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2016 DIGILAW 1250 (GUJ)

Commissioner of Income Tax v. Gruh Finance Ltd.

2016-07-05

G.R.UDHWANI, K.S.JHAVERI

body2016
JUDGMENT : K.S. Jhaveri, J. 1. Being aggrieved and dissatisfied with the impugned judgment and order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'B' (hereinafter referred to as 'the Tribunal'), the revenue has preferred the present Tax Appeals assailing the following orders: 2. These matters were admitted by this Court for consideration of the following substantial question of law: "TAX APPEAL No. 113 of 2007 (A) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) deleting an amount of Rs. 14,98,43,517/- being interest paid to National Housing Bank, from the chargeable interest? (B) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting an amount of Rs. 14,33,592/- being processing fees, reimbursement charges and damage charges, from the chargeable interest? (C) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting an amount of Rs. 51,78,071/- being interest portion of lease rental, from the chargeable interest?? Tax Appeal No. 112 of 2007 (A) Whether the Appellate Tribunal is right in law and on facts in holding that penal interest of Rs. 21,63,653/-cannot be considered in the chargeable interest? (B) Whether the Appellate Tribunal is right in law and on facts in holding that interest on inter corporate deposits cannot be included in the chargeable interest?? Tax Appeal No. 1303 of 2009 "Whether, the Appellate Tribunal is right in law and on facts in confirming the Order passed by the CIT[A] directing the Assessing Officer to exclude from chargeable interest Rs. 9,02,09,133/- being interest paid to NHB on refinance arrangement?" "Whether, the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT[A] and thereby deleting the addition of Rs. 2,30,01,009/- being fees and other charges which are in the nature of interest for the loans and advances given?" "Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT[A] and thereby deleting the addition of Rs. 19,22,96,972/- being lease rent included in the chargeable interest?" "Whether the Appellate Tribunal is right in law and on the facts in setting aside the issue relating to the addition of Rs. 19,22,96,972/- being lease rent included in the chargeable interest?" "Whether the Appellate Tribunal is right in law and on the facts in setting aside the issue relating to the addition of Rs. 84,28,337/- being interest on debentures and bonds, to the file of the Assessing Officer?" Tax Appeal No. 1304 of 2009 Whether the Appellate Tribunal is right in law and on facts in reversing the order passed by the CIT(A) deleting the addition of Rs. 1,33,81,775/- in respect of interest component of lease rent? Tax Appeal No. 1305 of 2009 Whether the Appellate Tribunal is right in law and on facts in reversing the order passed by the CIT(A) deleting the addition of Rs. 78,75,490/- made by the Assessing Officer on account of leased rent? Tax Appeal No. 1054 of 2010 [A] Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT(A) in deleting the disallowance of Rs. 17,67,67,067/- being interest paid NHB? [B] Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT(A) in deleting the addition for inclusion of Rs. 23,37,896/-being fees and other charges in the chargeable interest? [C] Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT(A) in deleting the amount of Rs. 3,28,46,914/- being interest EMI residual?" 3. Heard learned advocates for both the sides. We shall consider and discuss the aforesaid questions framed one after the other and accordingly the following two questions are being discussed first: "[1] Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT(A) in deleting the disallowance of Rs. 17,67,67,067/- being interest paid NHB? [2] Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT(A) in deleting the amount of Rs. 3,28,46,914/- being interest EMI residual?" 3.1 So far as the question of interest payable to NHB on financing scheme is concerned, the interest amount on this account considered chargeable under the Interest Tax Act by the Assessing Officer was directed to be deleted by the CIT(A). The Appellate Tribunal confirmed the decision of the CIT(A) to deduct the said interest from the gross interest for the purposes of Interest Tax Act. 4. Mr. M.R. Bhatt, learned Senior Counsel appearing with Ms. The Appellate Tribunal confirmed the decision of the CIT(A) to deduct the said interest from the gross interest for the purposes of Interest Tax Act. 4. Mr. M.R. Bhatt, learned Senior Counsel appearing with Ms. Mauna Bhatt, learned advocate for the revenue has drawn the attention of this Court to section 2(5), 2(7), 5 and6 more particularly explanation to section 6 of Interest Tax Act and contended that if we look closely to the provisions of these sections, it is clear that under the Interest Tax Act it is the gross interest which is chargeable to tax and the direction of the Tribunal is contrary to the provisions of the Act. In this regard he has relied upon a decision of the Apex Court in the case of Commissioner of Income Tax, Bombay City II v. Sitaldas Tirathdas reported in [1961] 41 ITR 367 wherein the Apex Court has held as under: "... The true test for the application of the rule of diversion of income by an overriding charge 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." 4.1 Mr. Bhatt submitted that no deduction can be allowed to the assessee as the sections of the Interest Tax Act are very clear. He submitted that the Assessing Officer is therefore justified in adding the amount to the chargeable interest declared by the assessee. Bhatt submitted that no deduction can be allowed to the assessee as the sections of the Interest Tax Act are very clear. He submitted that the Assessing Officer is therefore justified in adding the amount to the chargeable interest declared by the assessee. He submitted that so far as the EMI residual amount is concerned, the Assessing Officer has rightly held that the said amount is in the nature of interest on loans and advances and included the same in the chargeable interest of the assessee. 5. Mr. J.P. Shah, learned advocate appearing for the assessee has drawn the attention of this Court has drawn the attention of this Court to the circular No. 760 with regard to instructions regarding taxability of hire charges as interest and submitted that the Tribunal is justified in confirming the order passed by CIT(A). He has relied upon the decision of Kerala High Court in the case of Commissioner of Income Tax v. State Bank of Travancore reported in [1997] 228 ITR 40 (Ker) wherein the Kerala High Court has held as under: "16. Learned counsel for the parties have placed before us the Industrial Development Bank of India Refinance Scheme. It is seen therefrom that the Industrial Development Bank of India has been operating a scheme for granting refinance against term loans sanctioned by the eligible credit institutions such as banks 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. 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 the Industrial Development Bank of India for refinancing against the loan assistance sanctioned by them. These credit institutions get in touch with the Industrial Development Bank of India as a result of a general agreement for availing of refinance under various schemes of refinance. Under the Refinance Scheme, although the Industrial Development Bank of India 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. Under the Refinance Scheme, although the Industrial Development Bank of India 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 Industrial Development Bank of India has power to inspect the accounts. 17. Particularly Chapter V of the scheme relating to the procedure for availing of 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 the Industrial Development Bank of India. 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 the Industrial Development Bank of India. It is emphasised there that alternatively the bank may repay proportionate of such instalment to the Industrial Development Bank of India. It is also further emphasised that the bank must remit instalments of refinance to the Industrial Development Bank of India 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 he 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. 18. A further probe relating to the repayment of refinance (see Clause 2(i)), emphasising that repayment of refinance is to the Industrial Development Bank of India and is to be made in the same proportion as the refinance bears to the loan. 18. A further probe relating to the repayment of refinance (see Clause 2(i)), emphasising that repayment of refinance is to the Industrial Development Bank of India and is to be made in the same proportion as the refinance bears to the loan. The Industrial Development Bank of India 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, that 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 Section 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 Industrial Development Bank of India, then obviously the amount in question will not satisfy the character that it is interest income which accrued to the credit of the assessee the credit institution. 19. 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 Industrial Development Bank of India and it is to be understood in the nature of repayment obviously with regard to the money advanced by the Industrial Development Bank of India 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 on the said amount, interest has accrued or arisen to the credit of the institution in the concerned previous year." 6. We have considered the arguments canvassed by both the learned advocates with regard to the two questions quoted hereinabove. Considering the law laid down on the subject, we are of the view that the Tribunal has already considered the decision of the Kerala High Court in the case of State Bank of Travancore (supra) and the Tribunal is justified in dismissing the claim raised by the revenue. The concerned amount cannot have the legal requirement in terms of Interest Tax Act to be the 'chargeable interest' because it cannot be said that on the said amount interest has accrued or arisen to the credit of the assessee bank. The concerned amount cannot have the legal requirement in terms of Interest Tax Act to be the 'chargeable interest' because it cannot be said that on the said amount interest has accrued or arisen to the credit of the assessee bank. We are supported in this regard by the decision of the Punjab and Haryana High Court in the case of Commissioner of Income Tax v. Punjab State Industrial Development Corporation reported in [2010] 326 ITR 390 (P & H) wherein the Court relied and followed the decision of the Kerala High Court in the case of State Bank of Travancore (supra). 7. Similarly, in the case of Commissioner of Income Tax v. Bank of Maharashtra reported in [2003] 264 ITR 568 (Bom), the Bombay High court has observed that when the bank receives interest from its borrower it pays rediscounting charges to the financial institutions participating in their advance. The rediscounting charges do not accrue or arise to the assessee bank and hence they cannot form part of the chargeable interest in the hands of the assessee bank under Section 5 of the Interest Tax Act. Similar law has been laid down by the Madras High Court in the case of Commissioner of Income Tax v. Karur Vysya Bank Ltd. reported in [2000] 242 ITR 734 (Mad) and by the Karnataka High Court in the case of Commissioner of Income Tax v. Canara Bank reported in [1989] 175 ITR 601 (Kar). 8. Thus, from the aforesaid discussion and the decisions, we are of the opinion that the Tribunal is justified in dismissing the claim of the revenue inasmuch as whatever is collected by the Bank has to be passed over to the NHB and it is in the nature of repayment with regard to the money advanced by NHB alone and therefore in such a situation the concerned amount cannot have the legal requirement of 'Chargeable Interest' as it cannot be said that on the said amount interest has accrued. 9. Similarly, so far as EMI is concerned, the Tribunal is right in holding that after selling and transferring the loan portfolio the assessee has no right over the same but by virtue of agreement it is entitled to receive agreed percentage of interest component of each EMI towards the service of collection and rendering them to HDFC. 9. Similarly, so far as EMI is concerned, the Tribunal is right in holding that after selling and transferring the loan portfolio the assessee has no right over the same but by virtue of agreement it is entitled to receive agreed percentage of interest component of each EMI towards the service of collection and rendering them to HDFC. Therefore the amount received is not in nature of interest but in the nature of service charges and therefore the same cannot be subjected to interest tax. Therefore we answer both the questions in favour of assessee and against the revenue. 10. The other two questions which we now propose to discuss and answer are: "(B) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting the amount being processing fees, reimbursement charges and damage charges, from the chargeable interest? (C) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting the amount being interest portion of lease rental, from the chargeable interest??" 11. Mr. J.P. Shah, learned advocate appearing for the assessee submitted that so far as the above two questions are concerned, the assessee is the owner and it is a lease income and cannot be considered as interest income. He has relied upon the decision of the Apex court in the case of State Bank of Patiala v. Commissioner of Income Tax reported in [2016] 383 ITR 244 (SC) wherein paras 17 & 18 read as under: "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 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 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." 11.1 Mr. Shah has also relied upon an unreported decision of this Court in Tax Appeal No. 120 of 2004 rendered on 17.03.2015. 12. Having heard learned advocates for both the sides on the aspect of these two questions, we are of the opinion that the expenses such as processing fees, damage charges, verification charges, reimbursement charges and lease rent etc are expenses and they cannot be added to the income. The character of the receipts above is not synonymous to interest on loans and advances. Thus, we are of the view that the Tribunal has rightly answered the questions in favour of assessee and against the revenue. Answered accordingly. 13. The rest three issues are as under: "Whether the Appellate Tribunal is right in law and on the facts in setting aside the issue relating to the addition of Rs. 84,28,337/- being interest on debentures and bonds, to the file of the Assessing Officer? Whether the Appellate Tribunal is right in law and on facts in holding that penal interest of Rs. 21,63,653/- cannot be considered in the chargeable interest? 84,28,337/- being interest on debentures and bonds, to the file of the Assessing Officer? Whether the Appellate Tribunal is right in law and on facts in holding that penal interest of Rs. 21,63,653/- cannot be considered in the chargeable interest? Whether the Appellate Tribunal is right in law and on facts in holding that interest on inter corporate deposits cannot be included in the chargeable interest??" 13.1 The above three questions have already been answered by the Apex Court in the case of State Bank of Patiala (supra) and the decision of the Apex Court rendered in [2016] 65 Taxmann.com 11 (SC). Another decision rendered by this Court in Tax Appeal No. 117 of 2009 also answers the aforesaid three questions in favour of the assessee and against the revenue. Thus we answer the above questions in favour of assessee and against the revenue. 14. In view of the aforesaid discussion, we answer all the questions raised in the present set of appeals in favour of the assessee and against the revenue. The order passed by the Tribunal is confirmed accordingly. No order as to costs.