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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]

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

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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  

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  

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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,  

no charges are levied by the bank.  In case the bills are not  

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  

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.

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5. The entire case hinges on the construction of Section 2(7)  

of  the  Interest  Tax  Act,  1974  which  defines  “interest”  as  

follows:-

“Section 2(7), Interest Tax Act, 1974

2. In this Act, unless the context otherwise requires, —

(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-section  (1B)  of  section 42 of the Reserve Bank of India Act, 1934 (2  of 1934); (ii)       discount on treasury bills;”

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  

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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:-

“A  particular  expression  is  often  defined  by  the  Legislature by using the word ‘means’ or the word  ‘includes’.  Sometimes  the  words  ‘means  and  includes’  are  used.  The  use  of  the  word  ‘means’  indicates that “definition is a hard-and-fast definition,  and  no  other  meaning  can  be  assigned  to  the  expression  than  is  put  down  in  definition”.  (See : Gough v. Gough [(1891)  2  QB 665 :  60 LJ  QB  726]  ; Punjab  Land  Development  and  Reclamation  Corpn.  Ltd. v. Presiding  Officer,   Labour Court [(1990) 3 SCC 682, 717 : 1991 SCC  (L&S)  71]  .)  The  word  ‘includes’  when  used,  enlarges the meaning of the expression defined so  as  to  comprehend  not  only  such  things  as  they  signify  according  to  their  natural  import  but  also  those  things  which  the  clause  declares  that  they  shall include. The words “means and includes”, on  the other hand, indicate “an exhaustive explanation  of the meaning which, for the purposes of the Act,  must  invariably  be  attached  to  these  words  or  expressions”.  (See  : Dilworth v. Commissioner  of   Stamps [1899  AC  99,  105-106  :  (1895-9)  All  ER  Rep  Ext  1576]  (Lord  Watson); Mahalakshmi  Oil   Mills v. State of A.P. [(1989) 1 SCC 164, 169 : 1989  SCC (Tax) 56]” [at para 19]

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  

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on  loans  and  advances.  Section  32  of  the  Negotiable  

Instruments Act states as follows:-

“Section  32.  Liability  of  maker  of  note  and  acceptor of bill.  

In  the  absence of  a  contract  to  the  contrary,  the  maker of a promissory note and the acceptor before  maturity of a bill of exchange are bound to pay the  amount  thereof  at  maturity  according  to  the  apparent  tenor  of  the  note  or  acceptance  respectively, and the acceptor of a bill of exchange  at  or  after  maturity  is  bound  to  pay  the  amount  thereof to the holder on demand.  

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  

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,  

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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  

made in  India”,  and consequently  any amount  that  becomes  

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  

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  

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with the bank. It thus becomes imperative to first find out what  

in fact the High Courts have held on this vexed question.  

12. The Karnataka High Court in  State Bank of Mysore  v.  

Commissioner  of  I.T.,  Karnataka-I,  Bangalore,  (1989)  175  

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:

“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  

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paid on it. Discounting is a means of lending as is  pledge.”

It is stated in Byles on BILL OF EXCHANGE (24th  Edition) at page 282 as follows:

“A  banker  clearly  gives  value  for  a  bill  when  he  discounts  it,  the  transaction  consisting  of  the  purchase of the bill at a discount, i.e. allowing the  interest for the time the bill has to run, subject in the  event of dishonour to a right of recovery from the  person for whom it is discounted.”

The  practice  of  the  Bank  itself,  at  the  time  of  discounting is as disclosed in the letter used to be  sent  along  with  the  intimation  of  discount  which  showed that in case of delayed payment an overdue  interest at a particular rate had to be collected if not  paid on presentation. These facts are sufficient to  hold that the amount in question is interest under  Sec. 2(7) of the Interest Tax Act.

It  is  settled  law  that  interest  is  damages  or  compensation for delayed payment of money due.  Therefore the expression ‘compensation’ in Section  32  of  the  Negotiable  Instruments  Act  will  include  interest paid by way of damages or compensation  for  delayed payments.  We have already held that  Discounting of  Bills  is a form of  advance or loan,  and hence compensation paid on delayed payment  of  money  due  thereon  is  interest  on  loans  and  advances. Discount on bill is a form of advance or  loan granted to its customer by a Bank and if that be  the true position as indicated by Paget any amount  collected by the Bank for delayed payment of that  amount  cannot  be anything but  interest,  whatever  may  be  the  nomenclature,  and  is  chargeable  interest  for  the  purpose  of  Interest  Tax  Act.”  [at  pages 610 – 611]

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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:-

“Now the right  to  charge the amount  for  delay in  payment of bills accrued to the assessee by virtue  of  the  provisions  of  section  32  of  the  Negotiable  Instruments Act, 1881, and in accordance with the  terms  of  the  agreement  entered  into  by  the  assessee with its constituents in pursuance of which  bills were purchased by the assessee. On account  of  delayed  payment  of  bills  purchased  by  the  assessee,  the  assessee  became  entitled  to  liquidated  damages  by  way  of  compensation,  as  stipulated in the agreement. The right to charge that  amount by the assessee did not, therefore, 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. It  may  be  that  the  amount  payable  by  way  of  compensation for detention of a sum of money due,  can  be  said  to  be  covered  by  the  expression  “interest” in its widest sense, including both interest  proper  and  interest  by  way  of  damages.  But  the  provisions of the Interest-tax Act are attracted only  in the case of interest on loans and advances. The  amount  charged  by  the  assessee  for  delayed  payment of bills cannot be held to be “interest on  loans and advances”. In our opinion, therefore, the  Tribunal was not right in holding that the amounts in  question  charged  by  the  assessee  for  delayed  

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payment of  bills  were in the nature of  interest  on  advances and exigible to tax under the Interest-tax  Act.” [at page 28]

The Kerala High Court in  Commissioner of Income Tax vs.  

State Bank of Travancore, [1997] 228 ITR 40 (Ker), in arriving  

at  the same conclusion as the Madhya Pradesh High Court,  

has,  however,  adopted  a  different  line  of  reasoning   in  the  

following terms:-

“These overdue bills are presented to the bank by  the makers for the purpose of their recovery. As far  as the makers are concerned, there may be justified  or required circumstances for them to approach the  bank.  The  bank  has  ready  facilities  for  recovery,  more statutory  powers of  stringent  character  and,  therefore,  the  practice  gets  established  that  the  makers hand over the overdue bills to the bank for  recovery.  It  is  thereafter  that  the  bank  sets  in  motion. In other words, what is undertaken by the  bank is the recovery of the amount covered by the  bill and in regard to which, by virtue of Section 32 of  the  Negotiable  Instruments  Act,  1881,  a  statutory  liability  is  created  with  regard  to  the  prompt  payment.  The  details  that  are  available  in  the  context  would show that  the origin of  the amount  which is the subject-matter of an overdue bill gets  snapped.  In  other  words,  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.  In  such  a  situation,  ignoring  the  intermittent  acrobatics  as  to  whether  

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the amount can be understood as interest or could  continue to have the character of its description as  compensation in accordance with the provisions of  Section 32 of the Negotiable Instruments Act, 1881,  would  be  wholly  unnecessary,  at  least  for  the  purpose of consideration as to whether the amount  can assume the character of "chargeable interest".  It is elementary in the context that taxation liability  has to be understood and established and unless  this  is  apparent  from  the  material  on  record,  the  imposition  of  tax  does  not  get  justified.  In  other  words,  unless  the  amount  which  is  sought  to  be  chargeable  as  the  chargeable  interest  has  any  necessary  relationship  with  loans  and  advances,  such an attempt  to  understand the amount  alone  would not satisfy the requirement of justification.”

15. Likewise,  the  Andhra  Pradesh  High  Court  in  

Commissioner of Income Tax v.  State Bank of Hyderabad,  

[2014] 367 ITR 128 (AP) has also dissented from the Karnataka  

High Court’s view.  In addition, the Andhra Pradesh High Court  

has reasoned thus:

“It  is  not  uncommon that  banks purchase Bills  of  Exchange  from  their  customers  and  make  payments, on being satisfied that they are in order.  Whenever the purchase of Bills of Exchange takes  place,  the  purported  transaction  comes  to  be  governed  by  Section  32 of  the  Negotiable  Instrument Act. The basic transaction of borrowing  and lending is required to be between the persons  described as "maker" and "acceptor" under Section  32  of  the  Negotiable  Instrument  Act.  The  person  who purchased the Bills of Exchange becomes the  

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"bearer"  thereof.  Section  32  of  the  Negotiable  Instrument Act, defines the liability of the concerned  persons  to  discharge  their  respective  obligations.  However, 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.”

The Madras High Court  in  Commissioner of Income Tax v.  

Cholamandalam Investment  and  Finance  Co.  Ltd.,  [2008]  

296 ITR 601 (Mad ) has simply followed the Kerala High Court’s  

view,  and  the  Rajasthan  High  Court  in  a  judgment  dated  

12.11.2014,  which is  the impugned judgment  in  Civil  Appeal  

No.4988 of 2015, has reasoned thus:-

“The assessee-bank got right to charge the amount  for  the  delay  in  payment  of  bills  accrued  to  the  assessee by virtue of the provisions of Sec. 32 of  the  Negotiable  Instrument  Act,  1881  and  in  accordance with the terms of the agreement, that its  constituents (borrowers),  the bills  were purchased  by  the  assessee  and  on  account  of  the  delayed  payment of bills,  the assessee became entitled to  liquidated damages by way of  compensation from  the borrower. The right to charge that amount by the  assessee did not, therefore, arise on account of any  delay in re-payment of any loan or advances made  by the assessee. It may be that the amount payable  by way of compensation for detention of a sum of  money  due,  can  be  said  to  be  covered  by  the  expression  “interest”  in  its  widest  sense  including  interest proper and interest by way of damages but  

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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.  

In  our  view,  the scope and definition  of  the term  “interest”  cannot  be  interpreted  to  bring  within  its  fold  any  income  that  is  booked  by  an  assessee  under  the  head  interest.  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. The Parliament in its own wisdom has not  included any amount that is recovered in the form of  interest, penalty or otherwise under the definition of  Interest and had it been so, such nature of amount  as  contended  by  the  revenue  could  have  been  brought within the ambit and scope of interest.  

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.  

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.  

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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.  

In  CIT v.  Sahara India Savings & Investment Corpn. Ltd.,  

(2009) 17 SCC 43, this Court while dealing with the definition  

contained in Section 2(7) of the Interest Tax Act, held:-

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“Section 2(5) defines “chargeable interest” to mean  total  amount  of  interest  referred  to  in  Section  5,  computed in the manner laid down in Section 6. In  other  words,  the “scope of  chargeable interest”  is  defined under  Section 5 whereas “computation of  chargeable interest” is under Section 6. Section 2(7)  is the heart of the matter as far as the present case  is concerned.

In  accounting  sense,  there  is  a  conceptual  difference between loans and advances on the one  hand and investments on the other hand. Section  2(7) defines the word “interest” to mean interest on  “loans  and  advances  including  commitment  charges, discount on promissory notes and bills of  exchange  but  not  to  include  interest  referred  to  under Section 42(1-B) of the Reserve Bank of India  Act,  1934  as  well  as  discount  on  treasury  bills”.  Section 2(7),  therefore,  defines what is interest  in  the first part and that first part confines interest only  to  loans  and  advances,  including  commitment  charges, discount on promissory notes and bills of  exchange.

Pausing  here,  it  is  clear  that  the  interest  tax  is  meant  to  be  levied  only  on  interest  accruing  on  loans  and  advances  but  the  legislature,  in  its  wisdom,  has  extended  the  meaning  of  the  word  “interest”  to  two other items,  namely,  commitment  charges and discount on promissory notes and bills  of  exchange.  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. The fact remains that  interest on loans and advances will not cover under  Section  2(7)  interest  on  bonds  and  debentures  bought  by  an  assessee  as  and  by  way  of  “investment”. Even the exclusionary part of Section  

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2(7) excludes only discount on treasury bills as well  as  interest  under  Section  42(1-B)  of  the  Reserve  Bank of India Act, 1934.” [at paras 5 – 7]

16. The Karnataka High Court’s  view is  directly contrary to  

the view of this Court, and, therefore, cannot be countenanced.  

“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  

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  

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differ from the Karnataka view is obviously correct but for the  

reasons given by us.

17. It  will  be  interesting  to  notice  at  this  stage  that  the  

expression “interest” is also defined under the Income Tax Act.  

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  

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  

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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  

moneys borrowed” must be contrasted with “loan or advances”.  

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  

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  

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judgment  in  Civil  Appeal  No.4988 of  2015 is  correct  when it  

observed:-

“On  conjoint  reading  of  the  definition  of  interest,  which has been quoted herein above and under the  Interest Tax Act in para 4 (supra), it is noticed that  the Interest Tax Act, does not include the term “any  service fee or  other  charges in  respect  of  money  charge or debt incurred.” under its ambit and putting  to test the principle of harmonious interpretation, it  is  evident  that  the  parliament  in  its  wisdom  has  chosen not to add the aforesaid terminology under  the  Interest  Tax  Act,  and  what  has  not  been  mentioned neither be added nor is 22 required to be  read  in  between  the  lines.  We  have  already  observed about principles of  interpretation in para  8.5  and  8.6  (supra)  and  mere  crediting  the  said  amount  as  interest  will  certainly  not  entitle  the  revenue to treat the same as interest. Hon'ble Apex  Court in the case of Sutlej Cotton Mills and Godhra  Electricity (supra) have clearly expressed that mere  crediting  the  amount  under  a  head  is  not  determinative of the real nature and real intent and  purpose of the transaction is required to be seen.  Therefore,  we hold that  the amount  recovered by  the  assessee  from  the  constituents  (borrower)  cannot  be  taxed  as  interest  in  the  hands  of  the  assessee. On perusal of definition, it is distinctively  clear  that  such  charges  recovered  by  the  bank  cannot  be equated to the term interest  under  the  Act. Though the receipt of Guarantee Fees received  from constituents (borrowers) is not linked to what is  paid  to  DICGC  as  insurance  cover  on  behalf  of  depositors, the issue is not relevant for the reason  stated by us herein above.”

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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                            

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