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CASE NO.: Appeal (civil)  6724-6729 of 2003

PETITIONER: Commnr. of Income Tax, Karnataka

RESPONDENT: M/s. Canara Bank

DATE OF JUDGMENT: 30/07/2007

BENCH: S.H. KAPADIA & B. SUDERSHAN REDDY

JUDGMENT: JUDGMENT

O R D E R

       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) 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 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

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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.