Bombay HC: RBI subsidy under the Export Credit Scheme is not taxable as “interest” under Section 2(7) of the Interest Tax Act, as it does not stem from any loan or advance

Bank of India v. DCIT [Income Tax Appeal No. 425 of 2003]

Background: The assessee, a public sector bank, received ₹12.93 crore from the RBI under the Export Credit (Interest Subsidy) Scheme, 1968, as compensation for offering export credit to borrowers at concessional interest rates. While filing its return for AY 1992–93, the assessee excluded this subsidy from chargeable interest under the Interest Tax Act, 1974. The Assessing Officer treated the subsidy as “interest” under Section 2(7) and levied interest tax, which was upheld by the CIT(A) and ITAT. Aggrieved by the decision, the assessee filed an appeal before the Bombay HC under Section 260A of the Income Tax Act.

Decision: The Court held that the subsidy received from the RBI was not taxable as “interest” under Section 2(7) of the Interest Tax Act, as it did not arise from any loan or advance made by the assessee to the RBI. It emphasized that only amounts directly arising from loans or advances fall within the scope of “interest”. The Court relied on the Supreme Court rulings in State Bank of Patiala v. CIT and Muthoot Leasing, and the Delhi High Court decision in Punjab National Bank v. CIT, to hold that the RBI subsidy, being compensatory in nature and not connected to any borrowing by RBI, could not be taxed. The appeal was accordingly allowed in favour of the assessee.

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