2018 (9) TMI 114 - HC - Income Tax

TDS liability - Payment of interest on delayed delivery of plot - nature of interest as defined in Section 2(28A) - provision of Section 40(a)(ia) applicability - Held 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 flavor of compensation becomes evident from the words used in the particular clause. The expression interest used in Clause 7 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. Since there is neither any borrowing of money nor incurring of debt on the part of the assessee, in the present factual scenario, interest as defined under section 2 (28A) of the Act can have no application to such payments. 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. - decided in favour of assessee

Issues Involved:
1. Whether the payment for delayed delivery of plots constitutes "interest" under Section 2(28A) of the Income Tax Act, 1961.
2. Whether the disallowance under Section 40(a)(ia) of the Income Tax Act, 1961, for non-deduction of TDS, is applicable.

Issue-wise Detailed Analysis:

1. Nature of Payment for Delayed Delivery of Plots:
The primary issue is whether the payment made by the assessee to the allottees for delayed delivery of plots qualifies as "interest" under Section 2(28A) of the Income Tax Act, 1961. The assessee argued that the payment, although termed as "interest," was actually in the nature of damages for the delay in allotting the plots and not interest on any borrowed money or debt incurred. The AO, however, held that this payment was interest, necessitating TDS under Section 194A, and disallowed the deduction under Section 40(a)(ia) for non-deduction of TDS.

The Tribunal ruled in favor of the assessee, stating that the payment was not interest as defined under Section 2(28A) and thus, no obligation to deduct TDS existed. The Tribunal's decision was based on the interpretation that the payment was compensatory for the delay and not related to any borrowing or debt.

2. Applicability of Disallowance under Section 40(a)(ia):
Given the Tribunal's conclusion that the payment was not interest, the disallowance under Section 40(a)(ia) for non-deduction of TDS was deemed inapplicable. The revenue, however, contested this, arguing that the payment fell under the statutory definition of interest, thus mandating TDS deduction and subsequent disallowance for non-compliance.

Court's Analysis and Conclusion:
The Court examined the definition of "interest" under Section 2(28A) and concluded that it relates specifically to money borrowed or debt incurred. The Court found the Tribunal's interpretation persuasive, agreeing that the payment was compensatory for the delay in plot delivery and not interest on borrowed money or debt. The Court also referenced similar judgments, including the Himachal Pradesh High Court's ruling in Commissioner of Income Tax Vs. H.P. Housing Board, which distinguished such payments as damages rather than interest.

The Court emphasized that the contractual obligation to compensate for delayed plot delivery did not create a debtor-creditor relationship. The payment was a pre-agreed compensation for non-performance within the stipulated time, calculated using an interest rate merely as a measure.

The Court further noted the principle of strict construction of taxing statutes, resolving any ambiguity in favor of the taxpayer. Consequently, the Court confirmed the Tribunal's decision, holding that the payment did not constitute interest under Section 2(28A), and thus, the disallowance under Section 40(a)(ia) was not applicable.

Final Judgment:
The appeal by the revenue was dismissed, affirming the Tribunal's decision that the payment for delayed delivery of plots was compensatory and not interest under Section 2(28A). Consequently, there was no requirement for TDS deduction, and the disallowance under Section 40(a)(ia) was not applicable. The identical issues in the related appeal for the subsequent assessment year were also dismissed. No order as to costs was made.

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