ORDER
K.C. Singhal, Judicial Member
1. The only issue arising in this appeal is whether service charges received by the assessee from its customers (credit card holders) are liable to interest tax under the provisions of Interest Tax Act, 1974 (Act.).
2. Briefly stated, the facts are these. The assessee had issued credit cards to its customers who are entitled to make purchases on credits. The assessee pays the bills of vendors from whom credit card holders make purchases and in turn the assessee raises bills on its customers. The customers are required to make the payments by a specified date i.e., 15th of the next month. If payment is not made by the due date, the service charge is debited to the account of card holders and the same is included in the billing for the next month. Such charges are debited @ 2.5% per month. The assessee was asked by the Assessing Officer to show cases as to why services charges should not be included in the total chargeable interest. The explanation of assessee was that the amount due from the customers cannot be treated as “loans and advances” and accordingly the same is not chargeable to tax. Reliance was placed on judgment of Kerala High Court in the case of State Bank of Travancore, 228 ITR 40. The Assessing Officer did not accept the explanation of the assessee since he was of the view that unpaid account due from customers was nothing but loan or advance made to card holders. Accordingly, he included the sum of Rs. 3,11,14,255/- in the chargeable interest. On appeal, the Learned CIT (Appeals) following the judgment of Kernataka High Court in the case of State Bank of Mysore, 175 ITR 601, held that service charges amounted to interest and accordingly dismissed the appeal of the assessee. Aggrieved by the same, the assessee is in further appeal before the Tribunal.
3. The Learned Counsel for the Assessee, Mr. Farooq V. Irani, has made various submissions – (i) the provisions of charging section must be construed strictly, (ii) all kinds of interest do not fall within the ambit of Section 2(7) and it is only interest on loans and advances which is chargeable to tax, (iii) the amount due from its customers holding credit cards amounts to “debt” when not paid by the fixed date but every debt is not loan or advance though every loan or advance creates a debt. Thus, there is distinction between money borrowed and a debt, as is apparent from the legislative intent shown in Section 2 (28A) of the Income Tax Act, 1961. In support of his propositions, he relied on the following decisions:
(i) Bombay Steam Navigation (1953) Pvt. Ltd. v. CIT 56 ITR 52 (SC)
(ii) CIT v. State Bank of Travancorr 228 ITR 40 (Ker.)
(iii) CIT v. State Bank of Indore 172 ITR 358 (M.P)
(iv) CIT v. United India Roller Flour Mills 155 ITR 358 (Mad.)
(v) LIC of India v. J.C. Intt. Tax 82 ITD 749 (Mum.)
(vi) Grindlays Bank v. DCIT 79 TTJ 475 (Del.)
On the other hand, the Learned Departmental Representative has strongly relied on the orders of the lower authorities and the decision of Kar. High Court relied on by the Learned CIT (Appeals).
4. Rival submissions have been considered carefully in the light of relevant provisions of the Act as well as case law referred to. The term “Interest” in commercial parlance is understood in the widest possible sense i.e., any sum or compensation paid or charged for use of money / capital or paid for retention or delayed payment of such money / capital / debt. However, the legislature has used this term in restricted sense in as much as Section 2(7) of the Act defines “Interest” as interest on loans and advances. It also includes / excludes certain charges with which we are not concerned in this appeal. So, no person can be charged under the Act unless he receives interest on loans / advances.
5. In the present case, the controversy between the parties is whether service charges received by assessee from its customers, being the credit card holders, can be said to be interest on loans / advances. There is no direct decision available on this issue. However, we find that somewhat similar controversy arose before the Courts / Tribunal to which we would refer hereafter as the same would help us in adjudicating the issue.
6. At the outset, we would like to refer to the judgment of Hon’ble Supreme Court in the case of Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT 56 ITR 52, wherein, a distinction has been made between a loan and a debt. In that case, the assessee paid interest on delayed payment of purchase price and claimed the same as deduction U/s 10(2)(vi) of Indian Income Tax Act, 1922, which allowed deduction in respect of interest on borrowed capital. However, such deduction was disallowed and the controversy reached the Supreme Court. The Hon’ble Court held that unpaid purchase price could not be considered as loan or borrowed capital and, therefore, interest paid could not be allowed Under Section 10(2)(vi) of the said Act. Their Lordships observed as under:-
An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender.
The above observations clearly indicate the distinction between interest on a debt and interest on loan / advance.
7. Now, it would be useful to refer to the decision of the Tribunal in the case of Oriental Insurance Co., 89 ITD 520 (Del.), wherein, after considering various judgments of the Courts, a distinction has been made between loan or deposit by observing at Page-525 as under:-
The term “loans” and “deposits” are not mutually exclusive terms. There are a number of common features between the two. In a sense a deposit is also a loan with this difference that it is a loan with something more. Both are debts repayable. But, the question as to when the repayment is to be made furnishes the real point of distinction between the two concepts. A loan is repayable the minute it is incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefore or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit.
8. A perusal of the above reveals that in the case of loan of money, it is given at the instance of the borrower for his use with or without compensation. That means, in the case of loan, money has to pass from the lender to the borrower at the instance of the borrower. It is because of such distinction, as mentioned in the above case it was held that interest paid on deposits was not chargeable to interest tax under the provisions of Interest Tax Act, 1974.
9. In the case of L.I.C. of India, 82 ITD 749 (Mum.), it was held that investment by credit institutions in debt instruments like Govt., securities, bonds or debentures could not regarded as loan transactions and, therefore, interest on such debt instruments was in exigible to Interest Tax.
10. The Hon’ble Madhya Pradesh High Court in the case of CIT v. State Bank of Indore 172 ITR 24, held that though the amount paid by way of compensation for detention of a sum of money due would amount to interest but such interest could not be considered as interest on loans and advances and consequently would not fall within the scope of Section 2(7) of the Interest Tax Act. This view was followed by the Tribunal in the case of State Bank of Hyderabad, 66 ITD 46.8 (Hyd.) and it was, therefore, held that compensation received on bills of exchange for delay in payment of bills beyond the grace period was in exigible to Interest Tax Act.
11. The combined reading of the above legal position reveals that (i) though every loan creates a debt in favour of lender but every debt is not a loan, (ii) in case of loan, the money passes from lender to borrower for use of the borrower with or without interest. On the contrary, the liability to pay a debt may arise from diverse sources. Thus, there is distinction between a debt and a loan. In the present case, no money had been given by the Bank to the card holders. The Bank simply had provided credit facility to its card holders, which merely resulted in relationship of creditor and debtor between assessee and the card holders as and when the credit facility was availed by the card holders. It only creates a debt between assessee and card holders which is quite different from a debt created between lender and borrower of money. Further, no interest was payable if such payment was made before the fixed date. The interest was payable only when debt was not paid by the fixed date. So the service charges, though amounted to interest as per the judgment of Hon’ble Madhya Pradesh High Court in the case of State Bank of Indore (supra), cannot be considered as interest on loans. For the similar reasons, we are also of the view that amount due from the card holders cannot be considered as an advance because advance contemplates before hand payment against future commitment which is not the case before us. Accordingly, we hold that service charges received by the assessee from credit card holders on overdue payments cannot be considered as interest on loans and advances and consequently the provisions of the Interest Tax Act would not apply to the present case.
12. We are aware that Hon’ble Karnataka High Court in the case of State Bank of Mysore (supra) has taken a contrary view. However, the majority opinion is in favour of the assessee to which we agree. Even otherwise, where two views are possible on interpretation of the provisions of a statute, the legal position is that the view favourable to assessee should be adopted CIT v. Vegetable Products 88 ITR 192. Therefore, following the same, the issue has to be decided in favour of assessee.
13. In view of the above discussions, the order of the Learned CIT (Appeals) is hereby set aside and consequently the Assessing Officer is directed to exclude such service charges from the chargeable interest.
14. In the result, the appeal of the assessee stands allowed.
Pronounced in the open Court on this 19th day of September, 2005.