2021 (2) TMI 1008 - AT - Income Tax

Non deduction of TDS u/s 194A - compensation on cancellation of booking of flats - Interest disallowance u/s 40(a)(ia) - assessee had not deducted tax at source on stated payments - HELD THAT - The bookings were cancelled at the behest of purchasers and the assessee was under no obligation to pay any compensation in such an event. The payment was made as per mutual understanding. It is pertinent to note that the assessee was charging interest of 24% on delayed payments and therefore, the excess amount paid over and above the advances paid by the purchasers would be nothing but compensatory interest in nature. The buyer-seller relationship was snapped the moment the bookings were cancelled and the relationship of debtor-creditor would commence. As rightly held by Ld. CIT(A), there was no other way this payment could be interpreted because the assessee was under no legal obligation to pay compensation for cancellation of flat, the proposal for which came from the purchaser. Therefore, the impugned order would not require any interference on our part, in this regard. The said adjudication is also supported by assessment order for AY 2017-18 as placed on record by Ld. DR the perusal of which would reveal that the assessee, itself, has deducted tax at source on such excess payments during that year. Assessee could escape the rigors of Sec.40(a)(ia) in terms of second proviso to Section 40(a)(ia) read with first proviso to sub-section (1) of Section 201 by demonstrating that the payees have duly offered this income in their respective tax returns and paid due taxes thereon. In such a case, no disallowance u/s 40(a)(ia) is called for. Therefore, we deem it fit to restore the matter back to the file of AO for the limited purpose of providing an opportunity to the assessee to demonstrate fulfillment of these conditions by adducing requisite documentary evidences. Assessee's appeal stands partly allowed for statistical purposes

Summary

Issues:
Confirmation of interest disallowance u/s 40(a)(ia) for ?56.61 Lacs for Assessment Year (AY) 2015-16.

Analysis:

Issue 1: Interest disallowance u/s 40(a)(ia)
- The assessee contested the disallowance of ?56.61 Lacs under section 40(a)(ia) for compensation paid to parties against cancellation of flats.
- The Assessing Officer (AO) held that the compensation would be treated as interest payment under section 194A, requiring TDS deduction.
- The assessee argued that the payments were compensatory and not interest, citing mutual understanding and absence of debtor-creditor relationship.
- The Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the payments were akin to interest and the relationship shifted to debtor-creditor post cancellation.
- The Tribunal agreed with the CIT(A), noting the absence of legal obligation for compensation, interpreting the payments as compensatory interest.
- The Tribunal directed the AO to allow relief if the payees declared the income and paid taxes, per provisions of Section 40(a)(ia) and Section 201.

Conclusion:
- The Tribunal upheld the disallowance as compensatory interest under section 40(a)(ia) for cancellation payments.
- The matter was remanded to the AO to verify if payees declared income, as per statutory provisions.
- The appeal was partly allowed for statistical purposes.

This judgment clarifies the distinction between compensatory payments and interest, emphasizing the legal obligations post-cancellation of transactions and the importance of tax compliance by payees to avoid disallowances under tax laws.