Law:

Section:

Higher amount of interest tax under Interest-tax Act and consequently a higher amount of interest by way of rounding up collected by Banks from borrowers is illegal and amount so collected will be utilised for benefit of disadvantaged people Section 26C of the Interest-tax Act, 1974, read with articles 265 and 366(28) of the Constitution of India - Power of credit institutions to vary certain agreements - Whether taxing statute must be construed reasonably and nothing can be realised by way of tax or akin thereto which has not been authorised by Parliament - Held, yes - Whether section 26C was enacted only for a limited purpose, namely, to pass on burden of tax to borrowers - Held, yes - Whether purported demand by Banks from borrowers for a higher amount of tax and consequently a higher amount of interest by way of rounding up is wholly illegal and without jurisdiction - Held, yes FACTS The Reserve Bank of India by its Circular letter dated 2-9-1991 advised all the Scheduled Commercial Banks that the incidence of interest tax should pro rata be passed on to the borrowers. The appellant Association of Bankers, purported to be acting pursuant to or in furtherance of the said circular as also with a view to formulate a structure of uniform interest rate chargeable after including the interest tax payable, which was passed on to the borrowers by the concerned banks, advised them that the rate of interest be loaded with interest tax of 3 per cent and rounded up to the next higher 0.25 per cent. Such rounding up was allegedly found necessary allegedly on account of grossing up involved in calculating the incidence of tax. The Reserve Bank of India purportedly gave its approval to the proposal of the first appellant. The above action questioned by the respondents in a Public Interest Litigation (PIL) before the High Court on the ground that such purported rounding up was illegal and without jurisdiction. The appellants contended that such rounding up was permissible and contracted in nature, therefore, writ not maintainable. The High Court rejected the said contention and held that action of the appellants in rounding up interest rates to the next higher 0.25 per…

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