INDIAN BANKS' ASSOCIATION, BOMBAY AND ORS. v. M-S. DEVKALA CONSULTANCY SERVICE AND ORS

Citation: [2004] SUPP. 1 S.C.R. 225

Court: Supreme Court of India

Bench: V.N. KHARE, S.B. SINHA

Case summary

INDIAN BANKS' ASSOCIATION, BOMBAY AND ORS. v. M-S. DEVKALA CONSULTANCY SERVICE AND ORS.pdf

Judgment text

INDIAN BANKS' ASSOCIATION, BOMBAY AND ORS. v. MIS. DEVKALA CONSULTANCY SERVICE AND ORS. APRIL 16, 2004 [V. N. KHARE, CJ. AND S. B. SINHA, J. ] Interest Tax Act, 1974 : Sections 2(5), 2(7), 4, 5 and 26C-Imposition oftax on total amount of interest received by Scheduled Banks/Credit Institutions on loans and ' advances-Grossing up and rounding the interest rate to 0. 25% by banks by applying section 26C-legality of-Held: increase in rate ofinterest in terms ofSection 26C, has a direct nexus with the statutory impost which must be definite-Hence, the purported demandfrom the borrowerfor a higher amount oftax . and consequently a higher amount of interest by way ofrounding up was wholly illegal and without jurisdiction-Banking Regulation Act, 1949- Section 35-A~onstitution of India, 1950-Article 265 read with Article 366(28)-Interpretation of Statutes.

Section 26C-Grossing up and rounding the rate ofinterest by banks- Borrowers deprived ofhuge amounts-Banks unjustly enriched themselves- Principle· of de minimis-App/icability -- J' (2) In computing the chargeable interest ofa previous year, the amount of interest which accrues or arises to the assessee before the lst day of March, 1978, ai:id ending with the 30th day of June, 1980, or during the period commencing on the 1st day of. April, 1985 and ending with the 30th day of'September, 1991 shall not be taken into . account. Power of credit institutions to vary certain agreements. 26C.

Notwithstanding anything contained in any agreement under which any term loan has been sanctioned by the credit institution before the Ist day of October, 1991, it shall be lawful for the credit institution to vary the agreement so as to increase the rate of interest stipulated therein to the extent to which such institution is liable to pay the interest-tax under this Act in relation to the amount ofinterest on the terms loan which is due to the credit institution. Explanation. - For the purposes of this section, "term loan" means a loan which is not repayable on demand. " The relevant provisions of the Banking Regulations Act, 1949 are as under: - "35A. Power of the Reserve Bank to give directions. - (1) Where the Reserve Bank is satisfied that - (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or.

in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally; it is necessary to issue directions to banking companies, generally or to any banking company in particular, it may, from time to time, issue such directions as it deem fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or canceling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect. The Reserve Bank is entitled to give directions to bankers under Section 20(3) ofthe Foreign Exchange Regulation Act, 1947 blocking certain accounts. Section 20(3) does not contemplates the issue of prior notice before taking such action under that section.

Mohamed Ayisha Nachiyar v. Deputy Director, Enforcement, (1976) 46 Com Cas 653 (Mad) . Directions by Reserve Bank cannot prevent payment of higher bonus in terms of the agreement. American Express lnternatio~al Banking Corp. v. S. Sundaram, (1978) l SCC 101 : 1978 SCC (L&S) 34. " SECTION 26C OF THE ACT : T~e Parliament by reason of the said Act imposed a tax on the banks and other financial institutions. By reason ofthe said Act, the appellants were statutorily empowered to pass the burden thereof to the borrowers or realise the same on behalf of the Union of India. Concededly, in terms of the agreement of the term Joan, the appellants were not entitled to charge interest at a higher rate than the agreed one. Section 26C was, therefore, enacted so as to enable the bankers to realise the amount of tax which they were liable to pay on the chargeable interest.

The appellants have proceeded on the basis that having regard to definition of 'chargeable interest' as contained in Section 2(5) of the Act, the additional interest will have also to be calculated for the said purpose and the rate of tax must be calculcded thereupon which, as noticed hereinbefore, resulted in adding of interest for the purpose of calculation of tax ad infinitum. How the Parliament thought of the matter is the question. The Union of India does not agree with the contentions of the Appellants, nor do we. The action on the part of the appellants suggests that they had put the cart before the horse. The action of taking r~course to Section 26C would arise only when the chargeable interest has been calculated whereupon only the incidence oftax under the said Act is required to be passed on to the borrowers by way of additional interest. The entire approach of the appellants was based on a wrong premise. The said Act is a taxing statute.

The Union of India under the said Act cannot direct or permit the bankers or the financial institutions to raise interest. The Act must, therefore, receive purposive construction so as to give effect to the purport and object it seeks to achieve. [See BBC Enterprises v. Hi-Tech Xtravision Ltd. , [1990] 2 All ER 118 at 122-3; Mohan Kumar Singhania and Ors. v. ·Union ofIndia and Ors. , AIR (1992) SC I, Murlidhar Meghraj Loya v. State of Maharashtra, [1976] 3 SCC 684, Superintendent and Remembrancer of Legal Affairs to Govt. of West Bengal v. Abani Maitj, [1979] 4 SCC 85, Khet Singh v. Union ofIndia, [2002] 4 SCC 380 and High Court of Gujarat and Anr. v. Gujarat Kishan Mazdoor Panchayat and Ors. , JT (2003) 3 SC 50, Indian Handicrafts Emporium and Ors. v. Union ofIndia and Ors. , JT (2003) 7 SC 446, Ashok Leyland Ltd. v. State of T. N. . and Anr. , [2004] 3 SCC I and High Court of Gujarat and Anr. v. GujaratKishan Mazdoor Panchayat and Ors. , JT (2003) 3 SC 50.

In the event, the contention of the appellants is accepted, the same would give rise to incongruous results. Such an interpretation, as is well· known, must be avoided, if avoidable. Furthermore, a statutory impost must be definite. Having regard to Article 265 read with Article 366(28) of the Constitution of India nothing is realizable as a tax or by way of recovery of tax or any action akin thereto which is not permitted by law. It is neither in doubt nor in dispute that Section 26C is an enabling provision. It has to be so construed, having regard to the term 'lawful' used therein. It merely prevails over an agreement under which any term loan has been sanctioned by the credit institution before the l st day of October, 1991. It was 'lawful' for the credit institution to vary the agreement as regard rate of interest only for the purpose of recovering the amount of tax which was payable by the Appellants and a fortiori - nothing over and above the same.

Such increase in rate of interest would be (a) to the extent to which such institution is liable to pay the interest tax; (b) in relation to the amount of interest on the term loan; and (c) which is due to the credit institution. Increase in rate of interest in terms of Section 26C of the Act, thus, has a direct nexus with the statutory impost. The action on the part ofthe appellants in rounding up of the interest, thus, was wholly unjustified. Once it is held that increase in interest in a justifiable manner pertains to passing of the burden of tax, the contention that the same had been done by the bank in exercise of its contractual power must be rejected. A taxing statute must be construed reasonably. Nothing can be realised by way of tax or akin thereto which has not been authroised by the Parliament. The Executive cannot levy tax. It, for the said purpose, therefore, cannot even take recourse to the process of interpretation of a statute.

In Commissioner ofCentral Excise, Lucknow, U. P. v. Mis Chhata Sugar Co. Ltd, reported in (2004) 3 SCALE 6, administrative charges levied under U. P. Sheera Niyantran Adhiniyam, 1964 has been held to be a tax. In Mathuram Agrawal v. State ofMadhya Pradesh, (1999] 8 SCC 667, the law is stated in the following terms : "... The intention ofthe legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which dQes not follow from the plain, unambiguous language ofthe statute.

Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i. e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. Ifthere is any ambiguity regarding any of these ingredients in a taxation statute then there . is no tax in law. Then it is for the legislature to do the needful in the matter. " . (Emphasis Supplied) If a statute was ambiguous the contemporaneous C - '