TDS: Interest: Section 2(28A) and section 194A of Income-tax Act, 1961: Interest on amount deposited by allottees on account of delayed allotment of flats: Interest on account of damages: Tax need not be deducted at source.

The assessee, the Himachal Pradesh Housing Board, floated a self-financing scheme for sale of house/ flats wherein the allottees were required to deposit some amount with the assessee and construction was to be carried out out of these amounts. One of the conditions of the terms of allotment was that in case the possession of the house/flat was not given to the allottee within a particular time frame, the assessee was liable to pay interest to the allottees on the money received by it. There was a delay in construction of the houses and thereafter the assessee paid interest at the agreed rate to the allottees in terms of the letter of allotment. The Assessing Officer held that the assessee was liable to deduct tax at source on payment of such interest u/s.194A of the Income-tax Act, 1961. The CIT(A) and the Tribunal held that section 194A was not applicable.

On appeal by the Revenue, the Himachal Pradesh High Court upheld the decision of the Tribunal and held as under:

“(i) The amount which was paid by the assessee was not payment of interest, but was payment of damages to compensate the allottee for the delay in the construction of his house/ flat and the harassment caused to him.

(ii) Though compensation had been calculated in terms of interest, this was because the parties by mutual agreement agreed to find out a suitable and convenient system of calculating the damages, which would be uniform for all the allottees. The allottees had not given the money to the assessee by way of deposit, nor had the assessee borrowed the amount from the allottees.

(iii) The amount was paid under a self-financing scheme for construction of the flats and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats.”