Madras High Court
M/S.Chandok Services Pvt. Ltd vs The Assistant Commissioner Of Income ... on 16 April, 2025
Author: C.Saravanan
Bench: S.S.Sundar, C.Saravanan
T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On 11.03.2025
Pronounced On 16.04.2025
Coram:
THE HON'BLE MR.JUSTICE S.S.SUNDAR
and
THE HON'BLE MR.JUSTICE C.SARAVANAN
T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
M/s.Chandok Services Pvt. Ltd.,
Chandok Centre,
No.(713) 244, Anna Salai,
Chennai – 600 006.
...Appellant in all T.C.As
Versus
The Assistant Commissioner of Income Tax,
Company Circle I (3),
Chennai.
...Respondent in all T.C.As
Common Prayer:
Tax Case Appeals filed under Section 260A of the Income Tax
Act, 1961 against the order passed by the Income Tax Appellate Tribunal,
Chennai 'A' Bench, Chennai in Int.T.A.Nos.009/Mds/2008,
0010/Mds/2008, 0011/Mds/2008 & 0012/Mds/2008 respectively dated
15.05.2009.
For Appellant in all T.C.As : Mr.R.Kumar
For Respondent in all T.C.As : Mr.T.Ravikumar,
Senior Standing Counsel
1/28
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
COMMON JUDGMENT
(Judgment of the Court was delivered by C.SARAVANAN, J.)
These Tax Case Appeals have been preferred by the
Appellant/Assessee against the Order dated 15.05.2009 passed by the
Income Tax Appellate Tribunal, Chennai 'A' Bench, Chennai (for brevity,
hereinafter referred to as “ITAT”) in I.T.A.Nos.009/Mds/2008,
0010/Mds/2008, 0011/Mds/2008 & 0012/Mds/2008 respectively, relating
to the Assessment Years 1994-1995, 1995-1996, 1996-1997 & 1997-
1998.
2. On 11.11.2009, all these Tax Case Appeals were admitted by
this Court and the following substantial questions of law were framed:
“1. Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is right in law in holding that the
appellant is a 'credit institution' as defined in Section 2(5A) r.w.
Clause (va) of Section 2(5B) of the Interest Tax Act, 1974?
2. Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is right in law in concurring with
the views of the Commissioner (Appeals) and holding that mere
acceptance of monies as deposits without any 'scheme or
arrangement' as contemplated in the Reserve Bank
directions/notification will attract the provisions of the Interest
Tax Act?”
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
3. In the present case, originally, Assessment Order under Section
8 read with Section 10 of the Interest Tax Act, 1974 (for brevity,
hereinafter referred to as the “1974 Act”) was passed on 08.11.1999
determining the interest tax payable by the Appellant/Assessee for the
Assessment Years 1994-1995, 1995-1996, 1996-1997 & 1997-1998.
Challenging the said Assessment Order dated 08.11.1999, the
Appellant/Assessee preferred an Appeal before the Commissioner of
Income Tax (Appeals). By an Order dated 28.02.2000, the Commissioner
of Income Tax (Appeals) held that the Appellant/Assessee was not liable
to pay interest tax since the Appellant/Assessee could not be treated as a
“credit institution” under Section 2(5A) and “financial company” under
Section 2(5B) of the 1974 Act.
4. As against the said order, the Department preferred a Second
Appeal before the ITAT. By Common Order dated 24.06.2005, the ITAT
set aside the Assessment Order dated 08.11.1999 and remitted the case
back to the Assessing Officer with a direction to verify whether the
Appellant/Assessee accepted deposits or not and accordingly, to decide
the issue with reference to the provisions of Section 2(5B)(va) of the
1974 Act.
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
5. Pursuant to the aforesaid order of the ITAT, the
Respondent/Assessing Officer had passed the Assessment Orders dated
26.12.2006 under Section 8 read with Section 10 of the 1974 Act for the
Assessment Years 1994-1995, 1995-1996, 1996-1997 & 1997-1998
respectively. In the said Assessment Orders, the Respondent/Assessing
Officer held that since the Appellant/Assessee accepted deposits from its
Directors, Shareholders and Group Companies, the Appellant/Assessee
was to be treated as a “credit institution” within the meaning of Section
2(5B)(va) of the 1974 Act and therefore, the Appellant/Assessee was
liable to pay interest tax under the provisions of the 1974 Act for the
deposits accepted from its Directors, Shareholders and Group Companies
by the Appellant/Assessee.
6. The details of the interest tax payable by the Appellant/Assessee
as per the Assessment Order dated 26.12.2006 are as follows:-
For the Assessment Year 1994-95:
Tax Chargeable Interest Rs.4,26,716/-
Interest Tax thereon Rs.12,801/-
Add: Int. u/s. 12 Rs.12,801/-
Int. u/s. 12B Rs.17,025/-
Rs.29,826/-
Total Interest Tax Payable Rs.42,627/-
For the Assessment Year 1995-96:
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Tax Chargeable Interest Rs.14,12,850/-
Interest Tax thereon Rs.42,385/-
Add: Int. u/s. 12 Rs.32,212/-
Int. u/s. 12B Rs.46,199/-
Rs.78,411/-
Total Interest Tax Payable Rs.1,20,796/-
For the Assessment Year 1996-97:
Tax Chargeable Interest Rs.36,40,659/-
Interest Tax thereon Rs.1,09,219/-
Add: Int. u/s. 12 Rs.58,978/-
Int. u/s. 12B Rs.92,835/-
Rs.1,15,813/-
Total Interest Tax Payable Rs.2,61,032/-
For the Assessment Year 1997-98:
Tax Chargeable Interest Rs.27,65,877/-
Interest Tax thereon Rs.82,976/-
Add: Int. u/s. 12 Rs.24,892/-
Int. u/s. 12B Rs.50,614/-
Rs.75,506/-
Total Interest Tax Payable Rs.1,58,482/-
7. Aggrieved over the aforesaid Assessment Orders dated
26.12.2006, the Appellant/Assessee filed appeals in I.T.A.Nos.13 to
16/2006-07/A-III before the Commissioner of Income Tax (Appeals) III,
Chennai. However, the Commissioner of Income Tax (Appeals) III,
Chennai dismissed the tax appeals on 29.02.2008. Challenging the order
dated 29.02.2008 of the Commissioner of Income Tax (Appeals) III,
Chennai, the Appellant/Assessee preferred Appeals in
I.T.A.Nos.009/Mds/2008, 0010/Mds/2008, 0011/Mds/2008 &
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
0012/Mds/2008 before the ITAT.
8. By the Impugned Common Order dated 15.05.2009, the ITAT
affirmed the Order dated 29.02.2008 passed by the Commissioner of
Income Tax (Appeals) III, Chennai and thus, dismissed the Appeals filed
by the Appellant/Assessee in I.T.A.Nos.009/Mds/2008, 0010/Mds/2008,
0011/Mds/2008 & 0012/Mds/2008. Hence, the Appellant/Assessee is
before this Court.
9. Assailing the Impugned Common Order 15.05.2009 of the
ITAT, the learned counsel for the Appellant/Assessee submitted that the
ITAT has erred in holding that the Appellant/Assessee is a “credit
institution” liable to pay interest tax concurring with the view of the
Commissioner of Income Tax (Appeals).
9.1. It is submitted that the Appellant/Assessee was not a Company
which receives any deposit under any scheme or arrangement as
envisaged in Section 2(5B)(va) of the 1974 Act. Hence, the
Appellant/Assessee denied liability to pay interest tax under the 1974 Act
stating that it is not “credit institution” within the meaning of Section
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
2(5A) read with Section 2(5B)(va) of the 1974 Act. However, the
Assessing Officer had observed that the Appellant/Assessee has accepted
deposits from various persons and is, as such a “credit institution” liable
to pay interest tax under the provisions of the 1974 Act.
9.2. It is further submitted by the learned counsel for the
Appellant/Assessee that the authorities below have failed to see that the
term “deposit” is not to be understood in a general sense as mere
acceptance of monies but in the manner envisaged under the Reserve
Bank of India (RBI) notification read with the provisions of the 1974 Act.
Therefore, the learned counsel for the Appellant/Assessee prayed that the
Impugned Common Order dated 15.05.2009 passed by the ITAT is liable
to be set aside.
10. The learned Senior Standing Counsel for the
Respondent/Assessing Officer submitted that no perverse findings had
been rendered by any of the lower authorities and that the orders passed
by all three fact finding authorities below are well-reasoned orders. It is
submitted that in absence of any illegality committed by the authorities in
the orders, the scope of interference by this Court under Section 260A of
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
the Income Tax Act, 1961 is very limited especially in a case where there
are concurrent finding of facts. Therefore, it is stated that these Tax Case
Appeals are liable to be dismissed.
10.1. The learned Senior Standing Counsel drew our attention to
the decision rendered by this Court in Commissioner of Income Tax,
Chennai Vs. Tamil Nadu Industrial Development Corporation Ltd.,
(2014) 368 ITR 545 (Mds), wherein, it has been held that the primary
object of the Appellant/Assessee was to grant loans and advances to
Companies promoted by it and earned huge amount of interest from
transaction of finance. Therefore, the Appellant/Assessee was to be
regarded as “credit institution” falling under the definition of “financial
company” under Section 2(5B) of the 1974 Act.
10.2. The learned Senior Standing Counsel for the
Respondent/Assessing Officer further submitted that in the present case,
based on an oral arrangement entered between the parties, periodical
interest was also paid by the Appellant/Assessee to the depositors and
therefore, the 1974 Act would apply and that the Appellant/Assessee was
liable to pay interest tax on the interest paid on the aforesaid amount
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
received as deposits.
10.3. It is further submitted that all the depositors had given
identical confirmation letters that they were receiving interest from the
Appellant/Assessee and the word used was “periodical interest” and
therefore, a fixed pattern existed on the amounts paid by the
Appellant/Assessee.
10.4. The learned Senior Standing Counsel for the
Respondent/Assessing Officer further submitted that since all the fact
finding authorities have decided the issue against the Appellant/Assessee
and since there is no question of law arising in these Appeals, it is stated
that these Tax Case Appeals are liable to be dismissed.
10.5. In support of his submissions, the learned Senior Standing
Counsel for the Respondent/Assessing Officer has placed reliance on the
following decisions:
(i) Commissioner of Income Tax, Chennai Vs. Tamil Nadu
Industrial Development Corporation Ltd. (2014) 368 ITR 545 (Mds)
(ii) Tamil Nadu Industrial Development Corporation Ltd. Vs.
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Commissioner of Income Tax, Chennai (2015) 231 Taxman 224 (SC)
(iii) Syndicate Bank Employees Co-operative Thrift & Credit
Society Ltd. Vs. Income Tax Officer (2006) 287 ITR 40 (Mds)
(iv) T.N.Power Finance Infrastructure Development Corporation
Ltd. Vs. Joint Commissioner of Income Tax (2006) 280 ITR 491 (Mds)
(v) Commissioner of Income Tax Vs. P.Mohanakala (2007) 291
ITR 278 (SC)
(vi) C.Ramakrishna Vs. Deputy Commissioner of Income Tax
(2023) 456 ITR 253 (SC)
(vii) Principal Commissioner of Income Tax Vs. Santhosh
Kumar Agarwal (2023) 294 Taxman 515 (SC)
11. We have heard the learned counsel for the Appellant/Assessee
and the learned Senior Standing Counsel for the Respondent/Assessing
Officer.
12. Having considered the provisions of the 1974 Act, we are of
the view that the Impugned Common Order of the ITAT, also the
Appellate Commissioner and the Assessing Officer suffer from serious
non-application of mind.
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13. Tax on the interest paid by the Appellant/Assessee to its
Shareholders, Directors and Group Companies, are not chargeable to Tax
under the 1974 Act. We shall explain the position.
14. Section 4 of the 1974 Act is the charging Section. The object
of the 1974 Act was to impose a special tax on the total amount of
interest received by scheduled banks on loans and advances made in
India. In other words, the intention of the Parliament was only to levy
tax on the amount of interest charged by a scheduled banks on loans
and advances made in India and not on the interest paid by the
scheduled banks.
15. Interest on Government securities as also debentures and other
securities issued by local authorities, companies and statutory
corporations were not intended to be taxed. Interest charged on loans and
advances made to other “scheduled banks” likewise were also exempted
from the levy.
16. In this context, it will be useful to refer to the history behind
the enactment of the 1974 Act. The then Finance Minister made a speech
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on 31.07.1974 in the well of the Parliament. The speech bring out the
object of the 1974 Act. Relevant portion of the Finance Minister’s
speech is reproduced hereunder:-
“I shall now explain my tax proposals, dealing first
with proposals in the field of direct taxes. As a part
of the anti-inflationary package, I propose to levy a
tax on the gross amount of interest received by
scheduled banks on loans and advances made in
India. The banks would be expected to adjust their
functioning to this tax and reimburse themselves to
the extent necessary by making appropriate
adjustments in interest rate charges from borrowers.
The proposed tax will have both a monetary and a
fiscal impact in that it will serve the purpose both of
raising the cost of borrowed funds and of
supplementing Government revenues. The proposed
tax will be levied at the rate of 7 per cent of the
gross amount of interest earned by the banks. This
would imply on an average an increase of about 1
percent in the cost of borrowing from the banks.
Interest on Government securities, as also
debentures and other securities and statutory
corporations will not be included in the tax base.
Interest received on transactions between scheduled
banks will likewise be exempted from the proposed
levy.”
17. What was in contemplation was only a tax on the “chargeable
interest” of a ‘scheduled bank’.
18. The legislative intent for passing the Bill which was later
passed the 1974 Act was confined to imposition of a special tax on the
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total amount of “chargeable interest” by “scheduled banks” on loans and
advances made in India.
19. The expression “chargeable interest” has been defined in
Section 2(5) of the 1974 Act while the expression “interest” has been
defined in Section 2(7) of the 1974 Act.
20. The definition of the expression “chargeable interest” in
Section 2(5) of the 1974 Act has seen few changes in 1991 in harmony
with the amendment to the charging provision, namely Section 4 of the
1974 Act when interest charged by “credit institutions” were also brought
within the provisions of the 1974 Act. We shall shortly refer to the same.
21. It has to be however borne in mind that “interest tax” under the
1974 Act was never intended to be imposed on the interest paid by the
“scheduled banks” on deposits received from depositors.
22. When 1974 Act was enacted, interest tax was to be levied at the
rate of seven percent (7%) of interest charged and received by the
“scheduled banks”. Interest which had already accrued or paid before
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01.08.1974 was also not intended to be taxed.
23. The interest tax that was payable under the 1974 Act was also
allowed as a permissible deductions under the provisions of the Income
Tax Act, 1961 for computing the taxable income under the Income Tax
Act, 1961.
24. As mentioned above, Section 4 has seen few changes as “credit
institutions” were also taxed. In 1991, “credit institutions” were brought
within its purview of the 1974 Act. Thus, interest charged by “credit
institutions” were also liable to tax. As a sequitur, a corresponding
amendment was made to the definition of the expression “chargeable
interest” in Section 2(5) of the 1974 Act. In Section 2(5A) of the 1974
Act, a definition of “credit institution” was introduced. Since the
definition of “credit institution” was included, a new definition of
“financial company” was also introduced in Section 2(5B) of the 1974
Act in 1991.
25. The amendments to Section 4 of the 1974 Act are captured
below, for the sake of clarity:-
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Section 4 of the Interest Tax Act, 1974 (45 of 1974)
Section 4 of the Section 4 renumbered Section 4 of the
Interest Tax Act, as sub-section (1) and Interest Tax Act,
1974 with effect sub-section (2) by 1974 with effect
from 23.09.1974 Section 93 of the from 01.04.2001
Finance (No.2) Act,
1991 (49 of 1991) with
effect from 01.10.1991
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Section 4 of the Interest Tax Act, 1974 (45 of 1974)
4. Charge of tax.- 4. Charge of Tax. - 4. Charge of Tax. -
Subject to the (1) Subject to the (1) Subject to the
provisions of this provisions of this Act, provisions of this
Act, there shall be there shall be charged Act, there shall be
charged on every on every scheduled bank charged on every
scheduled bank for for every assessment scheduled bank for
every assessment year commencing on or every assessment
year commencing on after the 1st day of April, year commencing on
or after the 1st day 1975, a tax (in this Act or after the 1st day
of April, 1975, a tax referred to as interest- of April, 1975, a tax
(in this Act referred tax) in respect of its (in this Act referred
to as interest-tax) in chargeable interest of to as interest-tax) in
respect of its the previous year at the respect of its
chargeable interest rate of seven per cent of chargeable interest
of the previous year such chargeable interest. of the previous year
at the rate of seven Provided that the rate at at the rate of seven
per cent of such which interest-tax shall per cent. of such
chargeable interest. be charged in respect of chargeable interest.
any chargeable interest Provided that the
accruing or arising after rate at which
the 31 day of March, interest-tax shall be
st
1983 shall be three and charged in respect
a half per cent. of such of any chargeable
chargeable interest. interest accruing or
st
(2) Notwithstanding arising after the 31
anything contained in day of March, 1983
sub-section (1) but shall be three and a
subject to the other half per cent. of such
provisions of this Act, chargeable interest.
there shall be charged (2) Notwithstanding
on every credit anything contained
institution for every in sub-section (1)
assessment year but subject to the
commencing on and other provisions of
from the 1st day of April, this Act, there shall
1992, interest-tax in be charged on every
respect of its chargeable credit institution for
interest of the previous every assessment
year at the rate of three year commencing on
per cent. of such and from the 1st day
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Section 4 of the Interest Tax Act, 1974 (45 of 1974)
chargeable interest. of April, 1992,
interest-tax in
respect of its
chargeable interest
of the previous year
at the rate of three
per cent. of such
chargeable interest.
Provided that the
rate at which
interest-tax shall be
charged in respect
of any chargeable
interest accruing or
arising after the 31st
day of March, 1997
shall be two per
cent. of such
chargeable interest.
(3) Notwithstanding
anything contained
in sub-sections (1)
and (2), no interest-
tax shall be charged
in respect of any
chargeable interest
accruing or arising
after the 31st day of
March, 2000.
26. Thus, the charge under the 1974 Act was extended to “credit
institutions” in 1991 by amending Section 4(2) of the 1974 Act (which is
the charging Section) and by inserting in definition for the expression
“credit institution” in Clause (5A) to Section 2 of the 1974 Act.
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27. The expression “interest” has been defined in Section 2(7) of
the 1974 Act. The expression “chargeable interest” defined in Section
2(5) of the 1974 Act was also amended with effect from 01.10.1991.
28. It will be useful to refer to the definition of “chargeable
interest” and “interest” as defined in Section 2(5) and Section 2(7) of the
1974 Act. These definitions read as under:-
Section 2(5) of the 1974 Act Section 2(7) of the 1974 Act
“chargeable interest” means the “interest” means interest on
total amount of interest referred loans and advances made in
to in Section 5, computed in the India and includes—
manner laid down in Section 6. 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.
29. “Interest” as defined under Section 2(7) of the 1974 Act is
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chargeable to tax under Section 4 of the 1974 Act only if it arises directly
from a loan(s) or advance(s) given by a “scheduled bank” or a “credit
institution” to borrowers.
30. The Hon’ble Supreme Court, in M/s.State Bank of Patiala Vs.
Commissioner of Income Tax, Patiala, (2015) 15 SCC 483 : (2016) 383
ITR 244, though in a different context, held that the definition of
“Interest” as defined in Section 2(7) of the 1974 Act was exhaustive as it
uses the expression 'means and includes' but would not only on a very
narrow taxable event which does not include within its keen interest
payable on default in payment of amounts due under a discounted bill of
exchange.
31. The Hon'ble Supreme Court, in Commissioner of Income Tax
Vs. Sahara India Savings & Investment Corporation Ltd., (2009) 17
SCC 43 while dealing with the definition of “interest” in Section 2(7) of
the 1974 Act held as follows:-
6. 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
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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.
7. 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 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.”
32. A reading of the expression “chargeable interest” in Section
2(5) of the 1974 Act indicates that the total amount of interest referred to
in Section 5 of the 1974 Act is to be computed in the manner laid down in
Section 6 of the 1974 Act.
33. A plain reading of the provisions of the 1974 Act, indicates that
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interest charged by “credit institutions” as defined in Section 2(5A) of the
1974 Act and “scheduled banks” alone were leviable to interest tax on the
“chargeable interest” as defined in Section 2(5) of the 1974 Act of the
previous year at 7% on the “scheduled banks” and at 3% on the “credit
institutions” with retrospective effect from 01.10.1991.
34. Section 5 of the 1974 Act as amended by the Finance Act, 1991
as in force from 01.10.1991, prescribes the ‘Scope of Chargeable Interest’
whereby interest on loans and advances made to other credit institutions
or to any co-operative society engaged in carrying on the business of
banking.
35. As per Section 5 of the 1974 Act, “chargeable interest” of any
previous year of a “credit institution” shall be the total amount of
“chargeable interest” accruing or arising to the “credit institution” in that
previous year.
36. In fact, Proviso to Section 5 of the 1974 Act also makes it clear
that any interest in relation to categories of bad or doubtful debts referred
to in Section 43D of the Income Tax Act, 1961, shall be deemed to accrue
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or arise to the “credit institution” in the previous year in which it is
credited by the “credit institution” to its profit and loss account for that
year or, as the case may be, in which it is actually received by the “credit
institution”, whichever is earlier.
37. Section 6 of the 1974 Act which provides machinery for
“chargeable interest” also makes it clear that computation of chargeable
interest of a previous year of an assessee shall be allowed from the total
amount of interest accruing or arising to an assessee. Thus, tax is
payable only on the interest charged which arises or accrues on the
amount lent by the “scheduled banks” or “credit institutions”.
38. Proviso to Section 6 of the 1974 Act also makes it clear that
only such interest has been taken into account while computing the
“chargeable interest” of an assessee of an earlier previous year and the
amount which has been written off as irrecoverable in the accounts of the
assessee for the previous year during which it is established to have
become a “bad debt”.
39. For the sake of clarity, Section 5 and Section 6 of the 1974 Act
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
are reproduced below:-
Section 5 of the 1974 Act Section 6 of the 1974 Act
Scope of chargeable interest:- Computation of chargeable
Subject to the provisions of this interest:-
Act, the chargeable interest of any (1) Subject to the provisions of sub-
previous year of a credit section (2), in computing the
institution shall be the total chargeable interest of a previous
amount of interest (other than year, there shall be allowed from the
interest on loans and advances total amount of interest (other than
interest on loans and advances made
made to other credit institutions
to credit institutions accruing or
or to any co-operative society arising to the assessee in the
engaged in carrying on the previous year, a deduction in respect
business of banking) accruing or of the amount of interest which is
arising to the credit institution in established to have become a bad
that previous year: Provided that debt during the previous year:
any interest in relation to Provided that such interest has been
categories of bad or doubtful taken into account in computing the
debts referred to in section 43D of chargeable interest of the assessee of
the Income-tax Act shall be an earlier previous year and the
deemed to accrue or arise to the amount has been written off as
credit institution in the previous irrecoverable in the accounts of the
year in which it is credited by the assessee for the previous year during
credit institution to its profit and which it is established to have
loss account for that year or, as become a bad debt.
the case may be, in which it is Explanation.—For the removal of
actually received by the credit doubts, it is hereby declared that in
institution, whichever is earlier. computing the chargeable interest of
a previous year, no deduction, other
than the deduction specified in this
sub-section, shall be allowed from
the total amount of interest accruing
or arising to the assessee.
(2) In computing the chargeable
interest of a previous year, the
amount of interest which accrues or
arises to the assessee before the 1st
day of August, 1974 or during the
period commencing on the 1st day of
April, 1985 and ending with the 30th
day of September, 1991 shall not be
taken into account.
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
40. Amendments to the 1974 Act in 1991 have not authorized a
levy of interest tax on the interest paid or the liability incurred by a
“scheduled bank” or “credit institution” under Section 4 of the 1974 Act.
41. Even if the Appellant/Assessee is covered under the ambit of
the definition of “credit institution” in Section 2(5A) of the 1974 Act read
with Section 2(5B) of the 1974 Act as it includes any other “financial
company” as defined in Section 2(5B) of the 1974 Act, would not mean
that the Appellant/Assessee was liable to pay interest tax on the interest
paid on deposits collected from its Directors, Shareholders or its Group
Companies.
42. Only if the amounts were lent by the Appellant/Assessee and
interest were charged on the amount lent by the Appellant/Assessee,
interest tax would be payable at the rate prescribed under Section 4(2) of
the 1974 Act up to 31.03.2000 by the Appellant/Assessee.
43. In our view, no interest tax referred to in Section 4 of the 1974
Act is chargeable on the interest paid either by the “scheduled bank” or
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
by a “credit institution” to its creditors/lenders.
44. In our view, there was no question of the Appellant/Assessee
being held liable to pay interest tax under the 1974 Act on the interest
paid on the deposits collected from its Shareholders, Directors and Group
Companies.
45. Consequently, invocation of Section 8, Section 9 and Section
10 of the 1974 Act were without jurisdiction. The interest charged under
Section 12A of the 1974 Act was also without jurisdiction.
46. In our view, the Assessing Officer, the Commissioner of
Income Tax (Appeals) III, Chennai and the ITAT have failed to consider
the provisions of the 1974 Act and have wrongly held that the interest
paid by the Appellant/Assessee as “credit institution”, its Directors,
Shareholders and Group Companies was liable to tax under the 1974 Act.
47. Unfortunately, the Assessment Order dated 08.11.1999 has
seen two rounds of litigation, from the stage of assessment up to ITAT.
Neither the Assessing Officer nor the Tribunal have examined the
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
provisions before concluding that the interest tax was payable on the
interest paid on the amounts received from deposits/loans by the
Appellant/Assessee from its Directors, Shareholders and Group
Companies.
48. In the light of the above discussion, we answer the second
substantial question of law raised in these Appeals in favour of the
Appellant/Assessee and against the Income Tax Department.
49. Therefore, these Tax Case Appeals deserve to be allowed.
They are accordingly allowed. No costs.
(S.S.S.R., J.) (C.S.N., J.)
16.04.2025
mrr / arb
Index : Yes / No
Neutral Citation : Yes / No
To
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
1.Income Tax Appellate Tribunal 'A' Bench,
Chennai.
2.The Assistant Commissioner of Income Tax,
Company Circle I (3),
Chennai.
S.S.SUNDAR, J.
and
C.SARAVANAN, J.
mrr / arb
Pre-Delivery Common Judgment in
T.C.A.Nos.1123, 1367,1368 & 1369 of 2009
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T.C.A.Nos.1123, 1367, 1368 & 1369 of 2009
16.04.2025
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