By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi
Chartered Accountants
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Interest for delayed payment of purchase price to principal — Since such interest is compensatory in nature and not related to any deposit or loan or borrowings, no TDS required to be deducted u/s.194A and hence no disallowance u/s.40(a)(ia).
Facts:
The assessee had claimed interest expenses of Rs.12.47 lakh. Out of the total interest claimed, an amount of Rs.7.83 lakh was towards interest of FAG Bearing (India) Ltd. On the said amount of interest no tax was deducted at source. The assessee, having dealership of FAG Bearing (India) Ltd. as per terms of payment was allowed interest-free credit period for 60 days. In case of overdue payment the cost of purchase includes with a liability to pay a compensatory sum which was termed as interest. As per the assessee since it was not in the nature of interest in strict terms, hence there was no liability to deduct the tax at source. The AO denied such claim and stated that as per section 2(28A) interest means interest payable in any manner in respect of any money borrowed or debited. Hence as per the AO, for such payment section 194A was applicable and hence he disallowed such interest u/s.40(a)(ia). The learned CIT(A) upheld the claim of the assessee. The Department went into further appeal.
Held:
Section 2(28A) has defined the term ‘interest’, but the definition appears to be wide to cover interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligations. But it is also worth noting that the said definition is not wide enough to include other payments. There ought to be a distinction between the payments not connected with any debt, and a payment having connection with the borrowings. A payment having no nexus with a deposit, loan or borrowing is out of the ambit of the definition of interest as per section 2(28A). A decision of Respected National Consumer Disputes Redressal Commission was relied upon, where in the case of Ghaziabad Development Authority v. Dr. N. K. Gupta, (2002) 258 ITR 337 (NCDRC), it was held that if the nature of payment is to compensate an allottee, then the provisions of section 194A not to be applied as far as the question of deduction of TDS on interest is concerned.
Reliance was also placed on the decision of the Gujarat High Court in the case of Nirma Industries Ltd. (2006) 283 ITR 402, wherein the interest received from trade debtors was allowed as deduction u/s.80HH and 80-I, the source being trade activity. The Courts in their judgments have considered the immediate source of interest received. If the immediate source is a loan, deposit, etc., then the payment is in the nature of ‘interest’, but if the immediate source of payment is trade activity, then the nature of receipt is not ‘interest payment’, but in the nature of payment of compensation. Hence, interest for delayed payment of purchase price to principal was held as beyond the ambit of section 194A and hence not liable to TDS.
