1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR ------------------------------------------------- (1)INCOME TAX APPEAL No. 100 of 2006 C I T UDAIPUR V/S THE BANK OF RAJASTHAN LTD (2) INCOME TAX APPEAL No. 141/06 C I I UDAIPUR V/S THE BANK OF RAJASTHAN LTD. (3) INCOME TAX APPEAL No. 115/06 C I T UDAIPUR V/S THE BANK OF RAJASTHAN LTD. (4) INCOME TAX APPEAL No. 120/06 C I T UDAIPUR V/S THE BANK OF RAJASTHAN LTD. Mr. KK BISSA, for the appellant. Mr. RAMIT MEHTA, for the respondent. Date of Order : 28.8.2008 HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI KISHAN SWAROOP CHAUDHARI,J. ORDER REPORTABLE ----- These four appeals, arise out of three different orders of the Tribunal, and relate to the same assessee, but two different assessment years. 2 The basic judgment of the Tribunal is under challenge in appeals Nos. 115/2006 and 120/2006, being dated 31.3.2005, relating to the assessment years 1996-1997 and 1997-1998. The question involved in all these four appeals is common, being as to whether the interest/penal interest, charged by the Bank, on delayed payment of installments, in recurring deposit account, by the depositor, can be subjected to levy of tax, under the provisions of Interest Tax Act, 1974? and therefore, all these appeals are being decided by this common order. The facts, being not in dispute, need not detain us, in as much as, the controversy, in all the appeals, is only about various amounts of interest, recovered by the assessee, from customers/ depositors, under the nomenclature of penal interest, for late deposit of requisite installments, on or before the stipulated dates, on all the recurring savings deposit accounts. The assessing officer found the amount to be taxable, under the provisions of the interest tax Act, which was affirmed by the Commissioner. In appeal, the 3 Tribunal observed, that penal interest, charged by the Bank, on failure to deposit the installment of recurring deposit amount in time, by the customers, cannot be equalized with interest on “loans and advances”, whereas the Act envisages charging of tax on “loans and advances”, the deposits have been kept away form its pocket. Reliance was also placed on a Delhi Bench judgment of the Tribunal, in the case of Oriental Insurance Company Vs. Dy. Commissioner of Income Tax, reported in (2004) 89 ITD 520, wherein it was held, that the Interest Tax Act applies, only on the interest on “loan and advances”, and not on deposits. Thus, the addition made by the assessing officer, and confirmed by the Commissioner, was set aside. Arguing the appeal, learned counsel for the revenue, relied upon two judgments of the Karnataka High Court, being in case of CIT vs. Canara Bank, reported in 175 ITR 601, and State Bank of Mysore Vs. Commissioner of Income Tax, reported in the same volume at page 607. 4 On the other hand, learned counsel for the assessee, supported the impugned judgment, by relying on the basic language of the definition of interest, given in Sec. 2(7) of the Interest Tax Act, 1974. We have considered the submissions, and have gone through the judgments, relied upon by the learned counsel for the appellant. In our view, two judgments relied upon, are distinguishable on facts, in as much as, in Canara Bank's case, matter involved was, about the Industrial Development Bank of India's Bills Re- discounting Scheme. In that case, whole transaction was based upon pre-existing agreement between parties, including IDBI and the assessee Bank, was only found to be medium, or a conduit pipe, for disbursement of development fund, for implementation of Scheme. Rediscounting interest, paid on bills to RBI, or IDBI, did not accrue, or arise to the assessee bank, and thus, was not found to be forming part of chargeable interest, under 5 the Act. Likewise, in State Bank of Mysore's case also, the matter was regarding discounting of bills, which was found to be a form of loan, or advance, and it was held, that interest earned on overdue bills, by the Banks is damages or compensation, for delayed payment of money due, and thus, was found to be chargeable to tax. As against this, we may gainfully quote the provisions of Sec. 2(7), which define “interest”, for the purpose of the said act, which reads as under :- (7) “interest” means interest on loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include- (i) interest referred to in sub-section (1B) of Section 42 of the Reserve Bank of India Act, 1934; (ii) discount on treasury bills;) 6 Thus, from the reading of this definition, it is clear, that firstly, the definition is not inclusive one, and it defines interest, to mean interest on loan and advance, made in India. Obviously, the two items, which are purported to be included in the definition, are not relevant for the present controversy. Thus, in the very nature of things, for attracting the provisions of Act, the interest must be interest received, or being receivable, in certain circumstances, on the loans and advances, made in India. At this stage also, reference may be made to the objects and reasons, being to impose a special tax, on total amount of interest, received by the scheduled banks, on loans and advances, made in India. Learned counsel for the appellant submits, that delayed payment of installments of R.D. Account, should be taken to be a “loan or advance” 7 and, therefore, the interest earned thereon is exigible to tax. We are afraid, this interpretation cannot be accepted, in as much as, even taking the case on the highest, the liability of the depositor, to pay the installments, on or before specified date, can at best, be said to be a commitment on his part, and the penal interest is charged for not keeping up the commitment, but then, on any parameters, it cannot be said, that the amount of installments was required to be deposited by the depositor in the recurring deposit amount was an advance or loan by the bank to the account holder. When, the installments is paid, or not paid, the amount moves, or may not move, from the pocket of the depositor, but then, it never moves from the pocket of the bank, to the pocket of the depositor, while inherently in case of loan or advance, the fund has to move form the pocket of bank, or the person advancing the loan. Thus, in our view, it cannot be said, that the interest or penal interest, charged by the assessee, on the delayed payment of installments, 8 by the depositors of the recurring deposit accounts, is exigible to tax, under the provisions of Interest Tax Act, 1974. Thus, the question is answered against the revenue, and in favour of the assessee. The appeals have, thus, no force and are dismissed. ( KISHAN SWAROOP CHAUDHARI ),J. ( N P GUPTA ),J. /ns./