# INDIAN BANKS' ASSOCIATION, BOMBAY AND ORS v. MIS. DEVKALA CONSULTANCY SERVICE AND ORS

- **Citation:** [2004] Supp. 1 S.C.R. 225
- **Court:** Supreme Court of India
- **Decided:** 2004-04-16
- **Case number:** Civil Appeal No. 4655 of2000
- **Bench:** V.N. Khare, S.B. Sinha
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/indian-banks-association-bombay-and-ors-v-mis-devkala-consultancy-service-and-19918
- **Pages:** 30

## Headnote

B
Interest Tax Act, 1974 :
Sections 2(5), 2(7), 4, 5 and 26C-Imposition of tax on total amount of
interest received by Scheduled Banks/Credit Institutions on loans and C '
advances-Grossing up and rounding the interest rate to 0.25% by banks by
applying section 26C-legality of-Held: increase in rate of interest in terms
of Section 26C, has a direct nexus with the statutory impost which must be
definite-Hence, the purported demand from the borrower for a higher amount
of tax .and consequently a higher amount of interest by way of rounding up D
was wholly illegal and without jurisdiction-Banking Regulation Act, 1949Section 35-A~onstitution of India, 1950-Article 265 read with Article
366(28)-Interpretation of Statutes.
Section 26C-Grossing up and rounding the rate of interest by banksBorrowers deprived of huge amounts-Banks unjustly enriched themselves- E
Principle· of de minimis-App/icability <?f-Held: When unjust enrichment
takes place, doctrine of de minimis should not be applied in equity or
otherwise-Doctrines.
Public interest litigation :
Locus standi to maintain-Rule of-Discussed-On facts, grossing up
and rounding the rate of interest by banks and as such borrowers had to pay
higher amount of interest-Writ petition by firm of Chartered AccountantLocus of-Held: Petitioner had locus to maintain public interest litigation--
Constitution of India, I950-Artic/es 32 and 226.
Interest tax was imposed on the total amount of interest received
by Scheduled Banks/Credit Institutions on loans and advances. Reserve
Bank of India (RBI) directed all Scheduled Commercial Banks that the
incidence of interest tax should pro-rata be passed on· to the borrowers.
225
F
G
H
226
SUPREME COURT REPORTS [2004) SUPP. 1 S.C.R.
A Thereafter, the first appellant-Indian Banks' Association proposed that
the rate of interest be loaded with interest tax of 3% and rounded up to
the next higher 0.25% and RBI approved the same. Respondent-firm of
Chartered Accountants representing association of borrowers filed a public
interest litigation challenging the rounding up of interest rate as it
B increased the tax element, hence was illegal and without jurisdiction. High
Court held that rounding up of interest rate to the next higher 0.25% is
illegal and directed RBI to calculate the excess interest collected by banks
and deposit it with the Union of India. Hence the present appeals.
First appellant - Indian Banks' Association, State Bank of India,
C Punjab Nationa.JBank and Canara Bank inter alia contended that having
regard to the provisions contained in Sections 4 and 5 of the Interest Tax
Act read with Section 26C thereof, as interest tax was payable on the total .
chargeable interest which was enhanced on the loan in terms of Section
26C, a great deal of difficulties had arisen; that calculations in several steps
was necessary with a view to ensure the retaining of interest at the
D contractual rate; that since the calculation would come to an impossible
fraction, the revised rate had to be rounded up for easy calculation in
collection; that the appellants had realised in.terest in terms of Section 26C
which was authorised by RBI; that as the appellants have merely collected
a higher rate of interest to which they were entitled to in terms of the loan
E agreements, as the RBI only fixes minimum rate, the same had no nexus
with collection of tax within the meaning of Article 265 of the Constitution;
and that the increase in the rate of interest being of not much significance,
the doctrine of de minimus is applicable.
.
Reserve Bank of India contended that rounding up of interest was
F permitted having regard to the practical difficulties faced by the banks
but the same has been withdrawn since 1997; and that keeping in view
the fact that there are five crores borrowers throughout India, it may not
be feasible to comply with the directions issued by High Court.
Union of India contended that the appellants had not only paid to
G the Government interest tax on

## Text

_Characters 0–39,995 of 67,754. This is a partial read: ask again with offset=39995 for what follows._

INDIAN BANKS' ASSOCIATION, BOMBAY AND ORS.
A
v.
MIS. DEVKALA CONSULTANCY SERVICE AND ORS.
APRIL 16, 2004
[V.N. KHARE, CJ. AND S.B. SINHA, J.]
B
Interest Tax Act, 1974 :
Sections 2(5), 2(7), 4, 5 and 26C-Imposition of tax on total amount of
interest received by Scheduled Banks/Credit Institutions on loans and C '
advances-Grossing up and rounding the interest rate to 0.25% by banks by
applying section 26C-legality of-Held: increase in rate of interest in terms
of Section 26C, has a direct nexus with the statutory impost which must be
definite-Hence, the purported demand from the borrower for a higher amount
of tax .and consequently a higher amount of interest by way of rounding up D
was wholly illegal and without jurisdiction-Banking Regulation Act, 1949Section 35-A~onstitution of India, 1950-Article 265 read with Article
366(28)-Interpretation of Statutes.
Section 26C-Grossing up and rounding the rate of interest by banksBorrowers deprived of huge amounts-Banks unjustly enriched themselves- E
Principle· of de minimis-App/icability <?f-Held: When unjust enrichment
takes place, doctrine of de minimis should not be applied in equity or
otherwise-Doctrines.
Public interest litigation :
Locus standi to maintain-Rule of-Discussed-On facts, grossing up
and rounding the rate of interest by banks and as such borrowers had to pay
higher amount of interest-Writ petition by firm of Chartered AccountantLocus of-Held: Petitioner had locus to maintain public interest litigation--
Constitution of India, I950-Artic/es 32 and 226.
Interest tax was imposed on the total amount of interest received
by Scheduled Banks/Credit Institutions on loans and advances. Reserve
Bank of India (RBI) directed all Scheduled Commercial Banks that the
incidence of interest tax should pro-rata be passed on· to the borrowers.
225
F
G
H
226
SUPREME COURT REPORTS [2004) SUPP. 1 S.C.R.
A Thereafter, the first appellant-Indian Banks' Association proposed that
the rate of interest be loaded with interest tax of 3% and rounded up to
the next higher 0.25% and RBI approved the same. Respondent-firm of
Chartered Accountants representing association of borrowers filed a public
interest litigation challenging the rounding up of interest rate as it
B increased the tax element, hence was illegal and without jurisdiction. High
Court held that rounding up of interest rate to the next higher 0.25% is
illegal and directed RBI to calculate the excess interest collected by banks
and deposit it with the Union of India. Hence the present appeals.
First appellant - Indian Banks' Association, State Bank of India,
C Punjab Nationa.JBank and Canara Bank inter alia contended that having
regard to the provisions contained in Sections 4 and 5 of the Interest Tax
Act read with Section 26C thereof, as interest tax was payable on the total .
chargeable interest which was enhanced on the loan in terms of Section
26C, a great deal of difficulties had arisen; that calculations in several steps
was necessary with a view to ensure the retaining of interest at the
D contractual rate; that since the calculation would come to an impossible
fraction, the revised rate had to be rounded up for easy calculation in
collection; that the appellants had realised in.terest in terms of Section 26C
which was authorised by RBI; that as the appellants have merely collected
a higher rate of interest to which they were entitled to in terms of the loan
E agreements, as the RBI only fixes minimum rate, the same had no nexus
with collection of tax within the meaning of Article 265 of the Constitution;
and that the increase in the rate of interest being of not much significance,
the doctrine of de minimus is applicable.
.
Reserve Bank of India contended that rounding up of interest was
F permitted having regard to the practical difficulties faced by the banks
but the same has been withdrawn since 1997; and that keeping in view
the fact that there are five crores borrowers throughout India, it may not
be feasible to comply with the directions issued by High Court.
Union of India contended that the appellants had not only paid to
G the Government interest tax on the gross interest, which is, rounded off
cum tax interest rate collected by them but also ret~ined some parts
thereof; and that as the amount belongs to the ultimate borrowers, it
should be returned to them and if it is not feasible, it should be paid over
to the Government.
H
Respondent No. I contended that Section 26C of the Act, if properly
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE
227
read, would only mean that the enabling provisions had been made so as A
to enable the appellant-banks to recover the amount of tax from the
borrowers under the Act and nothing more.
Dismissing the appeals, the Court
HELD: 1.1. Section 26C of the Interest Tax Act, 1974 was enacted B
so as to enable the bankers to realize the amount of tax which they were
liable to pay on the chargeable interest. The action of taking recourse to
Section 26C would arise only when the chargeable interest has been
calculated whereupon only the incidence of tax under the said Act is
required to be passed on to the borrowers by way of additfonal interest.
Concededly, in terms of the loan agreement, appellants were not entitled C
to charge interest at a higher rate than the agreed one. Appellants have
proceeded on the basis that having regard to definition of 'chargeable
interest' as contained in Section 2(5) of the Act, the additional interest will
also have to be calculated for the said purpose and the rate of tax must
be calculated thereupon which, resulted in adding of interest for the
purpose of calculation of tax ad infinitum. The entire approach of the D
appellants was based on a wrong premise. (240-A-C-D)
1.2. A taxing statute must be construed reasonably. Interest Tax Act
must, therefore, receive purposive construction so as to give effect to the
purport and object it seeks to achieve. Union of India under the Act cannot
direct or permit the bankers or the financial institutions to raise interest.
(241-E)
1.3. A statutory impost must be definite. Having regard to Article
265 read with Article 366(28) of the Constitution nothing is realizable as
E
a tax or by way of recovery of tax or any action akin thereto which is not F
permitted by law. Further, Section 26C being an enabling provision, has
to be so construed, having regard to the term 'lawful' used therein.
Increase in rate of interest in terms of Section 26C of the Act, has a direct
nexus with the statutory impost. Therefore, the action on the part of the
appellants in rounding up of the interest was wholly unjustified. Once it
is held that increase in interest in a justifiable manner pertains to passing G
of the burden of tax, the submission that the same had been done by the
bank in exercise of its contractual power must be rejected. The executive
cannot levy tax. It cannot even take recourse to the process of
interpretation of a statute. (240-H; 241-A-B; D-EJ
Mohan Kumar Singhania and Ors. v. Union of India and Ors., AIR H
228
SUPREME COURT REPORTS [2004] SUPP. I S.C.R.
A (1992) SC 1; Murlidhar Meghraj Loya v. State of Maharashtra, (1976) 3 SCC
684; Superintendent and Remembrancer of Legal Affairs to Govt. of .West
Bengal v. Abani Maity, (1979] 4 SCC 85; Khet Singh v. Union of India, [2002)
4 SCC 380; High Court of Gujarat and Anr. v. Gujarat Kishan Mazdoor
Panchayat and Ors., JT (2003) 3 SC 50; Indian Handicrafts Emporium and
B Ors. v. Union of India and Ors:, JT (2003) 7 SC 446; Ashok Leyland Ltd v.
State of T.N. and Anr., [2004) 3 SCC 1; High Court of Gujarat and Anr. v.
Gujarat Kishan Mazdoor Panchayat and Ors., JT (2003) 3 SC 50;
Commissioner of Central Excise, Lucknow, UP. v. Mis Chhata Sugar Co. Ltd.,
(2004) 3 SCALE 6 and Mathuram Aggarwal v. State of Madhya Pradesh
(1999] 8 sec 667, referred to.
c
BBC Enterprises v. Hi-Tech Xtravision Ltd., (1990) (2) All ER 118,
referred to.
1.4. The amount of.tax must be calculated having regard to the
contractual rate of interest as thence obtaining and not upon addition of
D the purported interest by way of tax or otherwise. Once Section 26C is
read in a meaningful way, no difficulty arises in giving effect to sub-section
(2) of Section 4 and Sections 5 and 6 of the Act. Appellants cannot submit
that they h~ve exercised the power to claim a higher rate of interest only.
They may have a power to claim a higher rate of interest under the
agret:ment but they did not exercise the said jurisdiction. They invoked
E the enabling provisions contained in Section 26C of the Act and/or raised
rate of interest so as to pass on the burden of tax upon the borrowers.
They, while purporting to exercise their jurisdiction under a statute were
required to act in terms thereof and not in derogation thereto. It is wellsettled that when a procedure has been laid down the statutory authority
F must exercise its power in the manner prescribed or not at all. Appellants
sought to achieve the same object indirectly which they could not do
directly. Therefore, Section 26C must be held to have wrongly been applied
and consequently the action taken by the appellants in grossing up and
rounding the rate of interest is illegal. [242-E-H; 243-A-B)
G
2.1. Section 35A of the Banking Regulation Act empowers the
Reserve Bank of India to issue directions in relation to matters specified
under Section 35A and not for any other purpose. The submission of the
appellants that rate of interest had been _enhanced by them pursuant to
the directions issued by RBI must be held to be self-contradictory as
according to them RBI fixes only the minimum rate of interest leaving a
H determination thereof in a case of each individual borrower upon the bank
(
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE
229
concerned. If the matter relating to increase in the rate of the interest was A
within power of appellants, there was no reason to approach RBI.
(246-D-F)
2.2. Appellants could not have suo motu taken recourse to rounding
up of interest for the purpose of obtaining a higher amount of interest or
otherwise. The purported practical difficulty sought to have been put forth B
by the appellants is a self created one. It cannot be understood as to why
in this modern electronics age, this difficulty would be encountered while
calculating the exact amount of tax. Further, if such practical difficulty
existed there was apparently no reason as to why RBI refused to grant
such approval since 1997. The directions of RBI are not even in the nature C
of executive construction under the said Act. It was not binding on the
banks, far less on the borrowers. In any event by reason of a misplaced
and misapplied construction of statute, a third party cannot suffer.
{246-F-G-H; 247-A)
2.3. Having regard to the provisions contained in Article 265 of the D
Constitution read with Article 366(28) thereof the purported demand from
the borrower for a higher amount of tax and consequently a higher amount
of interest by way of rounding up was wholly illegal and without
jurisdiction. RBI could not have interpreted the provisions of the Interest
Tax Act nor thereby could have empowered the banks to charge something
more from the borrowers by the process of rounding up of interest. E
Appellants and RBI in the guise of exercise of their contractual powers
vis-a-vis Banking Regulation Act exceeded their jurisdiction in recovering
the tax imposed on them by way of interest under the Parliamentary Act.
Dhanyalakshmi Rice Mills and Ors. etc. etc. v. The Commissioner of Civil
Supplies and Anr. etc. etc., (1976) 4 SCC 723 and B.0.1. Finance ltd v.
Custodian and Ors., (1997) 10 SCC 488, distinguished.
ABl International ltd. and Anr., v. Export Credit Guarantee
Corporation of India ltd., JT (2003) 10 SCC 300 and Central Bank of India
v. Ravindra and Ors., (2002) 1 SCC 367, referred to.
3. In the instant case, not only a public interest litigation was filed
but SLP was also. filed by the association of borrowers. The amount
collected from the borrowers may be negligible for the appellant banks
F,
G
but the amount they have realised from five crores of borrowers is not a
small one. By reason of a self~created confusion, misconception as regard H
230
SUPREME COURT REPORTS (2004] SUPP. I S.C.R.
A application of a statute and misapplication and misconstruction thereof
by the appellants resulted in an illegal action as a result of which the
borrowers have been deprived ofa huge amount. Consequently, Union of
India and appellants have unjustly enriched themselves. When such an
unjust enrichment takes place, the doctrine of de minimis, should not be
B applied in equity or otherwise. [243-D-FI
Black's Law Dictionary, referred to •.
4.1. While entertaining a public interest litigation, this Court in
exercise of its jurisdiction under Article 32 of the Constitution and High
Courts under Article 226 thereof are entitled to entertain a petition moved
C by a person having knowledge in the sr.1bject matter of lis and, thus, having
an interest therein as contradistinguished from a busy body, is the welfare
of the people. The rule of locus has been relaxed by the courts for such
purposes with a view to enable a citizen of India to approach the courts
to vindicate legal injury or legal wrong caused to a section of people by
D way of violation of any statutory or constitutional right. (244-A-B)
E
4.2. Even where a writ petition has been held to be not entertainable
on the ground or otherwise of lack of locus, the court in larger public
interest has entertained a writ petition. Also .a private interest case can
also be treated as public interest case. [245-E-G)
4.3. In the instant case, the writ petitioner before High Court was a
firm of Chartered Accountants. As an expert in accountancy and auditing,
it must have come across several cases where its client had to pay a higher
amount of interest to the banks pursuant to the action of the appellants
as also RBI for no fault on their part. The same had been recovered from
F them without any authority of law. Therefore, it cannot be· said that the.
respondent had no locus to maintain the public interest litigation or the
writ petition filed by him pro bono publico before the High Court was not
maintainable. [245-G-H)
Guruvayur Devaswom Managing Committee and Anr. v. C.K. Rajan and
G Ors., JT (2003) 7 SC 312, referred to.
Shivajirao Nilangekar Patil v. Mahesh Madhav Gosavi, AIR (1987) SC
294, relied on.
5. More than five crores of borrowers are involved. A huge sum of
H money is to be recov~red from Union of India as also a large number of
...
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE [SINHA, J.]
231
banks. Since it is difficult for the Court to effectively monitor such A
recovery, a fund should be created for the benefit of the disadvantaged
people with the amount at the hands of Union of India, appellants and
other concerned Banks, which may be managed by Comptroller and
Auditor General of India. The corpus so created may be invested in such
a manner so as to enable the trustees to apply the same for the purpose B
of giving effect to the provisions of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995.
(249-F-H; 250-A-B)
National Federation for the Blind v. Union Public Service Commission,
[1993) 2 SCC 411; Javed Abidi v. Union of India, (1999) 1 SCC 467 and C
Kuna/ Singh v. Union of India, (2003) 4 SCC 524, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4655 of2000.
From the Judgment and Order dated 18.12.98 of the Karnataka High
Court in W.P. No. 3927 of 1994.
D
WITH
C.A. No. 5218 of 2000.
Altaf Ahmed, L. Nageswara Rao, Additional Solicitor Generals,
Dushyant A. Dave, P. Chidambaram, Gopal Subramanium, K.N. Bhat, T.L. E
Vishwanatha Iyer, (AC), Ms. Arpita Mahajan, Ms. Nina Gupta, Sukhjinder
Singh, Anish Verma, Ms. Poonam Das, Ms. Bina Gupta, P.R. Ramasesh, H.S .
Parihar, Kuldeep Parihar, Ms. V. Mohana, Nikhil Sakharadande, Ms. Sushma
Suri and B.V. Bairam Das for the appearing parties.
The Judgment of the Court was delivered by
S.B. SINHA, J. The authority of the bankers to round up the existing
interest rates to 0.25% is in question in these appeals which arise out of a
judgment and order dated 18.12.1994 passed by the High Court of Karnataka
F
in Writ Petition No.3927 of 1994. Civil Appeal No. 5218 of 2000 has been
filed by the Association of Borrowers of Karnataka upon getting itself G
impleaded as a party in the connected appeal.
Appellant No. I herein is an Association of Bankers. Appellant Nos. 2
to 28 are banks which were created under respective Parliamentary Acts or
nationalized in terms of provisions of the Banking Companies (Acquisition
& Transfer of Undertakings) Act, 1970 and the Banking Companies H
232
SUPREME COURT REPORTS [2004] SUPP. 1 S.C.~.
A (Acquisition & Transfer of.Undertakings) Act, 1980.
FACTUAL MATRIX:
Interest Tax Act was enacted by the Parliament w.e.f 1.8.1974 with an
object of imposing tax on the total amount of interest received by Scheduled
B Banks/Credit Institutions on loans and advances. It, however, was withdrawn
in the year 1978, but reintroduced in the year 1980; whereafter it was again
withdrawn in the year 1985. The said tax, however, was reintroduced w.e.f.
1.10.1991 by reason of Finance Act, 1991. The Reserve Bank oflndia by its
Circular letter dated 2.9.1991 advised all the Scheduled Commercial Banks
that the. incidence of interest tax should pro rat a be passed on to the borrowers
C wherefor a uniform practice should be followed in consultation with the First
Appellant herein.
The first appellant purported to be acting pursuant to or in furtherance
of the said circular as also with a view to formulate a structure of uniform
D 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% and rounded up to the next
higher 0.25%. Such rounding up was allegedly found necessary allegedly on
account of grossing up involved in calculating the incidence ef tax. The
Reserve Bank of India purportedly gave its approval tO the proposal of the
E first appellant in terms of its letter dated 22.4.1993. Other appellants herein
followed the said purported policy.
The aforementioned action on the part of the appellants herein came to
be questioned by the respondents in· a public interest litigation filed before
the Kamataka High Court, inter alia, on the ground that such purported
F rounding up is illegal and without jurisdiction as thereby the tax element
came to be increased and as a result thereof the banks collected additional
sums ofRs.723.79 crores annually by way of resorting to rounding up on the
basis thereof.
G HIGH COURT JUDGMENT :
H
The appellants herein inter alia contended that such rounding up of
interest was done by way of enhancement of the rate of interest which is
permissible. Such a matter, the appella!lts, contended, being contractual in
nature, the writ petition was not maintainable.
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE [SINHA, J.]
233
The High Court of Kamataka by reason of its impugned j1:1dgment A
dated 18.12.1998 rejected the said contention and found the action on the
part of the appellants herein illegal and consequently issued the following
directions :
" ... The Writ Petition is allowed. Rule issued is made absolute. The
action of the Respondents-Banks in rounding up interest rates to the B ,
next higher 0.25% is held illegal, arbitrary and untenable. A command
is issued to all the Banks to submit an account of the excess interest
collected by them from the borrowers and deposit the same with the
Reserve Bank of India to be debited in the account of the Union of
India. The Reserve Bank of India-Respondent No.2 is directed to take C
immediate effective steps for implementation of our directions by
calculating the excess interest collected by the Banks and ensuring
the same to be deposited in the funds of the Union of India."
The appellants herein are before us questioning the said judgment.
SUBMISSIONS :
D
Mr. Dushyant A. Dave, Senior Counsel appearing on behalf of the first
appellant, Mr. P. Chidambaram, Senior Counsel appearing for State Bank of
India, Mr. Gopal Subramanium, Senior Counsel appearing for Punjab National
Bank and Mr. Altaf Ahmed, Additional Solicitor General appearing on behalf E
of Canara Bank, would submit that :
(a) having regard to the provisions contained in Sections 4 and 5 of
the Interest Tax Act read with Section 26C thereof, as interest
tax was payable on the total chargeable interest which was
enhanced on the loan in terms of Section 26C as also in terms p
of contractual provisions of other term loans, a great deal of
difficulties had arisen as calculations therefor were required to
be made in several steps.
An example in respect thereof has been placed before us which is as
under:
G
H
I
A
B
c
D
E
F
G
H
234
SUPREME COURT REPORTS [2004] SUPP. I S.C.R.
St~p I:
* Cum Tax Interest to be earned in an attempt to
10.30
retain Rs. I 0 post Interest Tax
* Interest Tax payable on Rs.10.30 (since whole
of the amount collected is assessable to
Interest Tax)
0.309
Step II :
* Cum Tax Interest to be earned in an attempt
10.309
to retain Rs. I 0 post Interest Tax
* Interest Tax payable on Rs. I 0.309 (since whole
0.30427
of the amount collected is assessable to
Interest Tax)
Step III :
* Cum Tax Interest to be earned in an attempt
I0.30427
to retain Rs.I 0 post Interest Tax
* Interest Tax payable on Rs. 10.30427 (since
whole of the amount collected is assessable
to Interest Tax)
0.309278I
Step IV :
* Cum Tax Interest to be earned in an attempt
to retain Rs. J 0 post Interest Tax
10.309278I
.
* Interest Tax payable on Rs. I 0.3092781
0.309278343
(since whole of the amount collected is
assessable to Interest Tax)
Step V :
* Cum Tax Interest to be earned in an attempt
I0.309278342
to retain Rs. 10 post Interest _Tax
..
* Interest Tax payable on Rs. I 0.309278343
0.30927835026
(since whole of the amount collected
is assessable to Interest Tax)
(b) Such action was necessary with a view to ensure the retaining of
interest at the contractual rate;
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE [SINHA, J.]
235
(c) At or after Step V; as the amount of post tax interest earned by A
banks prior to imposition of interest tax would not be enough, if
banks raised rate of interest only exactly by 3%, they necessarily
had to increase the rate of interest by 0.30927835026 so as to
continue to earn pre tax interest @ 10%, the impugned decision
had been taken;
(d) Since the calculation would come to an impossible fraction, the
revised rate had to be rounded up for easy calculation in
collection;
B
(e) The appellants, therefore, had not realised any tax de'hors the
provisions of the Act but had realised interest in terms of Section C
26C which was authorised by the Reserve Bank of Inrlia;
(f) In any event, increase in the rate of interest being of not much
significance, the doctrine of de minimus should be applied;
(g) As the appellants have merely collected a higher rate of interest
to which they were entitled to in terms of the loan agreements, D
as the Reserve Bank of India only fixes minimum rate, the same
had no nexus with collection of tax within the meaning of Article
265 of the Constitution of India and, thus, the finding of the
High Court to the effect that the appellants have collected excess
amount of tax must be held to be bad in law;
E
- (h) In any view of the matter, as pursuant to or in furtherance of the
circular letter issued by the Reserve Bank of India, the borrowers
had been given notice and the terms of the loan agreement having
been altered, no writ application was maintainable;
(i)
The writ petition suffered from gross delay and laches on the F
part of the writ petitioner and, thus, the same should not have
been entertained.
Reliance in support of the aforementioned contentions has been placed
on Dhanyalakshmi Rice Mills and Ors. etc. etc. v. The Commissioner a/Civil
Supplies and Anr .. etc. etc., [1976] 4 sec 723; B.O.L Finance Ltd v. Custodian G
I
and Ors., [1997] IO SCC 488 and Central Bank of India v. Ravindra and
.Ors., [2002] I SCC 367.
Mr. N. Bhat, learned senior counsel appearing on behalf of the Reserve
Bank of India, would submit that his client permitted rounding up of interest H
236
SUPREME COURT REPORTS [2004) SUPP. I S.C.R.
A having regard to the practical difficulties faced by the banks; but the same
has since been withdrawn in the year 1997. Keeping in view the fact that
there are five crores borrowers throughout India, it may not be feasible to
comply with the directions issued by the High Court.
Mr. L. Nageswara Rao, the learned Additional Solicitor General,
B appearing on behalf of the Union of India, however, would point out that the
gross interest rate charged to the borrowers by the banks being made up of
three elements, namely, (a) interest rate; (b) interest tax on the interest rate;
and (c) element of rounding up interest rate to higher 25 paise; the appellants
had not only paid to the Government interest tax on the gross interest, that
C is, rounded off cum tax interest rate collected by them (which would be in
excess of the amount of tax under the Act) but also retained some ·parts
thereof. S,upporting the judgment of the High Court, Mr. Nageswara Rao
would contend that as the amount belongs to the ultimate borrowers, it should
be returned to them wherever feasible but in the event the same is not feasible
it should be paid over to the Government.
D
As Respondent No.I, writ petitioner, did not appear, we requested Mr.
T.L. Viswanatha Iyer, Senior Advocate, to assist the Court. The learned
counsel (Amicus Curiae) would contend that the appellants have construed
Section 26C wrongly and, thus, acted under a confusion. Mr. Iyer would
submit that Section 26C of the Act, if properly read, would only mean that
E the enabling provisions had been made so as to enable the appellant-banks
to recover the amount of tax from the borrowers under the Act and nothing
more.
F
STATUTORY PROVISIONS :
The relevant provisions of the Interest Tax Act, 1974 read as under :
"2(5) "chargeable interest" means the total amount of interest referred
to in section 5, computed ir. the manner laid down in section 6;
2(7) "interest" means interest on loans and advances made in India
G
and includes -
H
(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,
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE [SINHA, J.)
237
but does not include -
(i) · interest referred to in sub-section (JB) of.section 42 of the Reserve
Bank of India Act, 1934 (2 of 1934 );
(ii) discount on treasury bills;
"Charges of tax.
4(1) Subject to the provisions of this Act, there shall be charged on
every scheduled bank for every assessment year commencing on or
A
B
· after the lst day of April, 1975, a tax in this Act referred to as
interest-tax in respect of its chargeable interest of the previous year
at the rate of seven per cent of such chargeable interest
C
Provided that the rate at which interest-tax shall be charged in respect
of any chargeable interest accruing or arising after the 31st day of
March, 1983 shall be three and a half per cent of such chargeable
interest.
(2) Notwithstanding anything contained in sub-section (1) but subject
to the other provisions of this Act, there shall be charged on every
credit institution for every assessment year commencing on and from
D
the lst day of April, 1992, interest-tax in respect of its chargeable
interest of the previous year at the rate of three per cent of such E
chargeable interest :
Provided that the rate at which interest-tax shall be charged in respect
of any chargeable interest accruing or arising after the 31st day of
March, 1997 shall be two per cent of such chargeable interest.
Scope of chargeable interest.
F
5. Subject to the provisions of this Act, the chargeable interest of any
previous year of a credit institution shall be the 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 the
business of banking, accruing or arising to the credit institution in G
that previous year :
Provided that any interest in relation to categories of bad or doubtful
debts referred to in section 430 of the Income-tax Act shall be deemed
to accrue or arise to the credit institution in the previous year in
which it is credited by the credit institution to its profit and loss H
238
SUPREME COURT REPORTS [2004] SUPP. 1 S.C.R.
A
account for that year or, as the case may be, in which it is actually
received by the credit institution, whichever is earlier.
B
Computation of chargeable interest.
6(1) Subject to the provisions of sub-section (2), in computing the
chargeable interest of a previous year, there shall be allowed from the
total amount of interest (other than .interest on loans and advances
made to credit institution accruing or arising to the assessee in the
previous year, a deduction in respect of the amount of interest which
is established to have become a bad debt during the previous year :
C
Provided that s~ch interest has been taken into account in computing
the chargeable interest of the assessee of an earlier previous year and
the amount has been written off as irrecoverable in the accounts of
the assessee for .the previous year during which it is established to
have become ' bad debt.
D
E
Explanation - For the removal of doubts, it is hereby declared that in
computing the chargeable interest of a previous year, no deduction,
other than the deduction specified in this sub-section shall be allowed
from the total amoun~. of interest accruing or arising to the assessee.
(2) In computing the chargeable interest of a previous year, the amount
of interest which accrues or arises to the assessee before the lst day
of March, 1978, ai:id ending with the 30th day of June, 1980, or
during the period commencing on the 1st day of.April, 1985 and
ending with the 30th day of'September, 1991 shall not be taken into .
account.
F
Power of credit institutions to vary certain agreements.
26C. Notwithstanding anything contained in any agreement under
which any term loan has been sanctioned by the credit institution
before the I st day of October, 1991, it shall be lawful for the credit
institution to vary the agreement so as to increase the rate of interest
G
stipulated therein to the extent to which such institution is liable to
pay the interest-tax under this Act in relation to the amount of interest
on the terms loan which is due to the credit institution.
H
Explanation.- For the purposes of this section, "term loan" means a
loan which is not repayable on demand."
L
>--
'
J
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE [SINHA, J.]
239
The relevant provisions of the Banking Regulations Act, 1949 are as A
under: -
"35A. Power of the Reserve Bank to give directions.- ( 1) Where the
Reserve Bank is satisfied that -
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted
in a manner detrimental to the interests of the depositors or. in a
manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company
generally;
it is necessary to issue directions to banking companies, generally or
B
c
to any banking company in particular, it may, from time to time,
issue such directions as it deem fit, and the banking companies or the D
banking company, as the case may be, shall be bound to comply with
such directions.
(2) The Reserve Bank may, on representation made to it or on its own
motion, modify or cancel any direction issued under sub-section (1),
and in so modifying or canceling any direction may impose such E
conditions as it thinks fit, subject to which the modification or
cancellation shall have effect.
The Reserve Bank is entitled to give directions to bankers under
Section 20(3) of the Foreign Exchange Regulation Act, 1947 blocking
certain accounts. Section 20(3) does not contemplates the issue of a F
prior notice before taking such action under that section. Mohamed
Ayisha Nachiyar v. Deputy Director, Enforcement, (1976) 46 Com
Cas 653 (Mad)
. Directions by Reserve Bank cannot prevent payment of higher
bonus in terms of the agreement. American Express lnternatio~al G
Banking Corp. v. S. Sundaram, (1978) l SCC 101 : 1978 SCC (L&S)
34."
SECTION 26C OF THE ACT :
T~e Parliament by reason of the said Act imposed a tax on the banks H
240
SUPREME COURT REPORTS [2004] SUPP. I S.C.R.
A and other financial institutions. By reason of the said Act, the appellants were
statutorily empowered to pass the burden thereof to the borrowers or realise
the same on behalf of the Union of India. Concededly, in terms of the
agreement of the term Joan, the appellants were not entitled to charge interest
at a higher rate than the agreed one. Section 26C was, therefore, enacted so
B as to enable the bankers to realise the amount of tax which they were liable
to pay on the chargeable interest. The appellants have proceeded on the basis
that having regard to definition of 'chargeable interest' as contained in Section
2(5) of the Act, the additional interest will have also to be calculated for the
said purpose and the rate of tax must be calculcded thereupon which, as
noticed hereinbefore, resulted in adding of interest for the purpose of
C calculation of tax ad infinitum.
How the Parliament thought of the matter is the question. The Union
of India does not agree with the contentions of the Appellants, nor do we.
The action on the part of the appellants suggests that they had put the cart
before the horse. The action of taking r~course to Section 26C would arise
D only when the chargeable interest has been calculated whereupon only the
incidence of tax under the said Act is required to be passed on to the borrowers
by way of additional interest. The entire approach of the appellants was
based on a wrong premise. The said Act is a taxing statute. The Union of
India under the said Act cannot direct or permit the bankers or the financial
E institutions to raise interest. The Act must, therefore, receive purposive
construction so as to give effect to the purport and object it seeks to achieve.
[See BBC Enterprises v. Hi-Tech Xtravision Ltd., [1990] 2 All ER 118 at
122-3; Mohan Kumar Singhania and Ors. v. ·Union of India and Ors., AIR
(1992) SC I, Murlidhar Meghraj Loya v. State of Maharashtra, [1976] 3
SCC 684, Superintendent and Remembrancer of Legal Affairs to Govt. of
F West Bengal v. A bani Maitj, [ 1979] 4 SCC 85, Khet Singh v. Union of India,
[2002] 4 SCC 380 and High Court of Gujarat and Anr. v. Gujarat Kishan
Mazdoor Panchayat and Ors., JT (2003) 3 SC 50, Indian Handicrafts
Emporium and Ors. v. Union of India and Ors., JT (2003) 7 SC 446, Ashok
Leyland Ltd. v. State of T.N. .and Anr., [2004] 3 SCC I and High Court of
G Gujarat and Anr. v. GujaratKishan Mazdoor Panchayat and Ors., JT (2003)
3 SC 50.
In the event, the contention of the appellants is accepted, the same
would give rise to incongruous results. Such an interpretation, as is well·
known, must be avoided, if avoidable. Furthermore, a statutory impost must
H be definite. Having regard to Article 265 read with Article 366(28) of the
INDIAN BANKS' ASSON. v. DEVKALA CONSULTANCY SERVICE [SINHA, J.)
241
Constitution of India nothing is realizable as a tax or by way of recovery of A
tax or any action akin thereto which is not permitted by law.
It is neither in doubt nor in dispute that Section 26C is an enabling
provision. It has to be so construed, having regard to the term 'lawful' used
therein.
It merely prevails over an agreement under which any term loan has
been sanctioned by the credit institution before the l st day of October, 1991.
It was 'lawful' for the credit institution to vary the agreement as regard rate
B
of interest only for the purpose of recovering the amount of tax which was
payable by the Appellants and a fortiori - nothing over and above the same. C
Such increase in rate of interest would be (a) to the extent to which such
institution is liable to pay the interest tax; (b) in relation to the amount of
interest on the term loan; and ( c) which is due to the credit institution.
Increase in rate of interest in terms of Section 26C of the Act, thus, has
a direct nexus with the statutory impost. The action on the part of the appellants D
in rounding up of the interest, thus, was wholly unjustified. Once it is held
that increase in interest in a justifiable manner pertains to passing of the
burden of tax, the contention that the same had been done by the bank in
exercise of its contractual power must be rejected. A taxing statute must be
construed reasonably. Nothing can be realised by way of tax or akin thereto
which has not been authroised by the Parliament.
E
The Executive cannot levy tax. It, for the said purpose, therefore, cannot
even take recourse to the process of interpretation of a statute.
In Commissioner of Central Excise, Lucknow, U.P. v. Mis Chhata Sugar
Co. Ltd, reported in (2004) 3 SCALE 6, administrative charges levied under F
U.P. Sheera Niyantran Adhiniyam, 1964 has been held to be a tax.
In Mathuram Agrawal v. State of Madhya Pradesh, (1999] 8 SCC 667,
the law is stated in the following terms :
" ... The intention of the legislature in a taxation statute is to be gathered G
from the language of the provisions particularly where the language
is plain and unambiguous. In a taxing Act it is not possible to assume
any intention or governing purpose of the statute more than what is
stated in the plain language. It is not the economic results sought to
be obtained by making the provision which is relevant in interpreting H
A
B
c
242
SUPREME COURT REPORTS [2004] SUPP. I S.C.R.
a fiscal statute. Equally impermissible is an interpretation which dQes
not follow from the plain, unambiguous language of the statute. Words
cannot be added to or substituted so as to give a meaning to the
statute which will serve the spirit and intention of the legislature. The
statute should clearly and unambiguously convey the three components
of the tax law i.e. the subject of the tax, the person who is liable to
pay the tax and the rate at which the tax is to be paid. If there is any
ambiguity regarding any of these ingredients in a taxation statute
then there . is no tax in law. Then it is for the legislature to do the
needful in the matter. "
. (Emphasis Supplied)
If a statute was ambiguous the contemporaneous C<?nstruction placed
thereon by the officers charged with its enforcement and administration might
be required to be considered and given due weight but therefor the First
Appellant or the Reserve Bank of India were not competent. In this case, the
D stand of the Union of India also runs counter to the contentions of the
Appellants.
A plain reading of Section 26C ofthe Act leaves no manner of doubt
that the same was enacted only for a limited purpose, namely, to pass on the
burden of tax to the borrowers. The amount of tax must be calculated having
E regard to the contractual rate of interest as thence obtaining and not upon
addition of the purported interest by way of tax or otherwise. Once Section
26C is read in a meaningful way, no difficulty arises in giving effect to subsection (2) of Section 4 and Section 5 and 6 of the Act. If the provisions of
the Act are read in a manner in which we have made an endeavour, for an
amount of Rs.JOO lent and the rate of interest charged by the .bank being
F
G
10%, the interest thereon having been earned would come to Rs.IO, and,
thus, the borrower would be bound to pay only Rs.