Section 194A of the Income-tax Act, 1961 - Deduction of tax at source - Interest

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[2011] 12 taxmann.com 37 (Ahd.)

IN THE ITAT AHMEDABAD BENCH ‘A’

Income-tax Officer, Ward-2(2), Ahmedabad

v.

Parag Mahasukhlal Shah*

MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND A.K. GARODIA, ACCOUNTANT MEMBER
IT APPEAL NO. 2075 (AHD.) OF 2008
CO NO. 120/AHD./2008
[ASSESSMENT YEAR 2005-06]
JUNE 30, 2011

Section 194A of the Income-tax Act, 1961 - Deduction of tax at source - Interest other than interest on securities - Assessment year 2005-06 - Whether when a payment is compensatory in nature and not related to any deposit/debt/loan, then such a payment is out of ambits of provisions of section 194A - Held, yes - Assessee was proprietor of a concern engaged in trading of ball bearing - It was having dealership of FAG - As per terms of agreement, assessee was allowed interest free credit period for 60 days - In case of overdue payment cost of purchase was paddled with a liability to pay a compensatory sum which was termed as interest - As per assessee since it was not in nature of interest in strict terms, there was no liability to deduct tax at source - Assessing Officer took a view that as per section 2(28A) interest means, interest payable in any manner in respect of any money borrowed or debited - He thus opined that for payment in question provisions of section 194A were applicable - Since assessee failed to deduct tax under section 194A in respect of interest payments, Assessing Officer disallowed those payments by invoking provisions of section 40(a)(ia) - Whether in view of fact that impugned payment had a direct link and immediate nexus with trade liability being connected with delayed purchase payment, it did not fall within category of ‘Interest’ as defined in section 2(28A) for purpose of deduction of tax at source as prescribed under section 194A - Held, yes - Whether, therefore, Commissioner (Appeals) was justified in holding that assessee was not a defaulter of non-deduction of tax at source under section 194A - Held, yes

Section 2(28A) of the Income-tax Act, 1961 - Interest - Assessment year 2005-06 - Whether a payment having no nexus with a deposit, loan or borrowings is out of ambit of definition of interest as per section 2(28A) - Held, yes

FACTS

The assessee was a proprietor of a concern engaged in trading of ball bearings. He claimed certain interest expenses in the profit and loss account. The Assessing Officer noticed that a part of interest expenses was towards FAG. The assessee’s explanation was that he was having dealership of FAG. As per terms of agreement, the assessee was allowed interest-free credit period for 60 days. It was further informed that in case of overdue payment the cost of purchase was paddled with a liability to pay a compensatory sum which was termed as interest. Whenever there was default in making payment beyond the normal credit period, then the same was agreed to be compensated accordingly. It was, therefore, explained that the said amount was nothing but in the nature of additional sale price paid. 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. However, the Assessing Officer was not convinced and according to him as per section 2(28A) interest means, interest payable in any manner in respect of any money borrowed or debited. In his opinion, for such payment the provisions of section 194A were applicable. Finally, it was concluded that in terms of the provisions of section 40( a )( ia ), the expenditure of the said interest payment was to be disallowed. On appeal, the Commissioner (Appeals) having accepted the assessee’s explanation, directed the Assessing Officer to delete the addition.

On revenue’s appeal :

HELD

The definition of interest under section 2(28A) appears to be wide, inter alia, covers interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligation. This definition further includes service charges but those charges should be in respect of the money borrowed. By this definition, therefore, it is evident that if the charges are in respect of a debt or in respect of any credit facility then such charges are inclusive in the definition of ‘interest’. Therefore, the interest is a payment of money in lieu of use of borrowings. It is payable by a debtor to the creditor. But it is also worth to note that the said definition is not wide enough to include other payments. There ought to be distinction between the payments not connected with any debt, with a payment having connection with the borrowings. A payment having no nexus with a deposit, loan or borrowings is out of the ambit of the definition of interest as per section 2(28A). [Para 7.2]

The decision in the case of Ghaziabad Development Authority v. Dr. N.K. Gupta [2002] 258 ITR 337 (NCDRC) is very helpful to decide instant appeal because it was held in that case 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. Though the said compensation was mentioned as ‘interest’ but the Members held that the word used ‘interest’ did not fall within the definition as defined under section 2(28A). [Para 7.3]

As per section 194A, if a person is responsible for paying any income by way of interest, he shall at the time of credit or at the time of payment is required to deduct income-tax. Vide an Explanation annexed to section 194A, it is clarified that where any income by way of interest is credited either under the 'suspense account' or 'interest payable account' or 'by any other name', then also such person is liable to deduct tax. On plain reading of this section, it is apparent that the term 'interest' used in this section relates to and in connection of a debt or a loan or a deposit. The circumstances under which the assessee is required to deduct the tax have also been narrated. Therefore, a conclusion can be drawn that if a payment is compensatory in nature and not related to any deposit/debt/loan, then such a payment is out of the ambits of the provisions of section 194A. [Para 8.1]

If the immediate source of receipt of payment is a loan, deposit, etc., then the payment is in the nature of ‘interest’ but if the immediate source of receipt of payment is trade activity, then the nature of receipt is not ‘interest payment’ but in the nature of payment of compensation. [Para 8.2]

An another interesting feature involved to resolve the controversy was that the revenue otherwise could not allow the claim of payment under section 36(1)( iii ) because as per this section, the deduction is provided in respect of the amount of interest paid on capital borrowed for the purpose of business. The only provision under the Act is section 37 under which the payment/expenditure was allowable being laid out wholly and exclusively for the purpose of the business. The nature of payment was such that it could not be considered either under section 56, i.e. ‘Income from other sources’ or under section 57 prescribing deductions only in respect of ‘income from other sources’. Inter alia, the conclusion was that since the nature of payment did not fall within the category of ‘income from other sources’ as also could not be allowed as payment of interest under section 36(1)( iii ), therefore, it’s true nature was nothing but added value of cost of purchase, hence no TDS was required to be deducted. [Para 11]

In the light of aforesaid, it was opined that the impugned payment had a direct link and immediate nexus with the trade liability being connected with the delayed purchase payment, hence, it did not fall within the category of ‘interest’ as defined in section 2(28A) for the purpose of deduction of tax at source as prescribed under section 194A. Resultantly, the assessee could not be held a defaulter of non-deduction of tax at source under section 194A. The Commissioner (Appeals) had rightly reversed the findings of the Assessing Officer. [Para 12]

In the result, the revenue’s appeal was to be dismissed.

CASES REFERRED TO

Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402 / 155 Taxman 330 (Guj.) (para 3), CIT v. Nirma Industries Ltd. [2008] 166 Taxman 9 5 (SLP No. 28) (para 5), CIT v. Indo Matsushita Carbon Co. Ltd. [2006] 286 ITR 201/ 122 Taxman 516 (Mad.) (para 5), British Bank Middle East v. CIT [1998] 233 ITR 251 (Bom.) (para 5), CIT v. Jackson Engineers Ltd. [2010] 231 CTR 348 (Delhi) (para 5), CIT v. Advance Detergents Ltd. [2010] 228 CTR 356 (Delhi) (para 5), Phatela Cotgin Industries (P.) Ltd. v. CIT [2008] 303 ITR 411/ 166 Taxman 9 (Punj. & Har.) (para 5), Tata Sponge Iron Ltd. v. CIT [2007] 292 ITR 175/ 165 Taxman 191 (Ori.) (para 5), Ghaziabad Development Authority v. Dr. N.K. Gupta [2002] 258 ITR 337 (NCDRC) (para 7.2), CIT v. Madras Motors Ltd. [2002] 257 ITR 60 / 122 Taxman 516 (Mad.) (para 9), CIT v. Paras Oil Extraction Ltd. [1998] 230 ITR 266/96 Taxman 234 (MP) (para 10) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 / 129 Taxman 539 (SC) (para 10).