Law:

Section:

Section 4 of the Interest-tax Act, 1974, read with Industrial Development Bank of India Bills Rediscounting Scheme - Interest - Assessable as - Assessment year 1975-76 - Whether certain amount representing rediscounting interest paid by assessee-bank under Industrial Development Bank of India Bills Rediscounting Scheme formed part of chargeable interest of assessee-bank - Held, no Facts For the assessment year 1975-76, the assessee, a subsidiary of the State Bank of India, had not Included in the return of chargeable interest certain sum on the ground that the same did not represent interest income at all, and the correct interest income to be taken into account was the net after setting off the rediscounting charges paid to the RBI and the IDBI under the Industrial Development Bank of India Bills Rediscounting Scheme. The ITO, however, construed the said interest as coming within the purview of section 2(7) and accordingly, brought the said amount to tax as part of the chargeable interest. On appeal, the AAO held that on the discounting of the bills the assessee was taking the discount as income in its books and the subsequent rediscounting with the IDBI was only for obtaining the liquid resources necessary for the bank to continue its discounting operations and hence it was only in the nature of payment of interest on loans borrowed which was not allowable as a deduction. He further held that it was only part of the refinancing scheme in which the assessee was not acting as an agent of the RBI/IDBI in respect of the said bills. Accordingly, he upheld the order of the ITO. On second appeal, the Tribunal held that the transaction entered into between the purchaser and the bank under the scheme was one integrated transaction and the rediscounting of the bills by the assessee with the IDBI could not be considered as a separate transaction. It further held that even though a larger interest was collected from the purchaser the assessee had to pay a portion of it to the IDBI in accordance with the scheme and also undertake to get those rediscounted bills back by paying them well in advance of the due dates and recoup itself when the acceptor made the payment and…

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