Tribunal Holds Rediscounting Charges Not Taxable as Chargeable Interest under Interest-tax Act, Supreme Court Upholds Decision in Favor of Assessee-Bank.

This batch of civil appeals revolves around the question of whether the Tribunal's decision to exclude rediscounting interest from the assessee-bank's chargeable interest was justified. The appeals pertain to the assessment years 1979-80 to 1985-86, during which the nationalized bank did not include rediscounting charges received from IDBI in its chargeable interest. The Department argued that these charges should be taxable as "chargeable interest" under the Interest-tax Act of 1974. The appeals center on the interpretation of rediscounting charges within the IDBI's Bills Rediscounting Scheme. The Scheme, established in 1965, aims to boost sales of indigenous machinery by providing deferred payment options to buyers. Under the Scheme, IDBI rediscounts bills discounted by nationalized banks, and the discounting bank cannot charge a higher discount rate than prescribed by IDBI. The Scheme primarily seeks to offer financial assistance to manufacturers of indigenous machinery. The discounting bank, including the assessee-bank, must comply with the Scheme's requirements, and the primary responsibility for payment to IDBI rests with the seller's bank. Consequently, the collected rediscounting charges cannot be considered "chargeable interest" under the 1974 Act, as they are already committed to paying IDBI. The court rules in favor of the assessee-bank, emphasizing that the entire transaction should be viewed holistically. The assessee-bank acts as a conduit for disbursing the development fund under the Scheme, retaining 1.75 percent, which accrues to the bank. Therefore, the transaction cannot be bifurcated, and the appeals are disposed of without costs awarded.

A short question which arise for determination in this

batch of civil appeals is: whether the Tribunal was justified in

holding that an amount representing rediscounting interest

paid on promissory note/bill did not accrue or arise to the

assessee-bank by reason of diversion of such discount through

overriding title in favour of Industrial Development Bank of

India (IDBI) and hence did not form part of chargeable interest

under Section 2(7) of the Interest-tax Act, 1974 (for short, ’the

1974 Act’).

The facts giving rise to these civil appeals are as follows.

Assessee-bank is a nationalized bank. In the assessment

years 1979-80, 1980-81, 1981-82, 1982-83, 1983-84, 1984-

85, 1985-86 the assessee did not include rediscounting

charges received from IDBI in its chargeable interest.

According to the Department, rediscounting charges

represented assessee’s Interest Income and, therefore,

rediscounting charges were taxable as "chargeable interest" as

defined under Section 2(7) (of Income Tax Act, 1961) read with Section 5 of the 1974 Act.

The short question which arises for determination in

these civil appeals concerns the meaning of rediscounting

charges under the Scheme of rediscounting by IDBI. The Bills

Rediscounting Scheme was introduced in April, 1965, in terms

of the powers vested in the IDBI under Section 9(1)(b) (of Income Tax Act, 1961) of its

statute, which authorized IDBI to accept, discount or

rediscount bills of exchange, promissory notes of industrial

concerns. The object of the Scheme is two-fold, i.e., to

increase the sales of indigenous machinery/capital equipment

by offering to the prospective buyers/users deferred payment

facilities. While the manufacturers received the value of the

machinery within a few days of delivery by discounting the

bills with the banker, the buyer/user could utilize the

machinery acquired and repay its costs over a number of

years. Therefore, the Scheme facilitates sales of machinery,

thereby contributing to the industrial progress of the country.

Under the Scheme, IDBI itself does not discount the bills but

rediscounts those discounted by nationalized banks. The

buyers of the machinery under the Scheme have to obtain

through their banks prior clearance of IDBI for discounting the

bills and for determination of the quantum of assistance.

Under the Scheme, the discounting bank, availing itself of the

rediscounting facilities from IDBI, cannot charge the

seller/manufacturer discount at a rate higher than the rate

prescribed by IDBI. The seller/manufacturer is also

prohibited from charging interest for the deferred payment at

an amount higher than the amount paid to the bank. IDBI

under Scheme has a right to refuse rediscounting of bills of

such sellers/manufacturers who do not comply with the

requirements under the Scheme. Therefore, the Scheme is

enacted basically to give financial assistance to manufacturers

of indigenous machinery. Under the Scheme, every bill or pro-

note is required to be accepted at offices of IDBI. The

proforma of bills is also prescribed by IDBI. In each and every

document in support of bill or pro-note, IDBI has to be party.

Under the Scheme, the discounting bank such as the

assessee, availing itself of rediscounting facilities from the

IDBI, was not entitled to charge the seller/manufacturer

discount at rates higher than 1.75 per cent over the discount

rates charged by IDBI. Under the Scheme, the discounting

bank, like the assessee, has to take back the bill or promissory

note from IDBI against payment, three working days in

advance of their due dates and obtain payment thereof from

the acceptor/guarantor of the bills/pro-notes. Under the

Scheme, the primary responsibility for payment to IDBI is

placed on the seller’s bank which in the present case is the

assessee-bank. Therefore, the rediscounting charges of IDBI

collected by the assessee-bank cannot be "chargeable interest"

under Section 2(7) of the 1974 Act since even before the said

amount could reach the hands of the assessee-bank, it is

impressed with the character of rediscounting charges payable

to IDBI. The Scheme, viewed as a whole, makes it clear that

the assessee-bank is only the medium for the disbursement of

the development fund for the implementation of the Scheme

for which the assessee-bank is allowed to retain 1.75 per cent,

which accrues to the assessee-bank and, therefore, it is not

possible to bifurcate the transaction which has to be read in

its entirety.

For the aforestated reasons, we answer the above

question in affirmative, i.e., in favour of the assessee-bank and

against the Department. Accordingly, the civil appeals are

disposed of with no order as to costs.