COMMISSIONER OF INCOME-TAX Vs. VIJAYA BANK

JUDGEMENT

(1.) In this reference, two questions have been referred to us for our opinion by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, and they are as under : "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 3,73,494 is not liable to be included in the computation of chargeable interest ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy received by the applicant from the Reserve Bank of India in respect of export credit made available by it to its constituents, would fall under the definition of interest under Section 2(7) of the Interest-tax Act, 1974, and as such could be included in the chargeable interest under Section 5 ?"

(2.) The first question is referred at the instance of the Revenue and the second question is referred at the instance of the assessee. So far as the answer to the first question is concerned, it is concluded by a decision of this court in ITRC No. 33 of 1981 decided on June 10, 1988 (CIT v. Canara Bank [1989] 175 ITR 601), and therefore, we answer the same in the affirmative and against the Revenue.

(3.) So far as the second question is concerned, the facts are as follows : In the course of its banking activities, the assessee advances money on export at the shipment stage. The Reserve Bank of India subsidises interest if the lending bank charges interest at a specified rate lower than the normal rate of interest under the scheme known as The Export Credit (Interest Subsidy) Scheme, 1968 (hereinafter referred to as "the Scheme"). To make up the loss of interest to a certain extent on such transactions, the Reserve Bank of India gives subsidy. The assessee claimed before the Income-tax Officer for the relevant years in question that this amount given as subsidy by the Reserve Bank of India under the scheme is not taxable because it represents the subsidy and not interest and, therefore, was not chargeable to tax under the Interest-tax Act. It was contended that it is only the interest paid on loans and advances and not other forms of payment that was the subject matter of tax under the said Act. It was further contended that the subsidy does not really cover the difference between the normal rate of interest and the rate actually applied. Interest is only compensation allowed by law or contracted by parties for the use or detention of money. The subsidy is paid not by the borrower but by a different agency and hence is not interest paid on loan or advance.