IN HIGH COURT OF DELHI AT NEW DELHI Decided on: 05th February, 2015 ITA 96/2006 COMMISSIONER OF INCOME TAX Appellant Through Mr. N P Sahni, sr. standing counsel with Mr. Nitin Gulati, Adv. versus M/S KUBER MUTUAL BENEFIT LTD. ..... Respondent Through None CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K.GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. substantial question of law stated to be urged is whether ITAT s conclusions with respect to applicability of provisions of Interest Tax Act were erroneous? 2. assessee, at relevant time, was carrying on financial business which included accepting deposits as mutual benefit fund company. It also used to lend money and, for that purpose, charged from its borrowers certain amounts under different heads which included financing charges . AO was of opinion for assessment year 1996-97, that amount claimed as processing charges was in fact interest, and liable to be treated as such for purposes of Interest Tax Act, 1974. To say so, AO relied upon inclusive nature of definition of interest under Section 2 of said Act. Consequently, sum of Rs.3,17,52,377/- was added back and brought to ITA No.96 /2006 Page 1 tax under Interest Tax Act. assessee s appeal partly succeeded in that amount added back was halved. further appeal to ITAT however succeeded. 3. ITAT, relying upon decision of Madhya Pradesh High Court in Commissioner of Income Tax V. State Bank of Indore (1988) 172 ITR 24, held that financing charges could not be treated as interest. relevant findings of ITAT in this regard are as follows : It is apparent from definition of interest that it is only interest on loans and advances made in India that would be considered as interest within meaning of I. T. Act 974 (sic). Section 5 of Interest Tax Act, contemplates interest accruing or arising to assessee in previous year. It is generally agreement between parties, which will determine quantum of interest to be paid on loans and advances. Admittedly, financing charges which were considered as interest by revenue authorities was not payable as interest on loans and advances given by assessee as per agreement between parties. Ld. CIT(A) while setting aside original order of assessment framed by AO had specifically given direction that AO should place before assessee all aspects of case for their comments acceptance repudiation and explanation. In order of assessment framed deno vo, AO has merely made to observations that financing charges shown to have been received from members actually in nature of interest charged from its members. This was apparently not proper compliance with direction Ld. CIT(A). Be that as it may. There is no material brought by AO to come to conclusion that financing charges shown by assessee were infect in nature of interest on loans advanced by assessee to its members. perusal of order of Ld. CIT(A), shows that he has gone by fact that market rate of financing charges charged by assessee was much higher and to extent to which it is higher than market rate there was diversion of chargeable interest to that extent. He ITA No.96 /2006 Page 2 further, corroborated his findings by fact that borrowers were members of assessee and that as lender, assessee would be in position to exercise undue influence over its borrowers. This was not enough to come to conclusion that financing charges collected by assessee were in nature of interest payable on loans. As clearly stated, payment of interest would governed by agreement between parties. Admittedly, it is not case of revenue that there was any such agreement between assessee and its borrowers. financing charges were one time charge. It is therefore, not possible to construe then as interest on loans and advances. Apart from above, Ld. CIT(A) has not given any basis of coming to conclusion that 50% of financing charges should be treated as chargeable interest. quantum of 50% is adopted without any basis and purely as guess work. This was not permissible in law. Since there was no material to come to conclusion that processing fees charged by assessee was in nature of interest and that assessee by charging excess processing fees attempted to divert chargeable interest by claiming higher processing fees, addition sustained by Ld. CIT(A) was without any business and same deserves to be deleted and same is directed to be deleted. 8th ground of appeal in both appeal are allowed. 4. Section 2(7) of Interest Tax Act reads as follows : (7) "Interest" means interest on loans and advances made in India and includes : (a) commitment charges on unutilized 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 Reserve Bank of India Act, 1934 ; (2 of 1934) ITA No.96 /2006 Page 3 (ii) discount on treasury bills; What is chargeable interest is provided for by Section 5 of enactments which reads as follows : Scope of chargeable interest Subject to provisions of this Act, chargeable interest any previous year of credit institution shall be total amount of interest other than interest on loans and advances made to (other credit institutions or to any cooperative society engaged in carrying on business of banking) accruing or arising to credit institution in that previous year. Provided that any interest in relation to categories of bad or doubtful debts referred to in section 43D of Income- tax Act shall be deemed to accrue or arise to credit institution in previous year in which it is credited by credit institution to its profit and loss account for that year or, as case may be, in which it is actually received by credit institution, whichever is earlier. 5. In State Bank of Indore (supra) Madhya Pradesh High Court decided to deal with issue as to whether charges for delayed payment of loan and advances would be treated as interest. High Court was of opinion that it could not so be treated given that it was by way of damages that amounts were payable. In present circumstance, what swayed AO to bring income in question to tax, was what he considered to be unusual high rates of financing charges, from assessee by its members. 6. Whilst such factor might itself constitute suspicious circumstance, by no means can it be determinative or conclusive. In order to support his conclusions, AO ought to have made further enquiries such as what was ordinary rate which assessee charged from non-members for similar services and what did other similar placed companies or entities charge from ITA No.96 /2006 Page 4 their members or borrowers. conclusions, based on mere suspicion in such circumstances, could not have withstood scrutiny of law. However, Appellate Commissioner chose to give partial relief, based, again, on similar line of logic. However, this cannot result in our holding that ITAT can be faulted in its conclusions. As to whether charges or amounts received from borrowers or subscribers of schemes, are truly, interest necessarily has to be dependent on fact to fact determination, and cannot rest on suspicions of revenue officials. Another important factor in present case is that these financial charges were one time charges and were not recurring. For these reasons Court is of opinion that no question of law arises. appeal is accordingly dismissed. 7. Pending application is also disposed of as infructuous. S. RAVINDRA BHAT (JUDGE) R.K.GAUBA (JUDGE) FEBRUARY 05, 2015 vld ITA No.96 /2006 Page 5 Commissioner of Income-tax v. M/s. Kuber Mutual Benefit Ltd