Kerala High Court
Commissioner Of Income-Tax vs Federal Bank Ltd. on 18 June, 1987
Equivalent citations: [1991]189ITR117(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K. Sreedharan, J.
1. The following questions have been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :
"1. Whether, on the facts and in the circumstances of the case, and also on a consideration of the deduction permissible under Section 6 of the Interest-tax Act, 1974, the assessee is entitled to exclude rediscounting charges paid to Reserve Bank of India ?
2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exclude interest paid on participation certificates ?
3. Whether, on the facts and in the circumstances of the case, interest earned on kuri defaults (defaulters) could not be assessed under the Interest-tax Act, 1974 ?"
2. The assessee is a scheduled bank. For the assessment year 1975-76, the assessee filed a return of income under the Interest-tax Act, showing the chargeable interest at Rs. 91,70,200. In the revised return dated November 15, 1977, the chargeable interest was shown as Rs. 91,30,360 after deducting a sum of Rs. 2,75,687 being rediscounting charges on bills paid to the Reserve Bank of India. The assessee also claimed deduction of a sum of Rs. 20,833 representing a portion of the interest paid on borrowings from insurance and other financial companies on accepting participation certificates. The assessee contended that the kuri business conducted by it has nothing to do with the banking business and hence it does not attract interest-tax liability. The above deductions were not allowed by the assessing authority. On appeal, the Appellate Assistant Commissioner granted relief to the assessee in part. On further appeal, the Income-tax Appellate Tribunal, Cochin Bench, allowed all the claims for deduction put forward by the assessee. Hence, this reference at the instance of the Revenue.
3. We heard Sri N.R.K. Nair, learned counsel appearing for the Revenue, and Sri P. Balachandran, learned counsel appearing for the assessee. The contention raised by the Revenue is that the expenditure incurred by the assessee by way of payments to the Reserve Bank of India and interest paid on borrowings from insurance and other financial companies on accepting participation certificates are payments out of interest realised by the assessee and that those amounts are exigible to tax under the Interest-tax Act. It is further contended that the interest collected by the assessee from kuri subscribers, both prized and non-prized, for instalments defaulted, is interest under the Interest-tax Act and that those amounts are also exigible to tax.
4. Learned counsel appearing for the assessee submits that, in the case of re-discounting, the Reserve Bank of India advances only to specific transactions after ascertaining the identity of persons whose bills are discounted, that it is really a joint venture by the assessee and the Reserve Bank of India where the assessee and the Reserve Bank of India share in a common ratio the amount of profits paid by the customers. According to him, re-discounting is only a joint venture wherein the finance is provided by the Reserve Bank of India and the transactions are handled and serviced by the assessee. The profits on those transactions are shared between the participants of the joint venture, It is further contended that the participation by the General Insurance Corporation, the Life Insurance Corporation and other re-financing institutions are essentially another version of re-discounting by the Reserve Bank of India and that it is also a joint venture. Accordingly, the participation charges paid to the financing institutions are also not exigible to tax under the Interest-tax Act. Lastly, it is contended that in a kuri transaction, there is no loan or advance made by the assessee and so the amount collected by way of interest from the subscribers, prized and non-prized, will not fall within the purview of interest as defined in the Interest-tax Act.
5. Regarding the re-discounting system, the Income-tax Appellate Tribunal came to the following finding :
"In a case of re-discounting, the Reserve Bank advances only to specific transactions after ascertaining the identity of persons whose bills are discounted. So, it is a joint venture by the assessee and the Reserve Bank of India, whereby the assesee and the Reserve Bank share in a certain ratio the amounts of profits paid by the customer. It is not as if the money that is paid by the assessee to the Reserve Bank represents interest on monies advanced by the Reserve Bank to the assessee or remuneration payable to the Reserve Bank of India for services done to the assessee. It is a joint venture where the finance is provided by the Reserve Bank and the transaction is handled and serviced by the assessee .... The scheme of refinance, we once again repeat, is a joint venture. The proceeds from that transaction are shared between the participants of the joint venture. That is all that happened in this case. So Rs. 2,75,685 did not at any time belong to the assessee. It did not accrue to it. It accrued only to the Reserve Bank of India. It is the share of profit of the Reserve Bank of India. It is not a deduction from out of what is earned by the assessee."
6. In the case of participation charges, the Tribunal came to the conclusion that it is also a joint venture like re-discounting. The Tribunal observed :
"The participation is in respect of a particular transaction. So it is only a case of sharing the profit like re-discounting done by the Reserve Bank. All that applies to re-discounting applies to the payment for participation. "
7. The above findings regarding the nature of the transactions involved in re-discounting by the Reserve Bank of India and participation by financing institutions are not specifically challenged. The Revenue is bound by that finding. So, for the purpose of this case, we proceed on the basis that the nature of the above transactions is as found by the Appellate Tribunal. In that view, the amounts paid to the Reserve Bank of India and to the financing institutions cannot be taken as deduction from out of what was earned by the assessee. The Reserve Bank of India and financing institutions on the one hand and the assessee on the other were sharing the profits in a certain ratio. The profits so earned by the Reserve Bank of India and financing institutions never accrued to the assessee and cannot be considered as income in the hands of the assessee. Accordingly, we answer questions Nos. 1 and 2 in the affirmative, i.e., against the Revenue and in favour of the assessee.
8. The assessee was realising interest on defaulted instalments from both prized and non-prized subscribers in kuries. The interest so realised has been completely exempted by the Tribunal from liability under the Interest-tax Act. Under the Interest-tax Act, "interest" means "interest on loans and advances". The question that arises for consideration in this case is whether the interest realised from subscribers of kuri is "interest" under the Interest-tax Act or not. In the case of non-prized subscribers, there cannot be any incident of loan or advance from the foreman. In the absence of such loan or advance, if the foreman realises any interest, the amount collected by way of interest will not become "interest" under the Interest-tax Act. But the situation in the case of a prized subscriber will be entirely different. In K.P. Subbarama Sastri v. K.S. Raghavan [1987] 2 SCC 424 ; [1987] 1 KLT 753, the court took the view that the subscriber truly and really becomes the debtor for the prized amount paid to him. The subscriber has got the right to discharge that liability in instalments. Therefore, the interest paid by a prized subscriber on defaulted instalments will be interest paid on a loan or advance made by the foreman. Accordingly, the interest realised by the assesses from prized subscribers in the kuri conducted by it should be exigible to tax under the Interest-tax Act. In this view, we hold that the Income-tax Appellate Tribunal was not justified in allowing the assessee to deduct the entire amount of interest realised from subscribers in the kuries conducted by it and the deduction in so far as it relates to interest realised by the assessee from "prized subscribers" in the kuri is improper and not permissible. Therefore, the third question referred is answered in the negative, i.e., in favour of the Revenue and against the assessee to the limited extent mentioned above regarding interest realised from prized subscribers.
9. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.