of Income Tax, Karnataka Vs. M/S. Canara Bank  Insc 779 (30 July 2007)
S.H. KAPADIA & B. SUDERSHAN REDDY
O R D E R A short question which arise for determination in this batch of
civil appeals is: whether the Tribunal was justified in holding that an amount
representing rediscounting interest paid on promissory note/bill did not accrue
or arise to the assessee-bank by reason of diversion of such discount through
overriding title in favour of Industrial Development Bank of India (IDBI) and hence
did not form part of chargeable interest under Section 2(7) of the Interest-tax
Act, 1974 (for short, 'the 1974 Act').
The facts giving rise to these civil appeals are as follows.
Assessee-bank is a nationalized bank. In the assessment years 1979-80, 1980-81,
1981-82, 1982-83, 1983-84, 1984- 85, 1985-86 the assessee did not include
rediscounting charges received from IDBI in its chargeable interest.
According to the Department, rediscounting charges represented assessee's
Interest Income and, therefore, rediscounting charges were taxable as
"chargeable interest" as defined under Section 2(7) read with Section
5 of the 1974 Act.
The short question which arises for determination in these civil appeals
concerns the meaning of rediscounting charges under the Scheme of rediscounting
by IDBI. The Bills Rediscounting Scheme was introduced in April, 1965, in terms
of the powers vested in the IDBI under Section 9(1)(b) of its statute, which
authorized IDBI to accept, discount or rediscount bills of exchange, promissory
notes of industrial concerns. The object of the Scheme is two-fold, i.e., to
increase the sales of indigenous machinery/capital equipment by offering to the
prospective buyers/users deferred payment facilities. While the manufacturers
received the value of the machinery within a few days of delivery by
discounting the bills with the banker, the buyer/user could utilize the
machinery acquired and repay its costs over a number of years. Therefore, the
Scheme facilitates sales of machinery, thereby contributing to the industrial
progress of the country.
Under the Scheme, IDBI itself does not discount the bills but rediscounts
those discounted by nationalized banks. The buyers of the machinery under the
Scheme have to obtain through their banks prior clearance of IDBI for
discounting the bills and for determination of the quantum of assistance.
Under the Scheme, the discounting bank, availing itself of the rediscounting
facilities from IDBI, cannot charge the seller/manufacturer discount at a rate
higher than the rate prescribed by IDBI. The seller/manufacturer is also
prohibited from charging interest for the deferred payment at an amount higher
than the amount paid to the bank. IDBI under Scheme has a right to refuse
rediscounting of bills of such sellers/manufacturers who do not comply with the
requirements under the Scheme. Therefore, the Scheme is enacted basically to
give financial assistance to manufacturers of indigenous machinery. Under the
Scheme, every bill or pro- note is required to be accepted at offices of IDBI.
The proforma of bills is also prescribed by IDBI. In each and every document in
support of bill or pro-note, IDBI has to be party.
Under the Scheme, the discounting bank such as the assessee, availing itself
of rediscounting facilities from the IDBI, was not entitled to charge the
seller/manufacturer discount at rates higher than 1.75 per cent over the
discount rates charged by IDBI. Under the Scheme, the discounting bank, like
the assessee, has to take back the bill or promissory note from IDBI against
payment, three working days in advance of their due dates and obtain payment
thereof from the acceptor/guarantor of the bills/pro-notes. Under the Scheme,
the primary responsibility for payment to IDBI is placed on the seller's bank which
in the present case is the assessee-bank. Therefore, the rediscounting charges
of IDBI collected by the assessee-bank cannot be "chargeable
under Section 2(7) of the 1974 Act since even before the said amount could
reach the hands of the assessee-bank, it is impressed with the character of
rediscounting charges payable to IDBI. The Scheme, viewed as a whole, makes it
clear that the assessee-bank is only the medium for the disbursement of the
development fund for the implementation of the Scheme for which the
assessee-bank is allowed to retain 1.75 per cent, which accrues to the
assessee-bank and, therefore, it is not possible to bifurcate the transaction
which has to be read in its entirety.
For the aforestated reasons, we answer the above question in affirmative,
i.e., in favour of the assessee-bank and against the Department. Accordingly,
the civil appeals are disposed of with no order as to costs.