Banks not liable to pay interest on export subsidy: SC

NEW DELHI: The Supreme Court has held that banks are not liable to pay interest tax on subsidies they get from the RBI for giving concessional loans to exporters.

Dismissing an appeal filed by the income-tax department recently, a bench headed by justice S H Kapadia has upheld the Delhi High Court judgement, which said that the compensatory interest received as subsidy by Punjab National Bank from the RBI for giving concessional loans to exporters did not amount to interest tax chargeable under the Interest Tax Act, 1979.

The RBI gives export subsidy to banks to make good their losses due to extending export credit at a lower rate of interest.

PNB had received export subsidy of more than Rs 9 lakh for assessment years 1985-87 under the Export Credit (Interest Subsidy) Scheme, 1968. The assessing officer had taxed it on the grounds that any amount received by way of export subsidy
can only be regraded as such when it was directly paid to an exporter.

According to the department, the export subsidy PNB received was essentially in the nature of interest defined under Section 2(7) of the Act and hence is liable to be included in its income for paying tax.

Additional solicitor general Mohan Parasaran argued that the money the bank received can be regraded as export subsidy in the hands of an assessee only when the latter directly engaged in exports and received the subsidy in the course of its export business.

"Since the assessee is a bank and not engaged in any export activity, but is essentially engaged in (the) banking business, nor has rececived the said sum from (the) RBI for utilisation of any export activity as an exporter, the same cannot be regarded or characterised as an export subsidy as to take out the same from the taxing net," the petition stated.

While both the commissioner of Income Tax (Appeals) and the sectoral tribunal had upheld the assessing officers' orders, the High Court had held in favour of the bank.