DEVKALA CONSULTANCY SERVICES Vs. UNION OF INDIA

JUDGEMENT

(1.) INVOKING the jurisdiction of this Court under Art. 226 of the Constitution of India, the petitioner a partnership firm claiming to be engaged in assisting the banking public has filed this petition in public interest praying to declare that the action of the Respondents-Banks in rounding up interest rates to the next higher 0. 25% is illegal, arbitrary and untenable. It is further prayed that respondents be commanded to refund the excess interest collected from the borrowers as result of the rounding up to the next higher 0. 25% for which Respondent No. 2 be commanded to direct all the Schedule Commercial Banks to refund the alleged excess interest collected from the borrowers.

(2.) ). It is submitted that respondents 3 to 29, which are all Banks, operating in the Country were charging interest on loans and advances granted to the public at rate which was in excess of what is permitted under the provisions of the Interest Tax Act, 1974 (hereinafter referred to as the Interest Tax Act) and the directions issued by the second respondent under S. 21 of the Banking Regulations Act, 1949 (hereinafter referred to as the Banking Regulations Act ). The alleged illegal collection is stated to have been continued solely on the basis of a decision taken by Respondent No. 30, an Association of the Indian Banks. It is contended that respondent No. 3 is a Banking Company established under the provisions of the State Bank of India Act, 1955, respondents 4 to 10 are the Banking Companies established under the State Bank of India (subsidiary Banks) Act 1959 and Respondents 11 to 29 are stated to be Banking Companies established under the provisions of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. In his way, respondents 3 to 29 are stated to be the instrumentalities of the State amenable to writ jurisdiction of this Court. The provisions of the Interest Tax Act are stated to have been reintroduced with effect from 1-10-1991 by virtue of the Finance Act, 1991. Section 4 of the said Act provides that the Bank shall charge for every assessment year commencing on and from 1st day of April, 1992 the interest tax in respect of its chargeable interest of the previous year at the rate of 3% of such chargeable interest. The said Act further provides that notwithstanding anything contained in any agreement under which any term loan is sanctioned, it shall be lawful for the credit institution to the agreement to which such institution is liable to pay the interest tax under the Act in relation to the amounts on the term loan which is due to the credit institution. While imposing the tax of 3% on the interest earned by the Banks, they were permitted to enhance the rate of interest to the consumers to the extent of 3% on interest on the term loans. Under the directions issued by the Reserve Bank of India, the other Banks were allowed to enhance the rate of interest by 3% of the interest rates, which were in operation prior to 1-10-1991. In pursuance to the directions issued by the Reserve Bank of India, all the Banks are stated to have issued directives to their Branches to debit to each borrowal account tax at the flat rate of 3% of the interest arising of accruing to the Bank from 1-10-1991. It is alleged that totally ignoring the provisions of the Interest Tax Act and the instructions issued by the Reserve Bank of India, the Respondent No. 30 vide its communication addressed to all Respondents-Banks advised that the rate of interest be loaded with the interest tax of 3% and rounded up to the higher 9. 25%. In this way, the Banks charged penal interest of 2% on the amounts in defaults in respect of loans and advances and the cum-tax period interest in that event is rounded to be 2. 06%, with the result, that small borrowers, agriculturists, artisans, small industries, self-employed and other weaker sections of the society are subjected to illegal losses and burden. The Banks are alleged to be illegally enriching themselves. It is contended that under S. 26-C of the Interest Tax Act the Banks can increase rate of interest chargeable on loans and advances only to the extent to which they are liable to pay the interest tax and the action of the respondents in rounding up it to the next higher 0. 25% is resulting in actual increase of interest rate much beyond the permissible limits. Collection of such an interest is stated to be arbitrary, unfair, unjust amounting to illegal enrichment and unlawful gains by the banks. The rounding up the cum-tax interest to the next higher 0. 25% solely based on the decision of respondent No. 30 is stated to be without the authority of law and not referable to any statutory sanction. The action of the respondents has been termed to be amounting to unfair trade practice, exploitation by misusing monopolistic power, contrary to the statutory directives issued by the Reserve Bank of India, country to and violative of S. 26-C of the said Act, opposed to the public policy and detrimental to public interest, which cannot be sustained in law. The directions adopted by the Banks are claimed to be in violation of the provisions of Arts. 14 and 21 of the Constitution of India.

(3.) IN the statement of objections filed, respondent No. 30 has submitted that respondents 3 to 29 are its members. Respondents 3 to 29, which are credit institutions within the meaning of S. 5-A of the Interest Tax Act are liable to pay tax in respect of their chargeable interest of the previous year at the rate of 3% of such chargeable interest. The Banks are claimed to have been authorised to increase the rate of interest under the provisions of S. 26-C of the Interest Tax Act. The aforesaid Section is claimed to have been inserted in the statute book by Finance Act, 1991 with effect from 1-10-1991. As a result of the aforesaid provision, the respondent No. 2 is admitted to have issued instructions on 2-9-1991 advising respondents 3 to 29 to pass on the incidence of interest tax, pro rata, to their borrowers, irrespective of the category of borrowers and types of advances and to follow a uniform practice in that regard. After receipt of the aforesaid directions of the Reserve Bank of India, intimation was given to respondents 3 to 29 to increase the rate of interest as empowered under S. 26-C of the Interest Tax Act. The respondent submits that it has neither violated the provisions of the said Act nor the directions of respondent No. 2. It has only worked out the increase in the rate of interest as a measure for reimbursement of interest tax liability to be borne by the Banks under the provision of S. 4 of the said Act. It is further submitted that tax of 3% is on the gross interest income earned by the Banks, the liability of which is passed on to the borrower in terms of the provisions of S. 26-C of the Interest Tax Act. It is further contended that the rounding off to a figure of 0. 25% is a recognised practice in banking which does not result in alleged unjust enrichment of the banks. None of the Respondents is stated to be indulging in any unfair trade practice. The petition is claimed to be misconceived, which deserved dismissal. In the statement of additional objections filed by respondent No. 30 it is submitted that vide Annexure R-A4, the Reserve Bank of India has approved the action of respondent No. 30, which is in conformity with the powers of respondent No. 2 to advise the Banks under the provisions of S. 21 (2) (e) read with Ss. 35-A and 36 (1) (a) of the Banking Regulations Act. The increase of interest is stated to be very marginal and not excessive. The payment of interest is claimed to be purely a matter between the Bank and the borrower based upon contract entered into between the two, which cannot be questioned by a third person by way of writ filed under Art. 226 of the Constitution of India. It is submitted that since it was extremely cumbersome, difficult and impracticable to work out the exact interest tax component in respect of each borrower after adding the interest tax component, the rates of interest worked out by the respondent as a result of the incidence of interest tax at 3% under the Interest Tax Act by taking the cum-tax interest rates in steps of higher 0. 25% was resorted to which is sound and legal.