COMMISSIONER OF INCOME TAX Vs. CANARA BANK

JUDGEMENT

(1.) BY this reference under section 256(1) of the Income-tax Act, 1961, as applied to the Interest-tax Act,1974, by section 21 therof, the Income-tax Tribunal, Bangalore Bench, has referred the following questions of law for the opinion of this court :

(2.) THE assessee is a subsidiary of the State Bank of India and assessed under the Interest-tax Act, 1974 ("the Act"). For the assessment year 1975-76 for which the accounting year ended on December 31, 1974, the assess 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 incomea at all as the correct interest income to be taken into account is the after setting off the rediscounting charges paid to the Reserve Bank of India and the Industrial Development Bank of India under the Industrual Development Bank of India Bill Rediscounting Scheme. THE Income-tax Officer, disagreeing with the said contention, has contention the said interest as coming within the purview of section 2(7) of the Act and liable to tax and brought the said amount of Rs. 80,55,976 as part of the chargeable interest. He further held that all the assessee can claim are the deductions mentioned in section 6 of the Act and the said anmount does not come within the purview of the said section. On appeal by the assessee, the Appellate Assistant Commissioner came to the conclusion that on the discounting of the bills, the assessee is taking the discount as income in its books and the subsequent redis-counting with the Industrial Development Bank of India is only for obtaining the liquid rsources necessary for the bank to continue its di scounting operations. Hence, it is only in the nature of payment of interest on loans bowrrowed which is not allowable as a deduction. THE Appellate Assistant Commissioner further held that it is only part of the refinancing scheme in which the assessee was not acting as an agent of the Reserve Bank of India/Industrial Development Bank of India in respect of the said bill. On these grounds, the assessee's appeal was rejected. On further apeal by the assessee to the Tribunal, on an intrepretation of the scheme, the Tribunal held that the transaction entered into between the purchaser and the bank under the scheme is one integrated transaction and the redisconuting of the bills by the assessee with the Industrial Development Bank of India cannot be considered as a separate tranaction. Further, even though a larger interest is collected from the purchaser, the assess-bank has to pay a portion of it to the Industrial Development Bank of India in accordanc e with the scheme and also undertake to get those rediscounted bill back by paying them well in advance of the dates and recoup itself when the acceptor marks the payment. Hence, the interest that accrues to the assessee is only the net and not the gross interest received. As such, there is an overrding title of the Industrial Development Bank of India whereby the assessee has to part with a good portion of the interest received from the drawer of the bills to the Industrial Development Bank of India and in sum and substance, the advances are made by the Industrial Devlopment Bank of India not directly but throught the bank and gross interest is shared between the Industrial Development Bank of India and the assessee-bank Viewed from this angle, it has held that only the net interest is chargeable under the the Act. THE Tribunal also that held the transaction should be condidered as a joint venture, whereby the Industrial Development Bank of India and the assessee-bank joined together in working out the scheme. In this view of the matter, the assessee's claim that the sum of Rs. 80,55,976 is not chargeable to tax was upheld.

(3.) IN order to appreciate the rival contentions advanced on behalf of the parties, it is necessary to notice the salient features of the scheme which is admittedly the basis of the transactions under which the disputed interest has accrued. The bills rediscounting scheme was introduced in April 1965, in terms of the powers vested in the INdustrial Development Bank of INdia under section 9(1)(b) of its statute, which authorises it to accept, discount or rediscount bills of exchange, promissory notes of industrial concerns subject to such conditions as may be prescribed. the objective of the scheme is two-fold, i.e., to push up the sales of indigenous machinery/capital equipment by offering to the prospective purchasers/users deferred payment facilities. While the manufacturers get the value of the machinery within a few days of delivery by discounting the bills with the banker, the purchaser/user of the machinery, on the other hand, is enabled to utilise the machinery acquired and repay its cost over a number of years. The scheme thus facilitates sales of machinery, thereby contributing to the industrial progress of the country. IN the beginning, about 46 commercial banks participated in extending the benefits of the scheme. A simple procedure has been prescribed for availment of the scheme. The offer is made to the prospective purchaser/user to acquire indigeous machinery and defer payment in terms of the scheme. Under the scheme, the INdustrial Development Bank of INdia itself does not discount the bills but rediscounts those discounted by any of the institutions approved by it for this purpose. The buyers of the machinery under the scheme have to obtain through their banks prior clearance of the INdustrial Development Bank of INdia for discounting the bills. the quantum of assistance is also prescribed. However, one of the crucial features of the transaction under the scheme is that the discounting bank, availing itself of the rediscounting facilities from the INdustrial Development Bank of INdia, cannot charge the manufacturer/seller discount at rates higher than 1.75 per cent. over the rediscounting rate charged by the INdustrial Development Bank of INdia. The manufacturer/seller is also prohibited from charging interest for the deferred payment period at an amount which is materially higher than the amount paid to the bank. If, on discounting the bills, any excess amount is found to have been charged, the same should be refunded to the purchaser through the discounting bank. The INdustrial Development Bank of INdia has thus the right to refuse rediscounting of bills of such manufacturers/sellers who do not strictly comply with these requirements. Certain guidelines are also prescribed under Chapter-V of the scheme, which discloses that the scheme is designed to provide a quick and simple means to give financial assistance to the manufacturers of indigenous machinery. Every bill or promissory note is required to be accepted and made payable at two alternate places, viz., certain offices of the INdustrial Development Bank of INdia (depending on where the discounting families are to be availed of). The various appendices to the scheme prescribe the formats of bills and certificates prescribed by the INdustrial Development Bank of INdia in the transactions under the scheme. It is seen that in every one of these documents, the INdustrial Development Bank of INdia is a party to the transaction and an obligation and a liability is created in its favour which makes it clear that the whole transaction involving discounting and rediscounting of the bills is based upon a pre-existing agreement between the parties, including the industrial Development Bank of INdia. Some of the documents prescribed are required to be furnished by the purchaser directly to the INdustrial Development Bank of INdia. IN fact, appendix VII prescribes even a format of the resolution to be passed by the purchaser undertaking to abide by the scheme under which benefits under the scheme are made available to it. Under the scheme, the discounting bank such as the assessee, availing itself of the rediscounting facilities from the INdustrial Development Ban of INdia, is not entitled to charge the manufacturer or seller discount at rates higher than 1.75 per cent. over the discount rates charged by the INdustrial Development Bank of INdia. The rediscount rates of the INdustrial Development Bank of INdia collected by the assessee-bank cannot be chargeable interest inasmuch as even before the said amount reached the hands of the assessee, it was impressed with the character of rediscount charges payable to the INdustrial Development Bank of INdia. We are fortified in our view by the decision of the Madhya Pradesh High Court in CIT v. State Bank of INdore , wherein it was held that "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 discount charges." The Scheme, viewed as a whole, makes it clear that the assessee-bank is only a medium or a conduit pipe for the disbursement of the development fund for the implementation of the scheme for which it can retain up to 1.75 per cent. which alone accrues to the bank and in respect of the remaining interest received from the purchaser on the advances made to him, there is an overriding title of the industrial Development Bank of INdia, as the assessee-bank had to part with a major portion of the discounting charges.