IMPORTANT POINTS
Any amount becoming payable by way of compensation after discounting a bill is not an amount “on loans and advances made in India”. Hence these are not an interest in terms of Interest Act, 1974.
Amount received as “overdue interest” after due/cut-off date in inland/foreign demand bills is not liable to be taxed as interest under the Interest Tax Act, 1974.
Interest under Act, 1974 also does not include any service fee or other charges in respect of monies borrowed or debt incurred.

Judgment

R.F. Nariman, J.

1. Leave granted in special leave petition (civil) nos. 13359 of 2015 and 13357 of 2015.

2. There are 25 appeals that have been posted for hearing before us. They are concerned primarily with interest that is received by various banks after bills of exchange have been discounted by them and a party defaults and hence has to pay compensation by way of interest as payment is made after the date stipulated in the bill of exchange. The precise question that arises before us is whether such payment of compensation to the said banks is “interest” liable to tax under the Interest Tax Act, 1974.

3. The facts in all the cases are similar. The bank makes purchases of bills of exchange from its customers and charges commission thereon for services rendered by it. The discounted bills so purchased are then presented to the parties concerned for realization. If on presentation the bill is realized within time, no charges are levied by the bank. In case the bills are not realized in time but the other party pays the value of the bill beyond the stipulated time, a certain amount in the form of interest is charged by the bank on a fixed percentage basis for every day of default. This amount is credited by the bank in its interest account.

4. On these broad facts there is a sharp cleavage of opinion between the High Courts. The Madhya Pradesh High Court, Kerala High Court, Andhra Pradesh High Court, Madras High Court and Rajasthan High Court have all decided that such amounts are not chargeable to tax as “chargeable interest” under the Interest Tax Act. On the other hand, the Karnataka High Court and the Punjab and Haryana High Court have differed from this view and have stated that such amount would be so chargeable.

5. The entire case hinges on the construction of Section 2(7) of the Interest Tax Act, 1974 which defines “interest” as follows:-

“Section 2(7), Interest Tax Act, 1974

2. In this Act, unless the context otherwise requires, —

(7) "interest" means interest on loans and advances made in India and includes—

(a) commitment charges on unutilised 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 section 42 of the Reserve Bank of India Act, 1934 (2 of 1934);

(ii) discount on treasury bills;”

6. Under Section 4 of the said Act, there shall be charged on every scheduled bank for every assessment year a tax in respect of chargeable interest of the previous year at the rate of 7%.

7. The first important thing to notice is that the definition of interest contained in the Interest Tax Act, 1974 is a narrow one, and is exhaustive as it is a ‘means and includes’ definition. In P. Kasilingam v. P.S.G. College of Technology, 1995 Supp (2) SCC 348, this Court, when dealing with The Tamil Nadu Private Colleges (Regulation) Act, 1976, stated as follows:-

“A particular expression is often defined by the Legislature by using the word ‘means’ or the word ‘includes’. Sometimes the words ‘means and includes’ are used. The use of the word ‘means’ indicates that “definition is a hard-and-fast definition, and no other meaning can be assigned to the expression than is put down in definition”. (See : Gough v. Gough [(1891) 2 QB 665 : 60 LJ QB 726] ; Punjab Land Development and Reclamation Corpn. Ltd. v. Presiding Officer, Labour Court [(1990) 3 SCC 682, 717 : 1991 SCC (L&S) 71].) The word ‘includes’ when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include. The words “means and includes”, on the other hand, indicate “an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions”. (See : Dilworth v. Commissioner of Stamps [1899 AC 99, 105-106 : (1895-9) Al