1. The right to charge the amount by the assessee did not arise on account of any delay in repayment of any loan or advance made by the assessee. That right accrued on account of default in the payment of the bills
2. The moment the maker presents the overdue bill to the bank for recovery, it becomes a document negotiable in itself on its own strength empowering the bank to effect recovery and creating the liabilities of the parties as regards prompt payment thereof
3. It is difficult to imagine that the purchaser of the Bills of Exchange can be treated as a person who has advanced the loans, to the original borrower. For all practical purposes a different transaction altogether, comes into existence
4. The character of an overdue bill is not synonymous with the loans and advances and, therefore, it will not fall within the ambit and scope of interest u/s 2 (7) of the Interest Tax Act
5. In normal accounting sense, “loans and advances”, as a concept, is different from commitment charges and discounts and keeping in mind the difference between the three, the legislature, in its wisdom, has specifically included in the definition under Section 2(7) commitment charges as well as discounts
1. Assessee is a bank and received compensation after bills of exchange have been discounted by them on the delayed payments
2. This amount is credited by the bank in its interest account
3. A.O. treated this compensation as Interest and liable to tax under the Interest Tax Act, 1974
4. High Court decided the matter against the assessee
5. Assessee moved to the Supreme Court
6. Supreme Court decided the matter in favour of the assessee
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. Recently the Telangana and Andhra Pradesh High Court also had an occasion to consider the same issue in the case of CIT Vs. State Bank of Hyderabad: (2014) 367 ITR 128 and after considering the same issue, as is being examined by this Court and have come to the conclusion that the amount received after due date is not in the nature of interest. 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 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.
Cases referred to