Interest Subsidy from RBI Not Taxable under Interest Tax Act: High Court Rules in Favour of Assessee

The Bombay High Court ruled in favour of the Assessee, holding that the interest subsidy received from the Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme is not taxable under the Interest Tax Act.

The Division Bench of the Bombay High Court, comprising Chief Justice Alok Aradhe and Justice Sandeep V. Marne, while adjudicating an income tax appeal, held that the subsidy received by a bank from the Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme, 1968 does not constitute "interest" within the meaning of Section 2(7) of the Interest Tax Act, 1974, as it does not arise directly from any loan or advance made by the bank. Consequently, such a subsidy is not chargeable to interest tax under the said Act.

The High Court adjudicated an appeal filed under Section 260A of the Income-tax Act, 1961, by a public sector bank, challenging the treatment of an interest subsidy received from the Reserve Bank of India (RBI) under the Export Credit (Interest Subsidy) Scheme, 1968. The central question for determination was whether the subsidy amounting to ₹12.93 crores could be construed as 'interest' under Section 2(7) of the Interest Tax Act, 1974, and therefore be subject to interest tax under Section 4 of the Act.

The Assessee had excluded the subsidy from its return of chargeable interest for the assessment year 1992–93, contending that the subsidy did not arise from any loan or advance given by the Assessee to the RBI and therefore could not be treated as ‘interest’ under the Act. However, the Assessing Officer, relying on a Karnataka High Court decision in CIT v. Vijaya Bank, held the subsidy to be assessable interest and raised a tax demand. This view was subsequently upheld by the CIT (Appeals) and the Income Tax Appellate Tribunal, prompting the present appeal.

Upon hearing both sides, the High Court examined the scope of the term “interest” under Section 2(7) of the Interest Tax Act, which narrowly defines interest as arising from loans and advances made in India, and expressly includes certain components like commitment charges and discount on promissory notes, but not any form of subsidy. The Court heavily relied on the Supreme Court’s authoritative rulings in State Bank of Patiala v. CIT and Muthoot Leasing and Finance Limited and Another v. Commissioner of Income Tax, REEDLAW 2023 SC 01002, both of which held that unless income arose directly from loans or advances, it could not be treated as “interest” under the Interest Tax Act.

Applying this settled position, the Court held that no loan or advance was ever made by the Assessee to the RBI, and that the subsidy merely compensated the bank for interest shortfall on concessional export credit, not being in the nature of chargeable interest. The Court emphasised the strict interpretation applicable to taxing statutes and reiterated that tax cannot be imposed by inference, analogy, or intent unless expressly provided under the statute.

Consequently, the High Court answered the substantial question of law in favour of the Assessee and set aside the orders passed by the Tribunal and the lower authorities. The appeal was allowed, holding that the interest subsidy received by the Assessee from the RBI under the Scheme was not taxable as ‘interest’ under the Interest Tax Act, 1974.

Mr. Subhash S. Shetty, with Mr. Atul K. Jasani, Advocates, represented the Appellant.

Ms. Samiksha R. Kanani, Advocate, appeared for the Respondent.

---

To access the full content related to this article, including the complete judgment text, detailed legal analysis, ratio decidendi, headnotes, cited case laws, and updates on relevant statutes and notifications, we invite you to subscribe to our premium service.

Click "Subscribe" to unlock these exclusive legal resources.

If you are already a subscriber, please explore these resources by clicking the following citation/link.

REEDLAW 2025 Bom 06008