2024 (12) TMI 247 - AT - Income Tax

TDS u/s 194A - Assessee in default for non-deduction of TDS - interest paid on loan from group entities - As argued payment are in nature of reimbursement and therefore not liable for deduction of TDS - HELD THAT - From the records, we noticed that the assessee has submitted relevant documents to prove that the payment of interest is a reimbursement in nature. As per the language used by the Parliament in section 194A what is contemplated is the 'interest in the form of income'. In the present case the argument of the assessee is that it is only reimbursement of the interest payment in respect of the funds utilized by the assessee towards borrowing facility of it's group entities. As per the facts on record the assessee-company is a sister concern of 'Ruparel Realty Group'. The assessee-company borrowed a sum of money from its group entities which is repayable on demand. The same is evident from the presentation in the Balance Sheet of the period under consideration. In the balance sheet for year ending 31.03.2016,note no.6 under the head 'short-term borrowings' the 'Loans repayable on demand' from the group companies is disclosed. In the interim period group companies has advanced a loan as 'Short Term Loan Advances' under Current Assets of same amount. From the above evidence, it can safely be concluded that the assessee-company was enjoying borrowing facilities from the bank through it's group entity companies and the funds have been advanced to the assessee. As per the contention of the assessee to the extent of the funds utilized in respect of bank borrowing in the name of the group entity companies, the interest cost is reimbursed. In fact, the assessee is paying only the interest to the bank but itis through the group entity companies. The group entity companies is not in lending business. From the Balance Sheet of the assessee it has been observed that the assessee has shown the loan amount in the name of the group entity companies. If the credit limit has not been not transferred in the name of the assessee but the credit facility is being enjoyed by the assessee through the group entity companies, then in such a situation the assessee cannot directly show the name of the bank but liability has to be shown on the name of the group entity companies. Assessee is under no statutory obligation to deduct the tax at source under section194A.Consequently, the interest payable for failure to deduct TDS under section 201(1A) of the Act does not arise. Therefore, the ground of appeal taken by the assessee is allowed

Summary

Issues Involved:

1. Whether the assessee is considered as "Assessee in default" for non-deduction of TDS on interest payments to group entities.
2. Whether the interest payments to group entities are considered as reimbursement and not liable for TDS deduction under Section 194A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessee in Default for Non-Deduction of TDS:

The primary issue revolves around the assessee being deemed an "Assessee in default" for failing to deduct TDS on interest payments made to its group entities. The Assessing Officer (AO) initiated proceedings under Section 201(1)/201(1A) of the Income Tax Act, 1961, determining that the assessee was liable for interest of Rs. 1,27,458/- for non-deduction of TDS under Section 194A. The assessee challenged this order, arguing that the interest paid was in the nature of reimbursement and thus not subject to TDS. The Commissioner of Income Tax (Appeals) upheld the AO's decision, prompting the assessee to appeal further.

2. Nature of Interest Payments as Reimbursement:

The assessee contended that the interest payments to group entities were reimbursements and did not constitute income liable for TDS under Section 194A. The assessee is part of the Ruparel Realty Group, which operates multiple entities for real estate development. The funds borrowed by the principal entity are utilized across various group projects, and the interest payments are made to the principal lender after deducting TDS where applicable. The funds are then distributed among group entities based on project needs, and the interest costs are reimbursed at the same rate as charged by the principal lender, without any markup. The assessee argued that these transactions are pure reimbursements, not income, and thus outside the purview of Section 194A.

The Tribunal examined the nature of these transactions and noted that the interest paid was indeed a reimbursement for funds utilized by the assessee through its group entities. The Tribunal referenced several legal precedents, including decisions from the ITAT Mumbai and Karnataka High Court, which supported the view that reimbursement of expenses does not constitute income and is not subject to TDS. The Tribunal also noted that similar proceedings against other group entities were dropped, further supporting the assessee's claim.

Consequently, the Tribunal concluded that the assessee was under no statutory obligation to deduct TDS under Section 194A, as the interest payments were reimbursements and not income. The Tribunal allowed the assessee's appeal, directing the deletion of the addition made by the AO.

In conclusion, the Tribunal ruled in favor of the assessee, determining that the interest payments were reimbursements and not subject to TDS under Section 194A. The appeals for all assessment years from 2016-17 to 2020-21 were allowed, and the orders of the lower authorities were set aside.