied to workout the interest tax liability in respect of gross interest income. Reliance was placed on behalf of the assessee on the decision of the Hon'ble Madras High Court in the case of CIT v. Bank of Madhura Ltd. 215 ITR 928. The Id CIT (A) found no merit in the submissions made on behalf of the assessee and proceeded to uphold the action of the AO in computing the internet tax liability by applying a formula of 2/100 (3/100 for AY 97-98) for the following identical reasons given in all his impugned orders for the years under consideration.
"I have examined all the relevant facts of the case and the arguments of the appellant bank in its submissions have conceded that it is not maintaining separate heads of accounts of interest and interest tax recovered from the borrowers. The fact 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 duty was that of the manufacturer and Rules 80 to 84 did not detract from the position that payment of excise duty was the primary and exclusive obligation of the manufacturer and if payment be made under a contract or arrangement by any other person, it would amount to the meeting of the obligation of the manufacturer and nothing more. Payment of excise duty was a condition precedent to the removal of the liquor from the distillery and payment by the purchaser was on account of the manufacturer. According to normal commercial practice, excise duty should have been reflected in the appellant's bill either as merged in the price or shown separately. In the hands of the buyer, the cost of liquor was what was charged by the appellant under its bill together with the excise duty, which the buyer had directly paid on seller's account. The consideration for the sale was thus the total amount and not what was reflected in the bill Excise duty, though paid by the purchaser to meet the liability of the appellant, was part of the consideration for sale and was includible in the turnover of the appellant."
From the above discussion, it is clear that no deduction on account of alleged interest tax recovered from the customer can be allowed because (i) on the facts of the case, no interest tax has separately been recovered from customers (ii) even if such interest is accepted to have been recovered from the customers, it forms part of the interest earned by the appellant company in view of the relevant provisions of law and the above mentioned judgment of the Supreme Court. The law does not provide any deduction on account of the interest tax recovered from customers. Therefore, the action of the AO in computing the interest tax liability by applying the formula of 3/100 is upheld."
Aggrieved by the orders of the Id CIT (A), the assessee is in appeal before us.
5. The Id counsel for the assessee submitted before us that the interest tax levied under the Interest Tax Act, 1991 by the bank as well as financial institutions was allowed to be reimbursed and accordingly, the assessee was entitled to collect interest tax from the borrowers for passing it over to government. He invited our attention to para 97 of the Budget speech of the Finance Minister for 1991-92 reported in 190 ITR (statute) 89 and pointed out that the institutions were allowed 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 reported in 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 CIT v. Bank of Madura Ltd. reported in 215 ITR 928 wherein it was held in the similar facts and circumstances that the amount collected by the assessee bank from its borrowers 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 page 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 @ 2% on the ex-tax interest amount.
6. The Id DR on the other hand Invited out attention to the relevant assessment orders and pointed out that the gross, amount of interest was declared by the assessee as "chargeable interest" in its return of interest. He contended that the AO having charged the interest tax on the said amounts declared by the assessee bank itself, there was no infirmity at all in his order on this count. He submitted that if the amount of interest chargeable to tax was accepted by the assessee in its return of interest, interest tax has to be levied at the applicable rate on such amount and the AO therefore, was right in computing the interest tax liability by applying a multiplying factor of 2/100 (3/100 for AY 97-98), He invited our attention to the relevant portion of Finance Minister's speech (supra) relied upon by the Id counsel for the assessee to point out that it was specified clearly by the Finance Minister that interest tax is to be levied on the gross amount of interest received in para 97 as well as in para No. 98. He contended that the reliance of the learned counsel for the assessee on the said speech to contend that gross amount of interest received by it from the borrowers was inclusive of interest tax is clearly misplaced. As regards to the decision of Hon'ble Madras High Court in the case of Bank of Madhra Ltd (supra) relied upon by the learned counsel for the assessee, he contended that the said decision was rendered in the context of Interest Tax Act, 1971 whereas the act applicable in the present case is that of 1994. He contended that the ratio of the said decision by the Hon'ble Madras High Court, therefore, cannot be applied in the present case.
7. In the rejoinder, the Id counsel for the assessed submitted that the amount of chargeable interest declared by the assessee in its returns of interest is not conclusive and as held by the Hon'ble Delhi High Court in the case of CIT v. Bharat General Reinsurance Co Ltd., reported in 81 ITR 303, tax has to be levied in accordance with relevant provisions of the Act and not on the basis of wrong admission made by the assessee in the return. He contended that the assessee, in any case, had raised this issue before the Id CIT (A) land the Id CIT(A) having already considered and decided the same, the Tribunal sitting over the decision of the Id CIT(A) has to decide it on merits. He also contended that the decision of the Hon'ble Madras High Court in the case of Bank of Madurai Ltd (supra) 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 in, reliance has been placed by the Id counsel for the assessee on the budget speech of Finance Minister for the year 1992-92 and it would be worthwhile to reproduce the relevant paragraphs No. 97 & 98 of the said speech herein under 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 tax 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 in India. These institutions would reimburse themselves by making necessary adjustments in the interest rates charged from borrowers. The proposed tax is expected to raise the cost of borrowing and yield revenue to the Government. It should therefore, have both monetary and fiscal impact.
98. The proposed tax will be levied at the rate of three percent, of the gross amount of interest earned by banks, financial institutions and financial companies on loans and advances made in India. Interest received on transaction between the various credit institutions will be exempted from the proposed tax. The proposed tax will operate prospectively and interest accruing before 1st October, 1991, will not be taxed The proposed tax will be allowed as a deduction in computing taxable income under the Income Tax Act." Para 97-98 As it is evident from the portion of the Finance Minister's speech as reproduced above, the intention to levy the interest tax specifically on the gross amount of interest was clearly spelt out by the Finance Minster in para No. 97 as well as again in para 98 (emphasis supplied).
9. It is true that the banks and other institutions were allowed to reimburse themselves for the interest tax levied by making necessary adjustments in the interest rates charged from borrowers as clarified by the Finance Minister. However, there is nothing in the speech of the Finance Minister to suggest/indicate that adjustments of such interest rate would be by way of grossing up the interest rate by including the interest tax also therein. On the contrary, it was clarified in para No. 98 by the Finance Minister that the proposed interest tax will be levied at the specified rate of the gross amount of interest earned by the banks as well as the financial institutions on loans and advances made in India. The suggestion of the Finance Minister to the banks as well as financial institutions thus was to adjust their interest rate charged from the borrowers to take care of the additional liability on account of levy of Interest tax Act which clearly meant that the interest rate hitherto charged was to be increased suitably to take care of levy of interest tax. In the present case also, the assessee appears to have adjusted the interest rate charged on various types of loans and advances and a copy of its circular specifying interest rates on advances placed at page 67 to 87 of the assessee's paper book shows that the interest tax was sought to be separately recovered by staling 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 15.50% + interest tax. Operators up to 10 vehicles ii) Education loan 15% + interest tax. iii) Trading advances (working capital) PLR + 2.50% + interest tax. iv) Working Capital up to Rs. 2 lacs PLR (12%) + interest tax
The aforesaid instances of interest rate being charged by the assessee to 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 @2% on the extra tax interest amount", the fact remains to be seen from the rate of interest specified in the relevant circular is that interest tax was being recovered and collected separately by the assessee over and above the normal rate of interest charged to the respective borrowers.
10. Before us, heavy reliance has been placed by the Id counsel for the assessee on the decision of the Hon'ble Madras High Court in the case of Bank of Madura Ltd (supra) in support of the assessee's case. The facts involved in the said case, as given in the head note of the report, were as follows:
"The assessee, a non-nationalized banking company, had made loans and advances to various parties at specified rates of interest. The assessee bank was charging interest at 12% per annum from is borrowers. The Interest Tax Act 1974, which came into force with effect from August 1, 1974, provided that tax will be levied on banking companies at the rate of seven per cent, on the amount of interest accruing or arising to the bank in the relevant accounting year. The assessee bank decided to collect the special tax from the borrowers for payment, to the Government. In the assessment years, 1975-96 and 1976-77, the assessee collected interest tax amounting to Rs. 7,27,292/- and Rs. 19,69,989/-respectively, and claimed that the amounts collected were not "interest" within the meaning of Section 2(7) of the Interest Tax Act, 1974, since they were not interest on loans and advances and hence no tax. was payable on the amounts collected Under the Interest Tax Act, 1974. The income tax authorities rejected the claim of the assessee. The Tribunal accepted the claim of the assessee."
In the aforesaid facts and circumstances involved in the said case, a reference was made by the Hon'ble Madras High Court and their Lordships decided the issue in favour of the assessee by observing as under:
"The facts arising in the present case would go to show that the tax was levied under the Income Tax Act, 1974, against the assessee in respect of tax collected from its borrowers and credited the same in the books of account under the head "Special tax accounts," This amount collected by the assessee-bank was offered for tax under the income tax assessment. There is no prohibition for the bank to collect the tax payable by it from its borrowers under the various heads for various purposes. The bank was charging interest at 12% on the amount advanced by it to its borrowers. The amount of seven percent, 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 percent, on the borrowed amount. The amount collected at seven percent by the bank was paid as tax under the Interest Tax Act, 1974. The assessee bank is also offering this seven percent, 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 percent amount collected by the assessee bank would not fall under the definition "interest" as stated in Section 2(7) of the Interest Tax Act."
11. A perusal of the above clearly reveals that different facts were involved in the case of Bank of Madura Ltd. (supra) in as much as the assessee bank had collected interest tax from the borrowers for further payment to the government and the interest tax so collected was credited to a separate account maintained by the assessee. Thereafter the said amount was paid over to the government and having regard to all these facts of the case, it was held by the Hon'ble Madras High Court that this amount collected by the assessee from the borrower had no nexus with the amount advanced by it and the same therefore, did not fall under the definition "interest" as given in Section 2(7) of the Interest Tax Act, 1971. In the present case, the facts involved are altogether different in as much as the assessee is stated to have collected the interest tax as a part and parcel of interest from the borrowers and such tax being included in the interest amount, it is claiming to apply the multiplication factor of 2/102 (3/103 in A.Y. 97-98) to work out its interest tax liability. However, as already observed, going by the rates of interest specified by the assessee in its relevant circular, interest tax was to be charged separately to the borrower over and above the normal interest rate and adjustment to this effect was done by the assessee in its interest rate to get itself reimbursed on account of interest tax separately. Moreover, as specifically clarified by the Finance Minister in his budget speech (supra) relied upon by the Id counsel for the assessee, interest tax was to be levied on the gross amount of interest received by all banks and financial institutions which definitely called for application of multiplication factor of 2/100 (3/100 in A.Y. 97-98) to the gross amount of interest for computing interest tax liability of the assessee. As such, considering all the facts and circumstances of the case, we are of the view that the claim of the assessee for applying a multiplication factor of 2/102 (3/103 in A.Y. 97-93) to the gross amount of interest to work out its interest tax liability was not in accordance with law and the Id CIT(A) was fully justified in upholding the order of the AO computing the said interest tax liability by applying multiplication factor of 2/100 (3/100 in A.Y. 97-98). His impugned orders on this issue are, therefore, upheld dismissing the appeals of the assessee.
12. In the result, the appeals of the assessee are dismissed.