M/S.palghat Permanent Fund Ltd v. The Asst. Commissioner Of Income Tax,Circle V(1), Chennai-600 034

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 10.09.2018 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case (Appeal) Nos.1148 and 1149 of 2008 M/s.Palghat Permanent Fund Ltd.,16, Nana Street, T.Nagar,Chennai-600 017. ... Appellant/Respondent in both Appeals -vs- The Asst. Commissioner of Income Tax,Circle V(1), Chennai-600 034. ... Respondent/Appellant in both Appeals Prayer: Tax Cases (Appeals) filed under Section 21 of theInterest Tax Act, 1974 read with Section 260A of the Income TaxAct, 1961 against the common order of the Income-tax AppellateTribunal Chennai 'B' Bench, Chennai dated 27.07.2007 inInt.Tax.A.Nos.78 and 79/Mds/2003 for the assessment years 1999-2000 and 2000-01 respectively. Against the Order of theCommissioner of Income Tax (Appeals), V Made in ITA.No. 34 & 35of 2002-2003 dated 22.01.2003 preferred against the Order ofthe Assistant Commissioner of Income Tax, Company circle V (1),Chennai-34, dated 13.03.2002 made in 51134P of the Assement year1999-2000 and 2000-2001. For Respondent:Mr.M.Swaminathan,(in both Appeals)Senior Standing Counseland Mrs.V.Pushpa,Junior Standing Counsel COMMON JUDGMENT [Delivered by T.S.Sivagnanam, J.] These appeals, filed by the assessee under Section 260Aof the Income-tax Act, 1961 (hereinafter referred to as “theAct”), are directed against the common order dated 27.07.2007,passed by the Income-tax Appellate Tribunal Chennai 'B' Bench(in short, “the Tribunal”), Chennai dated 27.07.2007 inInt.Tax.A.Nos.78 and 79/Mds/2003 for the assessment years 1999-2000 and 2000-01 respectively. 2.The above appeals have been admitted, by order dated13.08.2008, on the following substantial questions of law:-“(i) whether on the facts and in thecircumstances of the case, the Appellate Tribunalwas justified and correct in law in upholding thelevy of interest tax on the penal/default interestcollected even though the charging provisions ofthe Act envisaged such levy on the loans andadvances only? (ii) Whether the Appellate Tribunal wasjustified in holding that the provisions of Section2(7) of the Act would be attracted to the facts ofthe case in view of the wrong assumption of factson the amounts received as recorded in para 5 ofthe impugned order and in the process whether theAppellate Tribunal was justified in confirming theaction of the respondent in expanding the scope ofthe 'chargeable interest' as defined? (iii) Whether on the facts and in thecircumstances of the case the Appellate Tribunalwas justified in upholding the levy of interest taxon the penal/default interest collected even thoughthe First Appellate Order was based on anotherFirst Appellate Order rendered under similarcircumstances accepted by the Revenue especiallythe appeals preferred by the Revenue in theAppellant's case were not maintainable in view ofthe decisions rendered by the Apex Court?” 3.The assessee is a non-banking financial institutionengaged in the business of operating chit funds and they havefiled revised returns for the relevant assessment yearsreturning the chargeable interest. 4.During the course of assessment, the Assessing Officerfound that the assessee had included default interest (penalinterest) in chargeable interest and hence, they were asked toshow cause as to why the default interest (penal interest)should not be included in chargeable interest. https://hcservices.ecourts.gov.in/hcservices/ 3.The assessee is a non-banking financial institutionengaged in the business of operating chit funds and they havefiled revised returns for the relevant assessment yearsreturning the chargeable interest. 4.During the course of assessment, the Assessing Officerfound that the assessee had included default interest (penalinterest) in chargeable interest and hence, they were asked toshow cause as to why the default interest (penal interest)should not be included in chargeable interest. https://hcservices.ecourts.gov.in/hcservices/ 5.The assessee contended that default interest is in thenature of penal interest received by the assessee in cases whereborrowers default on repayments within the due dates agreed toand hence, it has the character of interest on interest. It wasfurther contended that default interest (penal interest) has thenature of compensation received from borrowers, who default onrepayments within the due dates and therefore, it is out of thepurview of chargeable interest as defined in the Interest TaxAct, 1974. 6.The Assessing Officer did not accept the stand taken bythe assessee and held that any compensation received by thelender from the borrower, whatever name it is given, has thecharacter of interest on loans or advances and accordingly,completed the assessment holding that the default interest(penal interest), received by the assessee, has the nature ofinterest on loans and advances and thus, chargeable to interesttax within the meaning of Sections 2(1) and 5 of the InterestTax Act. Aggrieved by such order, the assessee preferred appealbefore the Commissioner of Income-tax (Appeals)-V (CIT(A)). Byorder dated 22.01.2003, the CIT(A) followed the decision in thecase of Shenoy Nagar Saswatha Nidhi Limited in ITA Nos.39 and40/1999-2000-CIT(Appeals)-IV dated 11.02.2000 and deleted theaddition made by the Assessing Officer for both the assessmentyears. 7.In the said decision, in the case of Shenoy NagarSaswatha Nidhi Limited (supra), it was held that Interest TaxAct authorities levy tax on interest on loans and advances andsuch other items specified in Section 2(7) of the Interest TaxAct and from its scope, penal interest and interest ofcompensatory nature which partakes the character of interest oninterest, are excluded. Aggrieved by the said order, theRevenue preferred appeal before the Tribunal. The Tribunal, byorder dated 27.07.2007, allowed the appeal filed by the Revenue.Aggrieved by the same, the assessee is before us by way of theseappeals. 8.Heard Mr.A.S.Sriraman, learned counsel for theappellant and Mr.M.Swaminathan, learned Senior Standing Counselfor the respondent. 9.The issue, which falls for consideration, is whetherthe penal interest collected by the assessee would fall withinthe ambit of the Interest Tax Act and more particularly, withinthe definition of Section 2(7) of the Interest Tax Act. Thesaid provision reads as follows:-“Section 2(7), Interest Tax Act, 1974 2. In this Act, unless the context otherwiserequires, (7) “interest” means interest on loans andadvances made in India and includes(a) commitment charges on unutilised portionof any credit sanctioned for being availed of inIndia; and (b) discount on promissory notes and billsof exchange drawn or made in India, but does notinclude-(i) interest referred to in sub-section (1B)of Section 42 of the Reserve Bank of India Act,1934 (2 of 1934); (ii) discount on treasury bills;” 10.In terms of the “definition” of interest as defined inSection 2(7) of the Interest Tax Act, it means interest on loansand advances made in India. It includes two other categoriesand excludes two other categories. But, in these appeals, weare not constrained about such inclusion or exclusion, as it isthe case of the Revenue that the charges collected by theassessee would fall within the inclusive definition of interestunder Section 2(7) of the Interest Tax Act. (ii) discount on treasury bills;” 10.In terms of the “definition” of interest as defined inSection 2(7) of the Interest Tax Act, it means interest on loansand advances made in India. It includes two other categoriesand excludes two other categories. But, in these appeals, weare not constrained about such inclusion or exclusion, as it isthe case of the Revenue that the charges collected by theassessee would fall within the inclusive definition of interestunder Section 2(7) of the Interest Tax Act. 11.The case of the Revenue is pitched on the sole pointthat whatever that has been collected is on loans and advancesextended by the assessee and in whatever name it might have beencollected, it would fall within the definition of interest underSection 2(7) of the Interest Tax Act. 12.More or less identical question came up forconsideration before a Division Bench of this Court in the caseof Commissioner of Income Tax vs. Cholamandalam Investment &Finance Co. Ltd. reported in (2008) 296 ITR 0601 wherein, thesubstantial question of law, which was framed for consideration,was whether the Tribunal was right in excluding additionaldiscount charges from the chargeable interest under the InterestTax Act. The Division Bench, after referring to the decision inthe case of Commissioner of Income-tax vs. State Bank ofTravancore reported in (1997) 228 ITR 40 (Ker), held thatinterest on loans and advances and the additional discountcharges would not attract the provisions of the Interest TaxAct. The operative portions of the judgment read as follows:-“3. To decide the issue whether theadditional discount charges are not liable to taxunder Interest-tax Act, it is useful to refer thedecision in CIT vs. State Bank of Travancore (1997)140 CTR (Ker) 358 : (1997) 228 ITR 40 (Ker) whereinthe Kerala High Court held that the character of anoverdue bill is wholly distinct from loans and https://hcservices.ecourts.gov.in/hcservices/ advances and the interest on the loans and advancesalone is taxable under the Interest-tax Act and thecharacter of an overdue bill is not synonymous withloans and advances and therefore, the interest onoverdue bills is to be excluded from chargeableinterest under the Interest-tax act. 4. Applying the above ratio to the facts ofthe case, we hold that the Interest-tax Act isattracted only in respect of interest on loans andadvances and the additional discount charges whichis an amount given as a premium, would not attractthe provisions of the Interest-tax act. TheTribunal is therefore correct in excludingadditional discount charges from the chargeableinterest under the Interest-tax Act.” 13.In the case of Commissioner of Income-tax vs. Bank ofRajasthan Ltd. [2010] 323 ITR 524 (Rajasthan), it was held thatinterest or penal interest charged by the assessee on thedelayed payment of instalments by the depositors of therecurring deposit accounts, is not exigible to tax under theprovisions of the Interest-tax Act, 1974. 14.Similar view was taken in the case of Commissioner ofIncome-tax vs. State Bank of Indore reported in [1988] 172 ITR24 (MP) wherein the Court held that the Tribunal was not rightin holding that the amounts charged by the assessee for delayedpayment of bills of entry were in the nature of interest onadvances and exigible to tax under the Act. 15.The High Court of Karnataka, in the case of State Bankof Mysore vs. Commissioner of Income-tax reported in (1989) 175ITR 607 (Kar.), held that interest is the damages orcompensation for delayed payment of money due and therefore, theexpression 'compensation' in Section 32 of the NegotiableInstruments Act, will include interest paid by way of damages orcompensation for delayed payments. It was further, held thatany amount collected by the Bank cannot be anything butinterest, whatever may be the nomenclature, and is chargeableinterest for the purpose of Interest Tax Act. 15.The High Court of Karnataka, in the case of State Bankof Mysore vs. Commissioner of Income-tax reported in (1989) 175ITR 607 (Kar.), held that interest is the damages orcompensation for delayed payment of money due and therefore, theexpression 'compensation' in Section 32 of the NegotiableInstruments Act, will include interest paid by way of damages orcompensation for delayed payments. It was further, held thatany amount collected by the Bank cannot be anything butinterest, whatever may be the nomenclature, and is chargeableinterest for the purpose of Interest Tax Act. 16.All the aforementioned decisions were considered forits correctness by the Hon'ble Supreme Court in the Case ofState Bank of Patiala vs. Commissioner of Income-tax, Patialareported in [2016] 383 ITR 244 (SC). The Hon'ble Supreme Courtheld that the view of the High Court of Karnataka in the case ofState Bank of Mysore (supra) is directly in conflict with thedecision of the Hon'ble Supreme Court in the case ofCommissioner of Income-tax vs. Sahara India Savings & InvestmentCorpn. Ltd. [2009] 17 SCC 43 and therefore, held that a contrary view cannot be countenanced. 17.It was further pointed out that “loans and advances”has been held to be different from discounts and legislature haskept in mind the difference between the two and it is clear thatthe right to charge for overdue interest by the assessee banksdid not arise on account of any delay in repayment of any loanor advance made by the said banks and this right arose onaccount of default in payment of amounts due under a discountedbill of exchange. Further, it was held that a subject can bebrought to tax only by a clear statutory provision in thatbehalf and interest is chargeable to tax under Interest Tax Actonly if it arises directly from a loan or advance. This findingwas explained by stating that it is clear from the use of theword “on” in Section 2(7) of the Interest Tax Act that interestpayable “on” a discounted bill of exchange cannot be equatedwith interest payable “on” a loan or advance. With the abovefinding, the Court held that the reasoning contained in thejudgments of the High Court, which differ from the High Court ofKarnataka is correct. The Court then proceeded to deal with theexpression “interest” as defined under the Income Tax Act inSection 2(28A) and held as follows:- “18.It will be noticed that this definitionis much wider than that contained in Section 2(7)of the Interest Tax Act, 1974. The expression“payable in any manner in respect of any moneysborrowed” is an expression of considerable width.It will be noticed that the aforesaid language ofthe definition section contained in the Income Taxact is broader than that contained in the InterestTax Act in three respects. Firstly, interest canbe payable in any manner whatsoever. Secondly, theexpression “in respect of” includes interestarising even indirectly out of a money transaction,unlike the word “on” contained in Section 2(7)which, we have already seen, connotes a directarising of payment of interest out of a loan oradvance. And thirdly, “any moneys borrowed” mustbe contrasted with “loan or advances”. The formerexpression would certainly bring within its kenmoneys borrowed by means other than by way of loansor advances. We therefore conclude that theInterest Tax act, unlike the Income Tax Act, hasfocused only on a very narrow taxable event whichdoes not include within its ken interest payable ondefault in payment of amounts due under adiscounted bill of exchange.” 18.In the light of the above referred decisions, theorder passed by the Tribunal does not lay down correct legal position and accordingly, the same calls for interference. 18.In the light of the above referred decisions, theorder passed by the Tribunal does not lay down correct legal position and accordingly, the same calls for interference. 19.In the result, the appeals filed by the assessee areallowed, the order passed by the Tribunal, is set aside and thesubstantial questions of law framed for consideration areanswered in favour of the assessee. Consequently, the orderpassed by the CIT(A) dated 22.01.2003, is restored. No costs. Sd/- Assistant Registrar(CS-VI) //True Copy// Sub Assistant RegistrarabrTo1.The Asst. Commissioner of Income Tax, Company Circle V(1), Chennai-600 034.2.The Income-tax Appellate Tribunal Chennai 'B' Bench, Chennai.3.The Commissioner of Income-tax (Appeals)-V, 121, Mahatma Gandhi Road, Chennai-600 034.4. The Assistant Registrar, Income Tax Appellate Tribunal, Rajaji Bhavan, Besant Nagar, Chennai.+1cc to Mr.S.Sridhar, Advocate, S.R.No. 62889+1cc to Mr.M.Swaminathan, Advocate, S.R.No. 63314T.C.(A) Nos.1148 & 1149 of 2008 SSV(CO)GN(26/10/2018)