1. Following substantial question of law has been referred for opinion ofthis Court by the Income Tax Appellate Tribunal, Chandigarh Bench,arising out of its order dated 17-5-1993, in respect of assessment years1977-78 to 1979-80 and 1981-82 to 1986-87:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the amount of liquidated damages received by the assessee by way of compensation on account of delay in payments beyond the days of grace is not interest includible in the chargeable interest for the calculation of interest tax

2. The assessee is a subsidiary of State bank of India and is assessed under the Interest-tax Act, 1974 (hereinafter referred to as, the). The assessee purchased bills of exchange drawn by its constituents and in some cases on account of delay in payment beyond the days of grace received liquidated damages by way of compensation. The assessee claimed that the said amount represented "damages" and not "interest" and thus, were not exigible to tax under the. The assessing officer held that the amounts involved amounted to interest and had been shown as such in the books of account. The amounts in dispute are as under:

3. On appeal, the Commissioner (Appeals) reversed the view of the assessing officer. The Tribunal upheld the said view.

Section 2(7) of theis reproduced below:

2(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 o n promissory notes and bills of exchange drawn or madein India, but does not include

(i) interest referred to in Sub-section (IB) of Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934);

(ii) discount on treasury bills;.

4. The issue was considered by a Division Bench of Karnataka High Court in State Bank of Mysore Vs. Commissioner of Income Tax, . Rajendra Babu, J. (as his lordship then was), after considering a contrary view taken by M.P. High Court in CIT v. State Bank of lndore (1988) 172 ITR 242, observed as under:

...When the bank discounts a bill, what happens is that the drawee gets a credit from the bank to the extent of the amount covered by the bill. This position has been explained in Law of Banking by Paget, 9th edition, at page 415, thus:

The discount of a bill is the purchase of it with, normally, a right of recourse and for a sum less than its face value. The discounter is free to deal with the instrument as he pleases. Discount is a negotiation. Other things being equal, there is no practical or legal distinction between the ordinary negotiation of a bill and its being discounted except in the sum paid on it. Discounting is a means of lending as is pledge.

It is stated in Byles on Bill of Exchange (24th edition), at page 282, as follows:

A banker clearly gives value for a bill when he discounts it, the transaction consisting of the purchase of the bill at a discount, i.e., allowing the interest for the time the bill has to run, subject, in the event of dishonour, to a right of recovery from the person for whom it is discounted.

The practice of the bank itself, at the time of discounting is as disclosed in the letter used to be sent along with the intimation of discount which showed that in case of delayed payment, overdue interest at a particular rate had to be collected, if not paid on presentation. These facts are sufficient to hold that the amount in question is interest u/s 2(7) of the Interest-tax Act.

It is settled law that interest is damages or compensation for delayed payment of money due. Therefore, the expression compensation in Section 32 of the Negotiable Instruments Act will include interest paid byway of damages or compensation for delayed payments. We have already held that discounting of bills is a form of advance or loan and hence compensation paid on delayed payment of money due thereon is interest on loans and advances. Discount on bill is a form of advance or loan granted by a bank to its customer and if that be the true position as indicated by Paget, any amount collected by the bank for delayed payment of that amount cannot be anything but interest, whatever may be the nomenclature, and is chargeable interest for the purpose of the Interest Tax Act. With great respect to the learned judges of the Madhya Pradesh High Court, we cannot subscribe to their view that discounting of bills is not a means of lending. In any event, in the present case, there is a specific agreement between the parties to pay overdue interest at a particular rate if the amount is not paid on presentation of the bill within the time stipulated. When there is an agreement between the parties to pay interest, no other question would arise for consideration at all. Therefore, on this question, we have to answer in the affirmative, i.e., against the assessee and in favour of the department. (p. 610)

5. We are in respectful agreement with the view taken by the Karnataka High Court.

6. Accordingly, we answer the: question in favour of the revenue and against the assessee.