2007 (2) TMI 135 - HC - Income Tax

Interest tax - AO made an addition to the interest chargeable to tax under the Act on account of receipt of amounts as interest/compensation/return in terms of agreements with collaborators for not making payment purchase of share in time - HC set aside the addition

Summary

Issues:
- Interpretation of Section 2(7) of the Income Tax Act, 1961 regarding the definition of "interest."
- Whether interest received on delayed payment of shares is chargeable to tax under the Interest Tax Act, 1974.

Analysis:
1. The Revenue appealed against the Tribunal's decision on the deduction of interest on delayed payment of shares under the Income Tax Act, 1961. The core issue revolved around whether the interest received by the assessee from collaborators for delayed payments of shares should be considered as chargeable interest under the Act.

2. The assessee, engaged in finance business, initially declared total interest income of Rs. 23,98,52,690/-, later revised to Rs. 12,88,46,250/-. The Assessing Officer added Rs. 3,50,36,152/- to the interest chargeable under the Act due to receipts from collaborators for delayed share payments. The CIT (A) deleted this addition, a decision upheld by the Tribunal.

3. The Tribunal emphasized that the interest received on delayed share payments did not fall under the definition of interest on loans and advances as per Section 2(7) of the Act. The Tribunal referred to a Kerala High Court judgment supporting the exclusion of such interest from taxable income, as it did not pertain to loans or advances.

4. Section 2(7) of the Act defines interest as pertaining to loans and advances made in India. The Tribunal ruled that the interest on delayed share payments did not qualify as interest on loans or advances disbursed by the assessee. The investment in equity participation did not constitute a loan or advance, leading to the dismissal of the Revenue's appeal.

5. The Court concluded that the interest on delayed share payments was not subject to tax under the Act, aligning with the strict interpretation of the definition of interest. Citing the Kerala High Court's precedent, the Tribunal's decision was upheld, and no substantial question of law was found to arise, resulting in the dismissal of the Revenue's appeal.