Do you know this? Excess Interest collected by the banks by rounding off the applicable interest cannot be retained by the banks

The Hon’ble Supreme Court in its Judgment dated April 16, 2004, has ordered that excess interest collected by the banks from the borrowers through rounding off the applicable interest rate should be recovered from the banks and credited to a Trust to be created for the benefit of disadvantaged people.

In the same judgment, the Hon’ble Court had also directed that each concerned bank shall contribute to the extent of ₹50 lakhs to the said Fund. In view consequently, the Reserve Bank of India advised all the banks that excess amount realised, if any, from their borrowers towards interest tax by way of rounding off, may be deposited with the above referred Trust Fund.

Background:

In the case of Devkala Consultancy Services, … vs Union Of India And Others in the Karnataka High Court(Dated  18 December 1998 ), it is submitted by the petitioner a partnership firm claiming to be engaged in assisting the banking public has filed this petition in the public interest that respondent banks (SBI and associates as well as nationalized banks) were charging interest on loans and advances granted to the public at a rate which was in excess of what is permitted under the provisions of the Interest-tax Act, 1974 and the directions issued by the second respondent under Section 21 of the Banking Regulation Act, 1949.

The petitioner prayed for the Hon’ble Court to declare that the action of the respondent Banks in rounding up interest rates to the next higher 0.25% is illegal, arbitrary, and untenable. It is further prayed that respondents be commanded to refund the excess interest collected from the borrowers as a result of the rounding up to the next higher 0.25% for which respondent 2 be commanded to direct all the Scheduled Commercial Banks to refund the alleged excess interest collected from the borrowers.

The provisions of the Interest-tax Act 1974 are stated to have been re-introduced with effect from 1-10-1991 by virtue of the Finance Act, 1991. Under the said Act the banks were obliged to pay the tax on the interests in terms of and to the extent provided under Sections 4 and 5 for every assessment year commencing on and from 1st day of April 1992. It is alleged that totally ignoring the provisions of the Interest-tax Act and the instructions issued by the Reserve Bank of India, respondent 30 (IBA) vide its communication addressed to all respondents-Banks advised that the rate of interest be loaded with the interest tax of 3% and rounded up to the higher 0.25%.

The Hon’ble court after hearing the case from both sides declared that the action of the respondents-banks in rounding up interest rates to the next higher 0.25% is held illegal, arbitrary, and untenable. A command is issued to all the banks to submit an account of the excess interest collected by them from the borrowers and deposit the same with the Reserve Bank of India to be debited in the account of the Union of India. The Reserve Bank of India-respondent 2 is directed to take immediate effective steps for the implementation of our directions by calculating the excess interest collected by the banks and ensuring the same is deposited in the funds of the Union of India.