M/S. STATE BANK OF PATIALA TR.GEN.MANAGER vs. COMMR.OF INCOME TAX,PATIALA

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS.5212-5220 OF 2007 M/S. STATE BANK OF PATIALA …APPELLANT THROUGH GENERAL MANAGER VERSUS COMMISSIONER OF INCOME TAX, PATIALA …RESPONDENT WITH CIVIL APPEAL NO.3185 OF 2015 CIVIL APPEAL NO.3383 OF 2015 CIVIL APPEAL NO.3764 OF 2015 CIVIL APPEAL NO.3766 OF 2015 CIVIL APPEAL NO.13465 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.13359 OF 2015] CIVIL APPEAL NO.3380 OF 2015 CIVIL APPEAL NO.3763 OF 2015 CIVIL APPEAL NO.13464 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.13357 OF 2015] JUDGMENT CIVIL APPEAL NO.4008 OF 2015 CIVIL APPEAL NO.4322 OF 2015 CIVIL APPEAL NO.4987 OF 2015 CIVIL APPEAL NO.4988 OF 2015 CIVIL APPEAL NO.4990 OF 2015 CIVIL APPEAL NO.4991 OF 2015 CIVIL APPEAL NO.4992 OF 2015 CIVIL APPEAL NO.4993 OF 2015 CIVIL APPEAL NO.4994 OF 2015 CIVIL APPEAL NO.4995 OF 2015 CIVIL APPEAL NO.4996 OF 2015 CIVIL APPEAL NO.4997 OF 2015 1 Page 1 CIVIL APPEAL NO.4986 OF 2015 CIVIL APPEAL NO.5328 OF 2015 CIVIL APPEAL NO.3381 OF 2015 CIVIL APPEAL NO.3382 OF 2015 J U D G M E N T R.F. Nariman, J. 1. Leave granted in special leave petition (civil) nos. 13359 of 2015 and 13357 of 2015. 2. There are 25 appeals that have been posted for hearing before us. They are concerned primarily with interest that is received by various banks after bills of exchange have been discounted by them and a party defaults and hence has to pay compensation by way of interest as payment is made after the JUDGMENT date stipulated in the bill of exchange. The precise question that arises before us is whether such payment of compensation to the said banks is “interest” liable to tax under the Interest Tax Act, 1974. 3. The facts in all the cases are similar. The bank makes purchases of bills of exchange from its customers and charges 2 Page 2 commission thereon for services rendered by it. The discounted bills so purchased are then presented to the parties concerned for realization. If on presentation the bill is realized within time,

realized in time but the other party pays the value of the bill beyond the stipulated time, a certain amount in the form of interest is charged by the bank on a fixed percentage basis for every day of default. This amount is credited by the bank in its interest account. 4. On these broad facts there is a sharp cleavage of opinion between the High Courts. The Madhya Pradesh High Court, Kerala High Court, Andhra Pradesh High Court, Madras High Court and Rajasthan High Court have all decided that such JUDGMENT amounts are not chargeable to tax as “chargeable interest” under the Interest Tax Act. On the other hand, the Karnataka High Court and the Punjab and Haryana High Court have differed from this view and have stated that such amount would be so chargeable. 3 Page 3 5. The entire case hinges on the construction of Section 2(7) of the Interest Tax Act, 1974 which defines “interest” as follows:-

JUDGMENT 6. Under Section 4 of the said Act, there shall be charged on every scheduled bank for every assessment year a tax in respect of chargeable interest of the previous year at the rate of 7%. 7. The first important thing to notice is that the definition of interest contained in the Interest Tax Act, 1974 is a narrow one, and is exhaustive as it is a ‘means and includes’ definition. In 4 Page 4 P. Kasilingam v. P.S.G. College of Technology , 1995 Supp (2) SCC 348, this Court, when dealing with The Tamil Nadu Private Colleges (Regulation) Act, 1976, stated as follows:-

8. The precise question that arises before us is whether compensation that can be traced to Section 32 of the Negotiable Instruments Act, 1881 can be regarded as interest 5 Page 5 on loans and advances. Section 32 of the Negotiable Instruments Act states as follows:-

In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default.” 9. It will be seen that when default of payment takes place, the acceptor of the bill of exchange is bound to compensate JUDGMENT any party to the bill for any loss or damage sustained by him and caused by such default. In most cases such loss or damage is a liquidated amount which can be calculated from the rate mentioned on the face of the bill of exchange. 10. The first thing that will be noticed is that the interest on which tax is payable under the Interest Tax Act is primarily on loans and advances made in India. By a deeming fiction, 6 Page 6 discount on bills of exchange made in India is also included. It is clear, therefore, that discount on bills of exchange would obviously not come within the expression “loans and advances

payable by way of compensation after a bill is discounted by the Bank would not be an amount which would be “on loans and advances made in India”. 11. Shri A.K. Sanghi, learned senior advocate appearing on behalf of the revenue basically placed for our consideration the reasoning of the Karnataka High Court judgment and adopted that reasoning as his argument. On the other hand, Shri Sanjay Jhanwar, learned counsel for the assessees, placed before us the reasoning of the High Courts in his favour and JUDGMENT adopted the same as his argument. He also argued that a loan of money may result in a debt but every debt does not involve a loan. He further argued that the transaction of drawing, accepting, discounting or re-discounting of bills of exchange can be bifurcated into three separate categories, and that the drawer of a bill may discount the bill of exchange with the bank, which would not result into a relationship of debtor and creditor 7 Page 7 with the bank. It thus becomes imperative to first find out what in fact the High Courts have held on this vexed question.

ITR 607, has reasoned thus: “Sri Sarangan, learned counsel for assessee relying on a decision of the Madhya Pradesh High Court in C.I.T. v. State Bank of Indore (69 CTR (MP) 147) contended that though this sum of money may be interest in its wider sense including both interest proper and interest by way of damages, still the provisions of Income Tax Act are not attracted since what can be brought within the purview of the Act is only interest on loans and advances. The amount charged by the assessee on delayed payment of bills cannot be held to interest on loans and advances and it was not exigible to tax under the Interest Tax Act. He also relied upon Sec. 32 of the Negotiable Instruments Act and contended that the said provision contemplates only compensation and not the interest at all. When the Bank discounts a bill what happens is the drawee gets a credit from the Bank to the extent of the amount covered by the Bill. This position has been explained in LAW OF BANKING By Paget, 9th Edition at page 415 thus: JUDGMENT “The discount of a bill is the purchase of it with, normally, a right of recourse and for a sum less than its face value. The discounter is free to deal with the Instrument as he pleases. Discount is a negotiation. Other things being equal there is no practical or legal distinction between the ordinary negotiation of a bill and its being discounted except in the sum 8 Page 8 paid on it. Discounting is a means of lending as is pledge.”

9 Page 9 13. The Punjab and Haryana High Court in CIT v. State Bank of Patiala , (2008) 300 ITR 395 (P&H) has merely reiterated the aforesaid view. 14. On the other hand, the Madhya Pradesh High Court in Commissioner of Income-Tax v. State Bank of Indore , (1988) 172 ITR 24 has reasoned thus:-

10 Page 10

11 Page 11

High Court’s view. In addition, the Andhra Pradesh High Court JUDGMENT has reasoned thus:

12 Page 12

JUDGMENT 13 Page 13 the provision of the Interest Tax Act can be said to be attracted only in case of interest received on loans and advances. However, the transaction ends on the due date occurs and the relationship of borrower lender ends.

We are further of the view that on the due date/cutoff date whatever amount has been recovered by the assessee bank, will certainly fall in the nature of interest, but once the due date/cutoff date is over, any amount received after that date by the bank, would be in the nature of compensation/penalty/liquidated damages and will not be “interest”. It is well settled proposition of law that the way in which entries are made by an assessee in its books of account or the nomenclature given to a transaction by the parties is not determinative of the due character/nature of that transaction. The definition as we have pointed out of ''interest'', shall not cover the amount received by the assessee after the due date. JUDGMENT We have gone through the judgments rendered by various High Courts as quoted above and are not in conformity with the view of Karnataka and Punjab and Haryana High Court and we concur with the view of Madhya Pradesh & Kerala High Court. 14 Page 14

Accordingly, in our view, the amount received as “overdue interest” in inland/foreign demand bills is not liable to be taxed as interest under the Interest Tax Act and we answer this question in favour of the assessee and against the revenue.” We are of the view that the Karnataka High Court’s reasoning is fallacious for the simple reason that Section 2(7) itself makes a distinction between loans and advances made in India and discount on bills of exchange drawn or made in India. It is obvious that if discounted bills of exchange were also to be JUDGMENT treated as loans and advances made in India there would be no need to extend the definition of “interest” to include discount on bills of exchange. Indeed, this matter is no longer res integra .

(2009) 17 SCC 43, this Court while dealing with the definition contained in Section 2(7) of the Interest Tax Act, held:- 15 Page 15

16 Page 16

“Loans and advances” has been held to be different from “discounts” and the legislature has kept in mind the difference between the two. It is clear therefore that the right to charge for overdue interest by the assessee banks did not arise on account of any delay in repayment of any loan or advance made by the said banks. That right arose on account of default in the payment of amounts due under a discounted bill of exchange. It is well settled that a subject can be brought to tax only by a clear statutory provision in that behalf. Interest is JUDGMENT chargeable to tax under the Interest Tax Act only if it arises directly from a loan or advance. This is clear from the use of the word “on” in Section 2(7) of the Act. Interest payable “on” a discounted bill of exchange cannot therefore be equated with interest payable “on” a loan or advance. This being the case, it is clear that the reasoning contained in the High Courts which 17 Page 17 differ from the Karnataka view is obviously correct but for the reasons given by us.

Section 2(28A) defines interest as follows:- “2. Definitions .--- In this Act, unless the context otherwise requires. [(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.]” 18. It will be noticed that this definition is much wider than that contained in Section 2(7) of the Interest Tax Act, 1974. The JUDGMENT expression “payable in any manner in respect of any moneys borrowed” is an expression of considerable width. It will be noticed that the aforesaid language of the definition section contained in the Income Tax Act is broader than that contained in the Interest Tax Act in three respects. Firstly, interest can be payable in any manner whatsoever. Secondly, the expression “in respect of” includes interest arising even indirectly out of a 18 Page 18 money transaction, unlike the word “on” contained in Section 2(7) which, we have already seen, connotes a direct arising of payment of interest out of a loan or advance. And thirdly, “any

The former expression would certainly bring within its ken moneys borrowed by means other than by way of loans or advances. We therefore conclude that the Interest Tax Act, unlike the Income Tax Act, has focused only on a very narrow taxable event which does not include within its ken interest payable on default in payment of amounts due under a discounted bill of exchange. 19. In fact, when we come to the second point agitated in some of the appeals by revenue namely as to whether JUDGMENT guarantee fees paid to the Deposit Insurance and Credit Guarantee Corporation could be included in the definition of interest in Section 2(7) of the Interest Tax Act, 1974, it will be clear that such definition does not include any service fee or other charges in respect of monies borrowed or debt incurred, again unlike the definition of ‘interest’ under the Income Tax Act. We find that the Rajasthan High Court in the impugned 19 Page 19 judgment in Civil Appeal No.4988 of 2015 is correct when it observed:-

JUDGMENT 20 Page 20 20. In the circumstances, we dismiss the appeals of revenue and allow the appeals of the assessees and set aside the judgments in favour of revenue. ……………………J. (A.K. Sikri) ……………………J. New Delhi; (R.F. Nariman) November 18, 2015 JUDGMENT 21 Page 21