2002 (10) TMI 88 - HC - Income Tax

Whether the payment made by the assessee which is a company engaged in retail finance services, corporate advisory services, securities trading and assets securitisation to the persons who had invested in a scheme floated by the assessee under which the investor was guaranteed a minimum return of 1.5 per cent. a month, is interest as it is defined in section 2(28A) of the Income-tax Act, 1961. - The questions referred to us, have to be and are answered in favour of the Revenue and against the assessee.

Summary

Issues:
1. Whether the payment made by the assessee to investors is considered "interest" under section 2(28A) of the Income-tax Act, 1961.
2. Whether the assessee was liable to deduct tax at source under section 194A.
3. Correctness of the Tribunal's finding on the applicability of section 2(28A) to the case.
4. Correctness of the Tribunal's decision on the liability of the assessee under section 201(1) and 201(1A) of the Act.

Analysis:
1. The main issue in this case was to determine if the payment made by the assessee to investors falls under the definition of "interest" as per section 2(28A) of the Income-tax Act, 1961. The Tribunal held that the return on investment at a guaranteed minimum payment of 1.5 percent per month is covered by this definition, making the assessee liable to deduct tax at source under section 194A. The Tribunal also directed the Assessing Officer to determine the actual tax liability after considering payments already made by investors on the interest received.

2. The assessee argued that the scheme did not create a debtor-creditor or borrower-lender relationship, hence sections 194A, 201(1), and 201(1A) were not applicable. However, the Court found that the scheme did impose an obligation on the assessee to repay investors and ensure monthly payments, meeting the definition of "interest" under section 2(28A). Therefore, the assessee was required to comply with section 194A for tax deduction at source.

3. The Tribunal's decision on the applicability of section 2(28A) was upheld, emphasizing that even if there was no traditional debtor-creditor relationship, payments made in relation to money claims or obligations fell within the statutory definition of "interest." The Court concluded that the payment made by the assessee to investors was indeed in the nature of interest, necessitating compliance with section 194A and making the assessee liable under section 201(1) and 201(1A) of the Act.

4. The Court noted the absence of incentives for taxpayers under the Act concerning tax deduction obligations, contrasting it with practices in some Western countries. Despite acknowledging these issues as matters for the Legislature and executive, the Court ruled in favor of the Revenue and against the assessee, affirming the applicability of sections 194A, 201(1), and 201(1A) based on the definition of "interest" under section 2(28A).