Karnataka High Court
Commissioner Of Income-Tax vs Vijaya Bank on 5 July, 1988
JUDGMENT Rajendra Babu, J.
1. In this reference, two questions have been referred to us for our opinion by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, and they are as under :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 3,73,494 is not liable to be included in the computation of chargeable interest ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy received by the applicant from the Reserve Bank of India in respect of export credit made available by it to its constituents, would fall under the definition of interest under Section 2(7) of the Interest-tax Act, 1974, and as such could be included in the chargeable interest under Section 5 ?"
2. The first question is referred at the instance of the Revenue and the second question is referred at the instance of the assessee. So far as the answer to the first question is concerned, it is concluded by a decision of this court in ITRC No. 33 of 1981 decided on June 10, 1988 (CIT v. Canara Bank [1989] 175 ITR 601), and therefore, we answer the same in the affirmative and against the Revenue.
3. So far as the second question is concerned, the facts are as follows :
In the course of its banking activities, the assessee advances money on export at the shipment stage. The Reserve Bank of India subsidises interest if the lending bank charges interest at a specified rate lower than the normal rate of interest under the scheme known as The Export Credit (Interest Subsidy) Scheme, 1968 (hereinafter referred to as "the Scheme"). To make up the loss of interest to a certain extent on such transactions, the Reserve Bank of India gives subsidy. The assessee claimed before the Income-tax Officer for the relevant years in question that this amount given as subsidy by the Reserve Bank of India under the scheme is not taxable because it represents the subsidy and not interest and, therefore, was not chargeable to tax under the Interest-tax Act. It was contended that it is only the interest paid on loans and advances and not other forms of payment that was the subject matter of tax under the said Act. It was further contended that the subsidy does not really cover the difference between the normal rate of interest and the rate actually applied. Interest is only compensation allowed by law or contracted by parties for the use or detention of money. The subsidy is paid not by the borrower but by a different agency and hence is not interest paid on loan or advance.
4. In view of the definition of the term "interest" under Section 2(7) of the Interest-tax Act, 1974 (hereinafter referred to as "the Act"), interest will only mean and include the amount paid on loans and advances.
5 Clause 2(i) of the Scheme reads as follows :
"2. The rate of the subsidy is one and half per cent, per annum and the subsidy is to be payable :
(i) in the case of any export credit which is in the form of a loan or advance, on the amount of the loan or advance actually drawn and outstanding from time to time, with periodical rests at the same intervals as for the application of interest by the institution concerned, during the period from the date of the advance or the grant of the credit, as the case may be, to the date on which the export bills in respect of the goods or commodities covered by that advance are negotiated, purchased or discounted by the institution claiming the subsidy, or the date on which all the amounts due to the institution claiming the subsidy are repaid, or the date of expiry of a period of one hundred and eighty days from the date of the advance or of the grant of the credit, whichever is the earliest."
6. This clause clearly discloses that the subsidy is paid by the Reserve Bank of India to offset a part of the loss incurred by the assessee as a result of charging interest at a rate lower than the normal rate of interest. If only the borrower had been allowed to pay at normal rate of interest to the bank and if he had been subsidised by the Reserve Bank of India towards payment of interest, there would have been no question of the assessee raising a contention of this sort and we fail to comprehend how this stand is now available to the assessee merely because the Reserve Bank of India directly pays the subsidy.
7. This clause clearly indicates that the subsidy is relatable to and dependent on the loan or advance being given and a lower rate of interest being charged.
8. Learned counsel for the assessee contended that it is only a mode of computation of chargeable interest and it will not indicate the character of the payment as interest In our view, this contention is untenable. The subsidy is made to offset a part of the loss incurred by charging a lower rate of interest. The conclusion we have to draw is that the subsidy is made towards interest and, therefore, the payment made by the Reserve Bank of India to the assessee is nothing but interest. As to the question whether the payment made by the person other than the borrower could be treated as interest, it is obvious that consideration can Slow from a person other than the borrower (in the present case, the Reserve Bank of India) and thus the payment does not lose the character of interest. In our opinion, the view taken by the Tribunal and the other Revenue authorities is correct and we answer the second question referred to us in the affirmative and against the assessee.