JUDGMENT Kamat, J. 1. The Revenue has come before us expecting our answer" to the following two questions: "1. Whether, on the facts and in the circumstances of the case, the interest on overdue bills is to be excluded from chargeable interest under the Interest Tax Act? 2. Whether, on the facts and in the circumstances of the case, the interest earned on, re-financing operations is to be excluded from the taxable interest?" The two references relate to assessment years 1984-85 and 1985-86. The assessee is the State Bank of Travancore, Trivandrum and is concerned with the tax liability under the provisions of the Interest Tax Act, 1974. 2. The Interest Tax Act, 1974 provides for the levy of tax on chargeable interest accruing or arising to the scheduled bank the assessee during the previous year. The tax becomes leviable on the interest income of credit institutions, such as the present assessee bank, including Cooperative Societies engaged in the business of banking, public financial institutions, State financial institutions and financial companies. The provisions of the Act would reveal that these credit institutions engaged in the business of providing finance by way of making loans, advances or otherwise and as such earn the interest income which becomes chargeable to tax and such interest income includes commitment charges and discount on promissory notes and bills of exchange. It is also seen that in case of interest earned by such credit institutions even with regard to loans and advances made to another credit institution, however, do not assume the legal character of chargeable interest. 3. Under the provisions of S.5 of the Act, the chargeable interest is required to be of the previous year of the credit institution and additionally the said amount of chargeable interest is also required to be accruing or arising to the credit institution in that previous year. The very character of the credit institution would show that the activity is engagement in providing credit facilities to the borrowers in the light of the requirements of the schemes. The schemes are floated in consonance with the relevant aspect of social welfare and spiral related to development of the area under consideration. The very character of the credit institution would show that the activity is engagement in providing credit facilities to the borrowers in the light of the requirements of the schemes. The schemes are floated in consonance with the relevant aspect of social welfare and spiral related to development of the area under consideration. For the purpose of Interest Tax Act, 1974, illustratively, perusal of S.2(7) defining "interest" would show that the interest has to be on loans and advances, including commitment charges on unutilised portion of any credit sanctioned, specified and discount on promissory notes and bills of exchange equally specified. The statutory provision limits the inseparable connection of the "interest" as interest on loans and advances. 4. So far as the first question expecting our answer is concerned, it relates to the interest on overdue bills and the question is whether the concerned amount is to be excluded from chargeable interest under the Interest Tax Act. As such it will have to be considered as to whether the amount collected by the assessee bank on overdue bills could be considered as the "interest" as is to be understood as the "chargeable interest" in accordance with the provisions of the Act. Not, in other words, it will also have to be considered as to whether the overdue bills which are taken over by the assessee bank from their makers could still continue to have the same character as emanating from loans and advances, to assume the further legal character of the said amount being considered as the "chargeable interest". Fortunately, the factual matrix does not present any controversy with regard to the manner in which the bank accepts the responsibility of the recovery of the amounts covered by the concerned overdue bills. 5. It is contended there cannot be much variance in regard thereto between the parties that in banking parlance, the negotiations of bills drawn at a usance (usance bill) alone is termed as "discount" and negotiations of demand bills is termed as "purchase". The exchange or earnings on demand bills are not classified either under "interest" or "discount", but only under "commission exchange and brokerage" and hence, it is contended by the assessee, that it is not includible for the purpose of Interest Tax Act. In the case of a demand bill, normally it becomes payable immediately on the presentation to the drawee. The exchange or earnings on demand bills are not classified either under "interest" or "discount", but only under "commission exchange and brokerage" and hence, it is contended by the assessee, that it is not includible for the purpose of Interest Tax Act. In the case of a demand bill, normally it becomes payable immediately on the presentation to the drawee. Such a demand bill is purchased at par from its maker and the fee or the charge earned in regard to the service rendered by the bank in regard to the bill and its subsequent collection is called "exchange" and such amount is classified in the accounts by the bank under a separate head called "exchange" in contradistinction to the amount earned on usance bill which is included under "interest and discount". 6. S.32 of the Negotiable Instruments Act (Act 26 of 1881) relating to the liability of the maker of the note as well as of the acceptor of the bill also makes the position clear in terms of the legal terminology in the context that the maker of the note is bound to pay the amount on maturity as well as the acceptor of the bill of exchange is also bound to pay the amount thereof to the holder on demand. The said provision also specifies the position in the event of the default of such payment making it statutorily clear that 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. 7. Thus the relevant statutory provision characterises the amount demanded and collected by the bank in the event of the default in regard to overdue bills as compensation sustainable in the context caused by such default. 8. In this context bearing in mind the statutory requirement of the necessary connection of the amount, whether" it is called as "compensation" or has to be understood as "interest", with loans and advances cannot be brushed aside in the process of considering the tax liability of the concerned amount. 9. Although it is true that it is not the nomenclature, it is not necessarily the origin that would determine the real character in the context. 9. Although it is true that it is not the nomenclature, it is not necessarily the origin that would determine the real character in the context. It may be that it is regarded as compensation under the provisions of S.32 of the Negotiable Instruments Act, 1881 in its connection in the event of default. At the same time it may be possible in the event of the process of the rate of calculation thereof to understand the situation more practically to see some of the facets of the interest in the process of collection and credit. At the same time in a given situation, the manner in which the credit of the amount in question is shown as a result of the accounting procedure of the bank would also not be a factor that will really go in the process of determination of its character. At the same time, the real statutory requirement for the purpose of determining as to whether the amount assumes the character of chargeable interest, its connection with loans and advances could not be ignored. In the context of the factual matrix, the veal question would be to understand as to what are these overdue bills which are taken up by the bank for the purpose of recovery. In this context the factual matrix presents no difficulties and the statutory provision of the Negotiable Instruments Act, 1881 is also crystal clear. 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 of recovery, more statutory powers of stringent character and therefore the practice gets established that the makers handover 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 S.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. 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 recover and creating the liabilities of the parties as regards prompt payment thereof. In such a situation, ignoring the intermittent acrobatics as to whether 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 S.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 as interest and therefore chargeable on that count alone would not satisfy the requirement of justification. 10. In this situation and background, the Income Tax Officer relied on the decision of the Commissioner of Income Tax (Appeals) for the assessment year 1981-82 determining that the amount collected by the assessee bank as a result of delay due to default would constitute interest on advances made by the bank and hence would be includible for Interest Tax Act. 11. The first appellate authority placed reliance on the decision of the Madhya Pradesh High Court (1988) 172 ITR 24- CIT v. State Bank of Indore taking the view in favour of the assessee therein. The Madhya Pradesh High Court has also emphasised the situation that the provisions of the Interest Tax Act are attracted only in the case of interest on loans and advances and as such the amount charged by the assessee for delayed payment of bills cannot be held to be "interest on loans and advances". The Appellate Tribunal affirmed the said decision and it is observed that there is no decision of the jurisdictional High Court. 12. The Appellate Tribunal affirmed the said decision and it is observed that there is no decision of the jurisdictional High Court. 12. With regard to this aspect, relating to the first question under consideration, the learned Senior Tax Counsel placed reliance on the decision of the Karnataka High Court (1989) 175 ITR 607 State Bank of Mysore v. CIT holding that the amount collected by the bank for delayed payment of demand bills would be the "interest" for the purposes of the Interest Tax Act, 1974. The learned Senior Tax Counsel took us through the reasoning of the judgment, reaching the above conclusion. Although the Karnataka High Court understood the term "interest" and damages or compensation for delayed payment of monetary due as synonymous to reach a conclusion that any amount collected by the bank for delayed payment of bills cannot be anything but interest, whichever may be its nomenclature and would be thus "chargeable interest" for the purpose of Interest Tax Act, 1974, it will have to be said that the staring statutory requirement of the connection with loans and advances is lost sight of and in the process the real character of an overdue bill, which is wholly distinct from loans and advances, is not taken into consideration. In our judgment, the character of an overdue bill which has been placed on record by the necessary material in regard thereto cannot be synonymous with loans and advances as discussed above. Apart therefrom, such an understanding would not be permissible to determine the taxation liability insisting its inevitable and inseparable connection with loans and advances. 13. The first question would therefore get answered in the affirmative against the Revenue and in favour of the assessee. 14. This takes us to consider the second question as to whether the interest earned on. refinancing operations is to be excluded in the matter of levy under the Interest Tax Act, 1974. 15. The learned counsel for the parties have placed before us IDBI Refinance Scheme. It is seen therefrom that IDBI has been operating a scheme for granting refinance against term loans sanctioned by the eligible credit institutions to the industrial concerns for setting up of industrial projects and for their expansion, modernisation and diversification schemes. Such industrial concerns include village, tiny, small and medium scale industries and such others which could be commonly understood as credit institutions eligible. Such industrial concerns include village, tiny, small and medium scale industries and such others which could be commonly understood as credit institutions eligible. The needy industrial concerns have to approach the eligible credit institutions for getting term loans for financing their projects and for this purpose the credit institutions have to apply, in turn, to IDBIfor refinancing against the loan assistance sanctioned by them. These credit institutions get in touch with IDBI as a result of a general agreement for availing refinance under various schemes of refinance. Under the Refinance Scheme, although IDBI appraises the refinance application from the point of compliance of various norms, terms and conditions under the scheme, the bank bears the primary responsibility regarding the loan assistance granted by it. In the context of the question for our consideration, the bank would be the assessee before us and the industrial concern would be the maker of the document or, in other words, the person who has received the loan in accordance with the terms and conditions from the point of view of compliance. Even the IDBI has power to inspect the accounts. 16. Particularly Chapter V of the scheme relating to the procedure for availing refinance tells us the procedure for repayment of refinance with reference to Clause.1(c) thereof. It is specifically stated there that all the repayment made by the borrowing concerns are passed on to IDBI It is also found therein that even where partial refinance has been granted, the bank (in this case the assessee) may retain the earlier maturities towards repayment of its own participation in the loan and pass on the latter maturities/ repayments to IDBI It is emphasised there that alternatively the bank may repay proportionate of each instalment to IDBI It is also further emphasised that the bank must remit instalments of refinance to IDBI on due dates regardless of whether or not the individual repayments of instalment loan have been received by it from the borrowers. It is also found in the context that the amount realised may be applied towards adjusting amounts of refinance already repaid by the bank out of its own funds and balance towards reduction of outstanding refinance assistance. Thus it would be seen that the assessee bank, in accordance with the scheme, is only a collecting agent with a clear legal obligation to pass on whatever is collected and received from the borrowers. Thus it would be seen that the assessee bank, in accordance with the scheme, is only a collecting agent with a clear legal obligation to pass on whatever is collected and received from the borrowers. 17. A further probe relating to the repayment of refinance [see Clause.2(i)] emphasising that repayment of refinance is to IDBI and is to be made in the same proportion as the refinance bears to the loan. This IDBI Refinance Scheme has been placed before us to appreciate, in the context, as to whether it could be said, in accordance with the statutory provisions, there is any facet of the interest amount in question having the character of the "chargeable interest" or, in other words, whether it could be considered as interest income of the assessee bank, in the language of S.5 of the Act as accruing or arising to the credit institutions in the concerned previous year. The obvious situation is that if the assessee, as the credit institution, is only to collect and pass it over to the IDBI then obviously the amount in question will not satisfy the character that it is interest income which is accrued to the credit of the assessee the credit institution. 18. Our examination of the scheme that is placed before us makes it abundantly clear that whatever is collected by the assessee bank is to pass over to the IDBI and it is to be understood in the nature of repayment obviously with regard to the money advanced by the IDBI alone. In such a situation the concerned amount cannot have the legal requirement in terms of the Interest Tax Act to be the "chargeable interest" because it cannot be said that the said amount as interest has accrued or arose to the credit of the institution in the concerned previous year. 19. The situation is plain and straight. However, the assessing authority came to the conclusion that the interest earned under the scheme forms part and parcel of the gross receipts of the bank under "interest from loans and advances". We are unable to understand, firstly, as to how the amount in question could be understood as receipt and/or income of the bank which is the pre-requisite of taxability as a consequence. We are unable to understand, firstly, as to how the amount in question could be understood as receipt and/or income of the bank which is the pre-requisite of taxability as a consequence. In this context, the observations of the assessing authority as to whether the bank has made its advances out of its own funds or through refinance from IDBI or RBI is immaterial, to say the least, is more than difficult to comprehend and appreciate in the context. 20. The first appellate authority the Commissioner of Income Tax (Appeals) has considered this aspect in Para.5 of its order. The said appellate authority also has proceeded to observe that the process is in the nature of a joint venture by the assessee bank and the IDBI or RBI This is not the factual position and is wrongly described in the context. However, the said appellate authority has observed that the interest earned by the assessee gets reduced by the interest paid on the refinance and therefore the same could be excluded from the chargeable interest. In our judgment, if the scheme is understood in the context, the bank is only the collecting agent and it has to collect the instalments and interest with a clear understanding of the relationship to pass over the collection to IDBI or RBI as the situation may be. 21. In this context also the decision of the Madhya Pradesh High Court (supra) has observed that under the bill re-discounting scheme, when the bills were re-discounted by the assessee bank, there was an overriding title of the Industrial Development Bank of India and thereunder the assessee has to part with a portion of the discounting charges. It is held that the amounts payable to the IDBI could never be held to be exigible to tax under the Interest Tax Act. The tribunal has relied on the same decision. The Madhya Pradesh High Court has, in turn, sought reliance from the decision of the Calcutta Bench of the Tribunal. It is not necessary, in view of the considered decision of the Madhya Pradesh High Court, as pointed out above. 22. To the same effect, the learned Senior Tax Counsel placed before us the decision of the Karnataka High Court (1989) 175 ITR 601 -CIT v. Canara Bank. It is not necessary, in view of the considered decision of the Madhya Pradesh High Court, as pointed out above. 22. To the same effect, the learned Senior Tax Counsel placed before us the decision of the Karnataka High Court (1989) 175 ITR 601 -CIT v. Canara Bank. to take the view that the re-discounting of the bills by the assessee bank with the IDBI cannot be considered as a separate transaction because the assessee bank had to pay it to the IDBI in accordance with the scheme. We have seen the scheme ourselves along with the factual matrix of the proceeding before us. We find that the amount of interest represents the aspect of re-discounting and therefore cannot form part of the interest income of the assessee as chargeable under the provisions of Interest Tax Act, 1974. 23. In view of the above position even question No. 2 would get answer in the affirmative against the Revenue and in favour of the assessee. 24. For the above reasons the two questions are answered in the affirmative i.e., against the revenue and in favour of the assessee. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.