Judgment :- THANIKKACHALAM, J. At the instance of the Department under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Tribunal referred the following two questions for our opinion. "1. Whether the amounts of Rs. 7, 27, 292 for the assessment year 1975-76 and Rs. 19, 69, 989 for the assessment year 1976-77 collected at the rate of seven per cent. of the interest on loans and advances are interest within the meaning of section 2(7) of the Interest-tax Act, 1974? 2. Whether the Tribunal was right in holding that only what is paid as per contract will be interest and what is paid voluntarily by the debtor is not interest?" The assessee is Bank of Madura Limited, Madras. The statement of the case relates to the assessment years 1975-76 and 1976-77. The accounting years are the respective calendar years 1974 and 1975. The assessee is a non-nationalised banking company. The assessee has made loans and advances to various parties at specified rates of interest. The Interest-tax Act, 1974, came into force with effect from August 1, 1974. That Act provided that tax will be levied on banking companies at the rate of seven per cent. on the amount of interest accruing or arising to the bank in the relevant accounting year. So the assessee-bank found out a device by which that seven per cent. or a substantial portion of it could be passed on to the debtors or reimbursed. So the assessee issued a circular to its branch offices, which reads as follows: "Bank of Madura Limited Central Office, Madurai Accounts and Statistics 19th Dec. 1974 BID/CIR : GEN : MISC. : 57/74 28th Aghn. 1896 CIRCULAR Interest-tax Act, 1974, seven per cent. tax on interest, loans and advances The Interest-tax Act, 1974, enacted by Parliament recently, envisages the levy of a special tax at seven per cent. on the total amount of interest, accruing or arising to banks every accounting year. Consequently, it has been decided to collect the special taxes from the borrowers for payment to the Government exchequerBranches are hereby requested to study the following instructions carefully and adopt the enunciated procedure for the recovery of the special tax. (1) The special tax is leviable on the interest debited to the various loans and advances accounts after 1st August, 1974. (1) The special tax is leviable on the interest debited to the various loans and advances accounts after 1st August, 1974. (2) The special tax is not applicable on interest on loans and advances made to other scheduled banks and the discount on treasury bills. (3) Interest means interest on loans and advances made in India and includes. (a) commitment charges on unutilised portion of any credit limits 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 the items mentioned in (2) above. In our bank, the seven per cent. tax is leviable on the interest on loans and advances and interest and discount on local bills discounted. Usance bills discounted, bills purchased clean and bills purchased documentary. (4) The tax is to be debited/recovered at the rate of seven per cent. at the time of every quarterly interest application or closing of the relevant account whichever is earlier. (5) With regard to the interest debited already for the quarter ended September 30, 1974, the tax on that part of the interest which relates to the months August and September, 1974, has to be collected this month. The tax collected for the five months August to December, 1974, should be credited in your profit and loss account under a separate head styled ' Special tax account'. A similar procedure should be followed with regard to the interest discount, etc., collected in subsequent quarters. (Sd.) Deputy Chief Officer." On the basis of that circular the bank began to collect extra seven per cent. from its debtors. Many people who had already availed of the loan facilities before the date of circular, protested against such additional levy. So, in their case, it was not levied or if levied, then waived and if collected, refunded. The total levy for the assessment year 1975-76 was about Rs. 13 lakhs and about Rs. 6 lakhs were so waived or refunded so that the net amount chargeable and in controversy before us is only Rs. 7, 27, 292 for the assessment year 1975-76 and for the assessment year 1976-77 it is Rs. 19, 69, 989., The assessee had offered this seven per cent. so collected for the purposes of income-tax assessment. 6 lakhs were so waived or refunded so that the net amount chargeable and in controversy before us is only Rs. 7, 27, 292 for the assessment year 1975-76 and for the assessment year 1976-77 it is Rs. 19, 69, 989., The assessee had offered this seven per cent. so collected for the purposes of income-tax assessment. But the assessee contended in interest tax proceedings that it is not interest and, therefore, not chargeable to tax under the Interest-tax Act. The income-tax authorities decided against the assesseeAggrieved, the assessee filed appeals before the Appellate Tribunal. The Tribunal held that the amount so collected is not interest within the meaning of "interest" in section 2(7) of the Interest-tax Act, because, according to the Tribunal, it is not interest on loans and advances, but only interest on interest. Before the Tribunal, the assessee made an alternative submission. According to the assessee, it was not interest at all either in law or under any statute for the time being in force. The Tribunal, accordingly, classified the amount into two categories, viz., amounts paid by the debtors voluntarily and the amounts paid by the party as part of the contract. According to the Tribunal, what is paid voluntarily is not interest and what is paid as per the terms of the contract is interest. Therefore, the Tribunal originally thought that the case must be referred back for determination of the amounts falling under these two categories, but since the Tribunal ultimately came to the conclusion that it is not interest on loans and advances, the case was not referred back. Accordingly, the Tribunal held that it is not interest on loans and advances under the Interest-tax Act. Learned standing counsel for the Department submitted as under: The amount of seven per cent. collected is at least in substance interest on loans and advances. This seven per cent. on interest amount is only a method of determination of the quantum of interest that can be collected and that what is collected as extra interest of seven per cent. is really in form and in substance interest on such advances and loans. The assessee-bank collected seven per cent. tax payable by it from its borrowers, The interest is payable on the principal sum by the borrower since he is utilising the borrowed amount for his own benefit. The seven per cent. is really in form and in substance interest on such advances and loans. The assessee-bank collected seven per cent. tax payable by it from its borrowers, The interest is payable on the principal sum by the borrower since he is utilising the borrowed amount for his own benefit. The seven per cent. collected by the bank is related to the borrowing by the borrower. The bank after collecting the seven per cent. is paying the tax payable by it under the Interest-tax Act. The seven per cent. collected from the borrowers by the bank is in turn paid by the assessee-bank towards the tax payable by it under the Interest-tax Act. It cannot be said that by diversion by overriding title the assessee-bank is not receiving this seven per cent. Since the collection of seven per cent. reached the hands of the assessee-bank, the question of diversion by overriding title cannot arise. The bank has no authority to collect tax from the borrowers. The tax was levied on the interest amount collected by the bank. Even though the collection of seven per cent. is illegal, it is taxable as interest in the hands of the assessee under the Interest-tax Act. It was, therefore, pleaded that the Tribunal was not correct in holding that seven per cent. collected by the assessee-bank from its borrowers is not interest under the Interest-tax ActOn the other hand, learned counsel appearing for the assessee submitted as under: Under the Interest-tax Act, 1974, interest was levied at seven per cent. on the interest collected by the assessee-bank. The assessee-bank is collecting the said seven per cent. tax from the borrowers and paying the same as tax under the Interest-tax Act. This collection of seven per cent. was offered for income-tax purposes and the tax was levied on such collection. The assessee-bank is collecting the amounts under various heads. All these amounts would not come under the caption "interest". The assessee is paying the advance tax under the Interest-tax Act, 1974, every three months. There is no prohibition for the assessee-bank to collect this seven per cent. tax from the borrowers. Since the assessee-bank used to collect this tax amount from the borrowers and paying the same as tax under the Interest-tax Act, 1974, by diversion by overriding title, the assessee has no interest over this amount. The assessee-bank is not collecting seven per cent. tax from the borrowers. Since the assessee-bank used to collect this tax amount from the borrowers and paying the same as tax under the Interest-tax Act, 1974, by diversion by overriding title, the assessee has no interest over this amount. The assessee-bank is not collecting seven per cent. on the amounts advanced. The collection of seven per cent. is on the interest payable by the borrowers. If once this collection does not come under the purview of interest, as contemplated under the Interest-tax Act, 1974, then no tax under the said Act can be levied. This seven per cent. was collected from the borrowers not along with the 12 per cent. interest charged by the assessee-bank. But this seven per cent. is collected separately under a different head and credited in the books of account under the head "Special tax accounts". For all these reasons, it was submitted, that the Tribunal was correct in holding that the seven per cent. of the amount collected by the assessee from its borrowers is not interest under the Interest-tax Act. In order to support this contention, learned counsel appearing for the assessee relied upon the decisions in CIT v. State Bank of Indore 1988 (172) ITR 24, 1988 (69) CTR 147, 1987 (35) TAXMAN 491, 1988 (69) CTR(MP) 147 (MP) and CIT v. Canara Bank 1989 (175) ITR 601, 1989 (44) TAXMAN 254 (Kar) We have heard the rival submissions. The fact remains that the assessee-bank has made loans and advances to various parties at certain specified rates of interest. The assessee-bank was charging 12 per cent. interest from its borrowers. The Interest-tax Act came into force with effect from August 1, 1974, according to which, tax will be collected on banking companies at the rate of seven per cent. on the amount of interest accruing or arising to the bank in the relevant accounting year. In the assessment years 1975-76 and 1976-77, the assessee collected Rs. 7, 27, 292 and Rs. 19, 69, 989, respectively. According to the assessee-bank, these amounts so collected are not interest within the meaning of "interest" under the Interest-tax Act, since it is not interest on loans and advances. But according to the Department, the amount of seven per cent. collected by the assessee-bank is in the nature of interest and, therefore, tax is payable on this collection as per the provisions of the Interest-tax Act, 1974. But according to the Department, the amount of seven per cent. collected by the assessee-bank is in the nature of interest and, therefore, tax is payable on this collection as per the provisions of the Interest-tax Act, 1974. Section 2(5) of the Interest-tax Act, 1974, defines "chargeable interest". Chargeable interest means the total amount of interest referred to in section 5, computed in the manner laid down in section 6. Section 2(7) defines "interest". Interest means interest on loans and advances made in India and includes (a) commitment charges on the 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) any amount chargeable to income-tax, under the Income-tax Act, under the head "Interest on securities"; (ii) discount on treasury bills ; and (iii) interest on moneys lent for the creation of a capital asset in India where the agreement under which such moneys are lent provides for the repayment thereof during a period of not less than seven years. Section 4 deals with charge of tax in the following manner. "Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax (in this Act referred to as 'interest tax') in respect of its chargeable interest of the previous year at the rate of seven per cent. of such chargeable interest. " Section 5 deals with the scope of chargeable interest as," subject to the provisions of this Act, the chargeable interest of any previous year of a scheduled bank shall be the total amount of interest (other than interest on loans and advances made to scheduled banks) accruing or arising to the bank in that previous year....." According to the assessee-bank, the seven per cent. amount collected by it was credited in its books of account under the caption "Special tax accounts". The assessee offered these amounts collected by it for income-tax purposes. According to the assessee, the seven per cent. collected from the borrowers has no connection with the loans and advances made to the borrowers. In fact, the tax payable by the assessee-bank was collected from the borrowers. Therefore, it will not come under the definition of interest under the Interest-tax Act. According to the assessee, the seven per cent. collected from the borrowers has no connection with the loans and advances made to the borrowers. In fact, the tax payable by the assessee-bank was collected from the borrowers. Therefore, it will not come under the definition of interest under the Interest-tax Act. It is the case of the assessee that by diversion by overriding title the amount collected by the assessee-bank reached the hands of the taxing authorities. But, learned standing counsel pointed out that, if these collections before reaching the hands of the assessee, reached the hands of the tax collector, then the question of diversion by overriding title would arise. In the present case, the amounts were collected by the bank and it reached the hands of the assessee and it is only thereafter the assessee is paying the tax to the tax authorities.Therefore, according to learned standing counsel, the principle of diversion by overriding title would not be applicable to the facts of the caseIn order to elucidate this point, learned standing counsel relied upon a decision in CIT v. Sitaldas Tirathdas 1961 AIR(SC) 728, 1961 (41) ITR 367, 1961 (1) SCJ 472, 1961 (2) SCR 634 , 1961 (1) MLJ 128 (SC). In the said decision, while considering the principle of diversion by overriding title, the Supreme Court held (at page 374): "the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by the obligation, income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income which has been received and is since applied. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income which has been received and is since applied. The first is case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee continued to be members of the family and received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income. The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case." According to the facts arising in the present case, the assessee-bank collected the amounts and then paid the tax under the Interest-tax Act. If once the collection reached the hands of the assessee, then it is not possible to say that the principle of diversion by overriding title would applyLearned counsel appearing for the assessee relied upon a decision in CIT v. State Bank of Indore 1988 (172) ITR 24, 1988 (69) CTR 147, 1987 (35) TAXMAN 491, 1988 (69) CTR(MP) 147 (MP). According to the facts arising in this case, the assessee, a banking-company, purchased bills of exchange drawn by its constituents, and in some cases, on account of delay in payment beyond the days of grace, received liquidated damages byway of compensation. In the assessment proceedings under the Interest-tax Act, the assessee claimed that the amount received as damages was not interest on loans and advances exigible to tax under the Interest-tax Act. The assessee further contended that it had to pay to the Industrial Development Bank of India rediscounting charges and after adjusting that amount against the discount charges recovered by the assessee, the balance alone should be held exigible to tax. The assessee further contended that it had to pay to the Industrial Development Bank of India rediscounting charges and after adjusting that amount against the discount charges recovered by the assessee, the balance alone should be held exigible to tax. On these facts, the Madhya Pradesh, High Court held (headnote), "under the Bills Rediscounting Scheme, when bills were rediscounted by the assessee, there was an overriding title of the Industrial Development Bank of India and the assessee had to part with a portion of the discounting charges. Therefore, the amounts paid to the Industrial Development Bank of India as rediscounting charges could not be held to be exigible to tax under the Interest-tax Act." Yet another decision relied upon by learned counsel appearing for the assessee was that reported in CIT v. Canara Bank 1989 (175) ITR 601, 1989 (44) TAXMAN 254 (Kar). According to the facts arising in this case, the assessee was assessed under the Interest-tax Act for the assessment year 1975-76. The assessee filed a return admitting chargeable interest of Rs. 80, 81, 25, 641. The assessee had not included in the return a sum of Rs. 80, 55, 976 since, according to it, the said sum did not represent interest income at all as the correct interest income to be taken into account was the net income after setting off the rediscounting charges paid to the Reserve Bank of India and the Industrial Development Bank of India under the IDBI Bills Rediscounting Scheme. On these facts, the Karnataka High Court held that (headnote) "under the scheme, the assessee-bank was only a medium or conduit pipe for disbursement of the development fund for the implementation of the scheme for which it could retain up to 1.75 per cent., which alone accrued to the bank and in respect of the remaining interest received from the purchaser on the advance made to him, there was an overriding title of the Industrial Development Bank of India. Therefore, the Tribunal was right in holding that the sum of Rs. Therefore, the Tribunal was right in holding that the sum of Rs. 80, 55, 976 representing the rediscounting interest paid on bills did not form part of the interest income of the assessee chargeable under the provisions of the Interest-tax Act, 1974." The facts arising in the present case would go to show that the tax was levied under the Interest-tax Act, 1974, against the assessee in respect of the tax collected from its borrowers and credited the same in the books of account under the head "Special tax accounts". This amount collected by the assessee-bank was offered for tax under the income-tax assessment.There is no prohibition for the bank to collect the tax payable by it from its borrowers under the various heads for various purposes. The bank was charging interest at 12 per cent. on the amount advanced by it to its borrowers. The amount of seven per cent. collected from the borrowers is for the purpose of paying tax under the Interest-tax Act. In fact, the collection of these amounts has no nexus with the amount advanced by the assessee-bank to its borrowers. In reality, it is interest on interest. It is stated that there is an oral contract between the borrowers and the bank for the payment of seven per cent. on the borrowed amount. The amount collected at seven per cent. by the bank was paid as tax under the Interest tax Act, 1974. The assessee-bank is also offering this seven per cent. collection for income-tax purposes and income-tax was levied thereon. The assessee-bank has to pay advance tax every three months. Therefore, the amount collected by the assessee-bank, though it reached its hands, ultimately went into the coffers of the Government. The assessee-bank is not appropriating the said amount for its own benefit. Under the law there is no prohibition for such collection. Thus, considering the facts arising in this case in the light of the judicial pronouncements cited supra, we hold that the Tribunal was correct in holding that seven per cent. amount collected by the asessee-bank would not fall under the definition "interest" as stated in section 2(7) of the Interest-tax Act. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs. Counsel's fee is fixed at Rs. 1, 000.