COMMISSIONER OF INCOME TAX vs. STATE BANK OF INDIA

TAXAP/207/2002HC GujaratGJHC24020659200201 September 2015Author: HONOURABLE MS. JUSTICE HARSHA DEVANI,HONOURABLE MR. JUSTICE A.G.URAIZEE13 pages
AI SummaryAllowed

What were the facts?

The assessee, State Bank of India, and the revenue, Commissioner of Income Tax, are parties to these appeals concerning assessment years 1995-96 and 1996-97. The appeals challenge the order of the Income Tax Appellate Tribunal (ITAT) which allowed the assessee's claim for exclusion of certain amounts collected from borrowers. The assessee claimed that amounts of Rs.4,26,05,914/- (AY 1995-96) and Rs.5,54,96,239/- (AY 1996-97) collected were not interest earned but represented interest tax recovered from borrowers. The Assessing Officer disallowed this claim, as did the Commissioner of Income Tax (Appeals), who held that such recovery constituted additional interest. The ITAT, however, found the facts identical to a previous case and directed deduction of these amounts from chargeable interest.

What did the High Court hold?

The High Court held that the amount collected by the assessee from its customers towards interest tax, as permitted by RBI guidelines, did not constitute interest accruing or arising to the assessee. The Court relied on the principle that if income is diverted before it reaches the assessee, it is deductible, whereas if it is to be applied after reaching the assessee, it is not. In this case, the assessee collected the amount not as part of its income but on behalf of the Government. Therefore, the income never truly reached the assessee. Consequently, the explanation to Section 6 of the Interest Tax Act, which disallows deductions other than those specified, was held to be inapplicable because the amount in question was not 'interest accruing or arising to the assessee'. The Court also noted that treating this amount as chargeable interest would lead to further interest being payable, frustrating the RBI guidelines. The substantial question of law was answered in favour of the assessee.

What were the issues?

1. Whether the Appellate Tribunal is right in law and on facts in holding that the amount of Rs.4,26,05,914/- collected by the assessee bank from its borrowers as amount for interest tax, was not part of the interest on loans and advances within the meaning of section 2(7) read with section 2(5), 5 and 6 of the Interest Act, 1974? Assessee's contentions: The amounts collected were not interest earned or received but represented interest tax recovered from borrowers, thus outside the purview of chargeable tax. The assessee acted as an agent for the government in collecting this tax, which had an overriding title. The Tribunal rightly followed the decision in CIT v. Bank of Madura Limited. Revenue's contentions: The assessee offered the total amount collected as interest in its return. The amount collected is interest on loans and advances as per Section 2(7) of the Act. Section 6 of the Act, particularly its explanation, prohibits any deduction other than specified. The theory of diversion at source was not accepted in the Bank of Madura Limited case by the Madras High Court, and the explanation to Section 6 was not considered in that judgment.

Which sections of the Income-tax Act were involved?

Section 2(7),Section 2(5),Section 5,Section 6,Section 260A

AI-generated summary — verify with the full judgment below

O/TAXAP/207/2002 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 207 of 2002 With TAX APPEAL NO. 208 of 2002

FOR APPROVAL AND SIGNATURE:

HONOURABLE MS.JUSTICE HARSHA DEVANI

and HONOURABLE MR.JUSTICE A.G.URAIZEE ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? No 2 To be referred to the Reporter or not ? No 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? No ========================================================== COMMISSIONER OF INCOME TAX....Appellant(s) Versus STATE BANK OF INDIA....Opponent(s) ========================================================== Appearance: MR MANISH R BHATT, SENIOR ADVOCATE with MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 MR RK PATEL, ADVOCATE with MR BD KARIA and MR DARSHAN R PATEL ADVOCATES for the Opponent(s) No. 1 ======

The order continues below.

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