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State Bank of Patiala v. Commissioner of Income Tax, Patiala

Civil Appeal · Neutral citation not assigned (Civil Appeal Nos. 5212-5220 of 2007)Decided 18 Nov 2015
Civil Appeal Nos. 5212-5220 of 2007
Justice A.K. Sikri · Justice Rohinton Fali Nariman

Background

Banks buy bills of exchange from their customers at a discount. When a party pays a bill late, the bank charges overdue interest for each day of delay. The tax department wanted this charge taxed as "interest" under the Interest Tax Act, and the High Courts were divided on whether it could be.

Decision Breakdown

The Supreme Court held that the Interest Tax Act defines "interest" narrowly, as interest on loans and advances and discount on bills, and that a late-payment charge arising from a default on a discounted bill does not fall within that definition. It rejected the Karnataka High Court's contrary view, and noted that the Income Tax Act has a much wider definition of interest that the Interest Tax Act does not share. It also held that guarantee fees paid to a deposit insurance corporation were not "interest" under the Interest Tax Act. The revenue's appeals were dismissed and the banks' appeals were allowed.

Lesson Learnt

A tax can be charged only where the statute clearly covers the amount, and courts read a narrow, exhaustive definition of this kind strictly. A charge is not taxable simply because a bank records it as interest in its books.

Official source (sci.gov.in)View Judgment (PDF)

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