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Commissioner Of Income-Tax v. Vijaya Bank.
Factual and Procedural Background
This opinion arises from two questions referred to the court by the Income-tax Appellate Tribunal, Bangalore Bench. The first question concerns whether a sum of Rs. 3,73,494 should be included in the computation of chargeable interest. The second question pertains to whether a subsidy received by the assessee from the Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme, 1968, qualifies as interest under section 2(7) of the Interest-tax Act, 1974, and thus should be included in chargeable interest. The first question was referred by the Revenue, and the second by the assessee.
Legal Issues Presented
- Whether the sum of Rs. 3,73,494 is liable to be included in the computation of chargeable interest.
- Whether the subsidy received from the Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme, 1968 falls within the definition of interest under section 2(7) of the Interest-tax Act, 1974, and is includible in chargeable interest under section 5.
Arguments of the Parties
Assessee's Arguments
- The subsidy received from the Reserve Bank of India is not taxable interest but a subsidy and hence not chargeable under the Interest-tax Act.
- Only interest paid on loans and advances is taxable, not other forms of payment such as subsidies.
- The subsidy does not cover the difference between normal interest rate and the lower rate charged; it is paid by a third party (Reserve Bank of India) and not by the borrower, thus cannot be considered interest.
- The subsidy is merely a mode of computation of chargeable interest and does not alter the character of the payment as non-interest.
Revenue's Arguments
The opinion does not contain a detailed account of the Revenue's arguments beyond the referral of the first question.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Canara Bank, [1989] 175 ITR 601 | Determination that the sum of Rs. 3,73,494 is not liable to be included in chargeable interest. | The court relied on this precedent to answer the first question in the affirmative and against the Revenue, thereby excluding the sum from chargeable interest. |
Court's Reasoning and Analysis
The court addressed the first question based on the precedent set in Commissioner Of Income-Tax v. Canara Bank, concluding that the sum in question is not liable to be included in chargeable interest.
Regarding the second question, the court examined the nature of the subsidy under the Export Credit (Interest Subsidy) Scheme, 1968. The subsidy is paid by the Reserve Bank of India to compensate banks for charging interest at a rate lower than the normal rate on export credit loans or advances. The court observed that the subsidy is directly linked to the loan or advance and the lower interest rate charged.
The court rejected the assessee’s contention that the subsidy is not interest because it is paid by a third party and not the borrower. It held that the subsidy serves to offset the loss from charging lower interest and therefore constitutes interest within the meaning of section 2(7) of the Interest-tax Act, 1974. The court further reasoned that payment by a person other than the borrower does not exclude the characterization of the payment as interest.
Consequently, the court affirmed the Tribunal’s view and ruled that the subsidy must be included in chargeable interest.
Holding and Implications
First Question: The sum of Rs. 3,73,494 is not liable to be included in the computation of chargeable interest. This ruling is based on established precedent and is against the Revenue.
Second Question: The subsidy received from the Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme, 1968, constitutes interest under section 2(7) of the Interest-tax Act, 1974, and is therefore includible in chargeable interest. This ruling is against the assessee.
The direct effect is that the assessee must include the subsidy amount in its chargeable interest for tax purposes, while the Revenue cannot include the sum of Rs. 3,73,494 as chargeable interest. The opinion does not establish any new precedent beyond these determinations.
Rajendra Babu, J.:— 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.
3. 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 (Commissioner Of Income-Tax v. Canara Bank., [1989] 175 ITR 601), and therefore, we answer the same in the affirmative and against the Revenue.
4. 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.
5. 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.
6. 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.”
7. 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.
8. 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.
9. 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 flow 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.
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