INDIAN BANKS' ASSOCIATION, BOMBAY AND ORS. versus M/S. DEVKALA CONSULTANCY SERVICE AND ORS.

Citation: [2004] SUPP. 1 S.C.R. 225 · Decided: 16-04-2004 · Supreme Court of India · Bench: V.N. KHARE · Disposal: Dismissed

cites 1 · see the full citation network in Lexace

Judgment (excerpt)

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, 1949-
Section 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 banks-
Borrowers 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 Accountant-
Locus 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 
R

Excerpt shown. Read the full judgment & AI analysis in Lexace.