Subsidy Received by BOI from RBI Cannot be Treated as 'Interest' Chargeable u/s 4 of Income Tax Act: Bombay HC [Read Order]

The assessee/Appellant is a public sector banking company. The assessee filed return of income for the year 1992-93. In the said return Assessee did not include the interest subsidy of Rs.12,93,55,596/- as chargeable interest received by it from the Reserve Bank of India (RBI) on the ground that the said subsidy does not fall within Section 4 of the Interest Tax Act, 1974.

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The Assessing Authority saddled the assessee with the interest tax on the interest subsidy of Rs.12,93,55,595/- received from the Assessee from the RBI under Export Credit (Interest Subsidy) Scheme, 1968. The Assessor computed assessable chargeable interest at Rs.705,64,57,822/-.

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Being aggrieved by the said order the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) affirmed the order passed by Assessing Officer and dismissed the appeal preferred by the Assessee. Thereafter the Assessee filed an appeal before the Income Tax Appellate Tribunal (the Tribunal) which was dismissed.

The assessee while inviting the attention of the Court to Section 2(7) of the Act submitted that amount of subsidy received by the Assessee from the RBI on the Scheme cannot be treated as 'interest' under Section 2(7) of the Act. The department submitted that real nature of payment received by the Assessee from the RBI is required to be assessed. The aforesaid amount is paid to the Assessee to compensate the Bank for interest shortfall due to concessional export credit. It is deferred or indirect interest income and the Court must look at the real nature of transaction nor merely its form or label.

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The issue before the bench was whether the amount of subsidy received by the Assessee from RBI under the Scheme can be treated as 'interest' as defined under Section 2(7) of the Income Tax Act.

The bench observed that no loan or advance was given by the assessee to the RBI. Therefore, any amount received by the assessee from the RBI in the form of a subsidy or compensation for loss on interest by whatever name it may be called, would not convert the amount received by the assessee from the RBI to interest, as defined under Section 2(7) of the Act.

The Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne stated that “the amount of subsidy received by the Assessee is not relatable in loan or advance given by the assessee to the RBI and therefore, the amount of subsidy can neither be treated as commitment charges nor discount on promissory notes on bill of exchange drawn or made in India.”

It was found that the amount of subsidy received by the Assessee is not relatable in loan or advance given by the assessee to the RBI and therefore, the amount of subsidy can neither be treated as commitment charges nor discount on promissory notes on bill of exchange drawn or made in India. Therefore, the amount of subsidy received by the assessee from the RBI under section 42(1B) of the RBI Act, 1934 cannot be treated as interest chargeable under Section 4 of the Act.

The bench allowed the appeal and set aside the impugned order.

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