October 2018

Scope of The Definition of The Term ‘Interest’ – Section 2(28a)

Pradip Kapasi
Gautam Nayak
Bhadresh Doshi
Chartered Accountants

Issue for Consideration

The term ‘interest’ has been defined in section 2(28A) of the Income tax Act as under:


"interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.


The term has been exhaustively defined and in its scope it includes the service fee or other charges in respect of the borrowings, debts and even unutilized credit facilities. It not only includes interest, as understood generally, which is payable on any kind of borrowing or debt, but also includes payment on a deposit, claim or other similar right or obligation. This extensive definition of ‘interest’ has been a subject matter of controversy, more particularly from the point of view of the applicability of section 194A to various types of payments for deduction of tax at source.


By applying the extensive definition, the Madras High Court considered the payment of guaranteed return at a particular percentage to the investors, under an investment scheme, to be an ‘interest’, though not captioned as interest otherwise by the parties. On the other hand, the Calcutta High Court took a view that the payment of an amount due to delay in delivering the plots, though termed as interest in the letter of allotment, did not fall within the ambit of the definition of ‘interest’. Though the facts of the cases before the Madras High Court and the Calcutta High Court were materially different, the issue arising therefrom was similar i.e. when does a payment made in respect of a particular ‘obligation’ constitute interest. 


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