- (1.) THESE four appeals arise out of three different orders of the Tribunal and relate to the same assessee but two different assessment years.
(2.) THE basic judgment of the Tribunal is under challenge in Appeals Nos. 115 of 2006 and 120 of 2006, being dt. 31st being as to whether the interest/penal interest charged by the bank on delayed payment of instalments in recurring deposit account by the depositor can be subjected to levy of tax under the provisions of the Interest -tax Act, 1974 ? and therefore, all these appeals are being decided by this common order. The facts, being not in dispute, need not detain us inasmuch as the controversy in all the appeals is only about various amounts of interest recovered by the assessee from customers/depositors under the nomenclature of penal interest, for late deposit of requisite instalments on or before the stipulated dates on all the recurring savings deposit accounts. The AO found the amount to be taxable under the provisions of the Interest -tax Act which was affirmed by the CIT. In appeal, the Tribunal observed that penal interest charged by the bank on failure to deposit the instalment of recurring deposit account in time by the customers cannot be equated with interest on "loans and advances", whereas the Act envisages charging of tax on interest on "loans and advances", the deposits have been kept away from its pocket. Reliance was also placed on a Delhi Bench judgment of the Tribunal in the case of Oriental Insurance Co. Ltd. vs. Dy. CIT (2004) 82 TTJ (Del) 1084 : (2004) 89 ITD 520 (Del), wherein it was held that the Interest -tax Act applies only on the interest on "loan and advances" and not on deposits. Thus, the addition made by the AO and confirmed by the CIT was set aside.
(3.) ARGUING the appeal, learned counsel for the Revenue relied upon two judgments of the Karnataka High Court, being in the case of CIT vs. Canara Bank (1989) 175 ITR 601 (Kar) and State Bank of Mysore vs. CIT (1988) 74 CTR (Kar) 52 : (1989) 175 ITR 607 (Kar) reported in the same volume at p. 607. On the other hand, learned counsel for the assessee supported the impugned judgment by relying on the basic language of the definition of interest given in section 2(7) of the Interest -tax Act, 1974. We have considered the submissions and have gone through the judgments relied upon by the learned counsel for the appellant. In our view, the two judgments relied upon are distinguishable on facts inasmuch as in Canara Bank's case (supra), the matter involved was about the Industrial Development Bank of India's Bills Re -discounting Scheme. In that case, the whole transaction was based upon pre -existing agreement between parties, including IDBI and the assessee -bank was only found to be a medium or a conduit pipe for disbursement of development fund for implementation of the Scheme. Rediscounting interest paid on bills to RBI or IDBI did not accrue or arise to the assessee -bank and thus was not found to be forming part of chargeable interest under the Act. Likewise, in State Bank of Mysore's case (1989) 175 ITR 607 (Kar) also, the matter was regarding discounting of bills, which was found to be a form of loan or advance and it was held that interest earned on overdue bills by the banks is damages or compensation for delayed payment of money due and thus was found to be chargeable to tax. As against this, we may gainfully quote the provisions of s. 2(7), which define "interest", for the purpose of the said Act, which reads as under : "2(7) 'interest' means interest on loans and advances made in India and includes : (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India ; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include - - (i) interest' referred to in sub -s. (IB) of s. 42 of the Reserve Bank of India Act, 1934 ; (ii) discount on treasury bills ;" ;