2015 (6) TMI 939 - HC - Income Tax

TDS u/s 194A - Excess payment refund debited in the Profit & Loss Account under the head indirect expenses - Whether should be treated as interest on the customers deposits/advances under section 2(28A) ? - Held that - The purchaser had paid certain amounts to the appellant. At a later point of time, the purchaser opted out of the agreement and the appellant entered into fresh agreements with new buyers for prices that are higher than what was agreed with the purchasers. Out of the receipts from the new buyers, the appellant refunded to the purchasers the amount paid by them and a portion of the excess amount received. The amount thus refunded to the purchasers represents the consideration the purchasers paid towards the undivided shares in the property agreed to be purchased and also the cost of construction of the apartment, which work was entrusted to the appellant, being the builder. Such a relationship does not spell out a debtor-creditor relationship nor is the payment made by the appellant to the purchaser one in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A). Further, there is no finding in the assessment order or in the order of the Tribunal that the amount paid by the purchasers, which was refunded, was accounted as deposit or advance received from them or that there is any debtor-creditor relationship between the parties, obliging the appellant to pay the amount to the purchasers. There is also no case for the revenue that the excess amount paid by the appellant was based on any agreement between them or that it was quantified at rates that were already agreed between the parties. In such circumstances, the payments made do not qualify to be interest as defined in section 2(28A) of the Act and the appellant did not have the obligation to deduct tax at source as provided under section 194A nor can they be proceeded against under section 201A, treating them as an assessee in default. The Tribunal was not correct to held that the excess payment refund debited in the Profit & Loss Account of the appellant under the head indirect expenses should be treated as interest on the customers deposits/advances - Decided in favour of assessee.

Summary

Issues:
1. Whether the excess payment refund debited in the Profit & Loss Account should be treated as interest on customers' deposits/advances.

Analysis:
The judgment in question revolves around the issue of whether the excess payment refund debited in the Profit & Loss Account of the appellant should be classified as interest on customers' deposits/advances. The appellant, a builder, had entered into construction agreements with customers, where payments were to be made in instalments. Some customers later expressed inability to fulfill obligations, leading to the appellant entering into new agreements with higher prices. The excess amounts refunded were debited as 'indirect expenses' in the P&L account, leading to a dispute during an Income Tax Act survey under section 133A.

Upon analysis, the court considered the definition of 'interest' under section 2(28A) of the Act, emphasizing the debtor-creditor relationship and the nature of the payment in question. Various precedents were cited, such as Bikram Singh v. Land Acquisition Collector and Commissioner of Income-tax v. Sahib Chits (Delhi) (Pvt.) Ltd., which highlighted that interest is linked to pre-existing debts and debtor-creditor relationships. The court emphasized that for a payment to be classified as interest, it must be in discharge of a pre-existing obligation.

The court further examined the specific case details, noting that the payments made by the appellant to purchasers did not establish a debtor-creditor relationship or constitute a discharge of pre-existing obligations. There was no evidence of the refunded amounts being accounted as deposits or advances, and no agreement existed obliging the appellant to make such payments. Consequently, the court concluded that the payments did not meet the criteria to be classified as interest under section 2(28A) of the Act.

In light of the above analysis, the court set aside the Tribunal's order, ruling in favor of the appellant. The judgment highlighted the importance of establishing a debtor-creditor relationship and the discharge of pre-existing obligations for a payment to be categorized as interest. The appellant was not deemed liable to deduct tax at the source or be treated as an assessee in default under section 201A based on the nature of the payments made.