Payment for delayed allotment of plot by Housing Board not interest liable to TDS u/s 194A. Expression ‘interest’ was used merely for quantification of the liability – High Court
ABCAUS Case Law Citation:
ABCAUS 2499 (2018) 08 HC
Important Case Laws Cited/relied upon by the parties:
Viswapriya Financial Services and Securities Limited Vs. Commissioner of Income Tax
Commissioner of Income Tax Vs. Dr. Sham Lal Narula
Commissioner of Income Tax Vs. H.P. Housing Board
Ghaziabad Development Authority v. Dr N.K.Gupta
The Central India Spinning and Weaving
Empress Mills v Municipal Committee
The aforesaid appeal was filed by the Revenue against the Income Tax Appellate Tribunal (Tribunal / ITAT) in in holding that payment of interest on delayed delivery of plot was not in the nature of interest as defined in Section 2(28A) of the Income Tax Act, 1961 (the Act) and therefore, the provision of Section 40(a)(ia) of the Act was not applicable
The assessee was a company engaged in the business of development of land, housing and infrastructural facilities in New Town Projects. The entire shares of the assessee were owned by the State Government and all the directors of the assessee were nominated by the State Government.
In the course of assessment proceedings for an amount was found debited in the profit and loss account of the assessee. The nature of this expenditure was explained before the Assessing Officer (AO) as compensation paid for delay in delivery of plots.
It was explained that as per the offer of allotment of plot of land developed by the assessee, the assessee is under an obligation to hand over physical possession of the plot to the allottees on payment of the entire cost of the land. If possession of handing over of the plot is delayed for more than six months from the scheduled date of possession, the assessee has to pay interest on instalments already paid by the allottee during such extended period at the prevailing fixed term deposit rates for similar period offered by the State Bank of India.
The assessee submitted that although the as per the relevant clause of the allotment letter the expression “interest” was used, the actual nature of payment was in the nature of damages for delayed allotment of a plot and not in the nature of interest.
The explanation of the assessee was not accepted by the AO who opined that the payment was in the nature of interest and by reason thereof, the assessee should have deducted tax at source under Section 194A of the Act.
The AO further held that since the assessee failed to deduct tax at source on the amount, the claim of the assessee for deduction of the said sum cannot be allowed by reason of Section 40(a)(ia) of the Act. Accordingly, the AO accordingly disallowed the claim for deduction of the assessee.
The order of the AO was confirmed by the Commissioner of Income Tax (Appeals) and the assessee’s appeal was dismissed.
The Tribunal held that the amount in question could not be characterised as interest within the meaning of Section 194A of the Act and hence there was no obligation on the part of the assessee to deduct tax at source.
Aggrieved by the order of the Tribunal, the revenue preferred the instant appeal before the Hon’ble High Court.
The Hon’ble High Court observed that as per definition given in Section 2(28A) of the Act, the term ‘interest’ has been made entirely relatable to money borrowed or debt incurred and various gradations of rights and obligations arising from either of the two. The parenthesis in the section is in the nature of a qualification of the borrowing of money/incurring of debt and what it includes.
The Hon’ble High Court noted that under identical facts, the Himachal Pradesh High Court, relying on the judgment of the Hon’ble Supreme Court and Madras High Court, had held that the money paid on account of for the delay in handing over possession of the flats was in the nature of damages suffered by the allottees.
Accordingly, in view of the judgments of various High Courts and the Hon’ble Apex Court, the Hon’ble High Court opined that that the payment made by the assessee to the allottee was in terms of the agreement entered between them where the liability of the assessee would arise only if it failed to make the plots available within the stipulated time. Hence, the payment made under the relevant clause was purely contractual and as rightly held by the Tribunal, in the nature of compensation or damages for the loss caused to the allottee in the interregnum for being unable to utilise or possess the flat.
The Hon’ble High Court clarified that the flavour of compensation became evident from the words used in the particular clause. The expression ‘interest’ used may be seen merely as a quantification of the liability of the assessee in terms of the percentage of interest payable by the State Bank of India.
The Hon’ble High Court held thatin the absence of any borrowing of money or incurring of debt on the part of the assessee, interest as defined under section 2 (28A) of the Act had no application to such payments. Consequently, there was no obligation on the part of the assessee to deduct tax at source and consequently no disallowance could have been made under Section 40(a)(ia) of the Act.
The decision of the Tribunal was confirmed and appeal of the Revenue was dismissed.