Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 2
CASE NO.:
Appeal (civil) 6724-6729 of 2003
PETITIONER:
Commnr. of Income Tax, Karnataka
RESPONDENT:
M/s. Canara Bank
DATE OF JUDGMENT: 30/07/2007
BENCH:
S.H. KAPADIA & B. SUDERSHAN REDDY
JUDGMENT:
JUDGMENT
O R D E R
A short question which arise for determination in this
batch of civil appeals is: whether the Tribunal was justified in
holding that an amount representing rediscounting interest
paid on promissory note/bill did not accrue or arise to the
assessee-bank by reason of diversion of such discount through
overriding title in favour of Industrial Development Bank of
India (IDBI) and hence did not form part of chargeable interest
under Section 2(7) of the Interest-tax Act, 1974 (for short, ’the
1974 Act’).
The facts giving rise to these civil appeals are as follows.
Assessee-bank is a nationalized bank. In the assessment
years 1979-80, 1980-81, 1981-82, 1982-83, 1983-84, 1984-
85, 1985-86 the assessee did not include rediscounting
charges received from IDBI in its chargeable interest.
According to the Department, rediscounting charges
represented assessee’s Interest Income and, therefore,
rediscounting charges were taxable as "chargeable interest" as
defined under Section 2(7) read with Section 5 of the 1974 Act.
The short question which arises for determination in
these civil appeals concerns the meaning of rediscounting
charges under the Scheme of rediscounting by IDBI. The Bills
Rediscounting Scheme was introduced in April, 1965, in terms
of the powers vested in the IDBI under Section 9(1)(b) of its
statute, which authorized IDBI to accept, discount or
rediscount bills of exchange, promissory notes of industrial
concerns. The object of the Scheme is two-fold, i.e., to
increase the sales of indigenous machinery/capital equipment
by offering to the prospective buyers/users deferred payment
facilities. While the manufacturers received the value of the
machinery within a few days of delivery by discounting the
bills with the banker, the buyer/user could utilize the
machinery acquired and repay its costs over a number of
years. Therefore, the Scheme facilitates sales of machinery,
thereby contributing to the industrial progress of the country.
Under the Scheme, IDBI itself does not discount the bills but
rediscounts those discounted by nationalized banks. The
buyers of the machinery under the Scheme have to obtain
through their banks prior clearance of IDBI for discounting the
bills and for determination of the quantum of assistance.
Under the Scheme, the discounting bank, availing itself of the
rediscounting facilities from IDBI, cannot charge the
seller/manufacturer discount at a rate higher than the rate
prescribed by IDBI. The seller/manufacturer is also
prohibited from charging interest for the deferred payment at
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 2
an amount higher than the amount paid to the bank. IDBI
under Scheme has a right to refuse rediscounting of bills of
such sellers/manufacturers who do not comply with the
requirements under the Scheme. Therefore, the Scheme is
enacted basically to give financial assistance to manufacturers
of indigenous machinery. Under the Scheme, every bill or pro-
note is required to be accepted at offices of IDBI. The
proforma of bills is also prescribed by IDBI. In each and every
document in support of bill or pro-note, IDBI has to be party.
Under the Scheme, the discounting bank such as the
assessee, availing itself of rediscounting facilities from the
IDBI, was not entitled to charge the seller/manufacturer
discount at rates higher than 1.75 per cent over the discount
rates charged by IDBI. Under the Scheme, the discounting
bank, like the assessee, has to take back the bill or promissory
note from IDBI against payment, three working days in
advance of their due dates and obtain payment thereof from
the acceptor/guarantor of the bills/pro-notes. Under the
Scheme, the primary responsibility for payment to IDBI is
placed on the seller’s bank which in the present case is the
assessee-bank. Therefore, the rediscounting charges of IDBI
collected by the assessee-bank cannot be "chargeable interest"
under Section 2(7) of the 1974 Act since even before the said
amount could reach the hands of the assessee-bank, it is
impressed with the character of rediscounting charges payable
to IDBI. The Scheme, viewed as a whole, makes it clear that
the assessee-bank is only the medium for the disbursement of
the development fund for the implementation of the Scheme
for which the assessee-bank is allowed to retain 1.75 per cent,
which accrues to the assessee-bank and, therefore, it is not
possible to bifurcate the transaction which has to be read in
its entirety.
For the aforestated reasons, we answer the above
question in affirmative, i.e., in favour of the assessee-bank and
against the Department. Accordingly, the civil appeals are
disposed of with no order as to costs.