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TMI Blog2011 (6) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned payment had a direct link and immediate nexus with the Trade liability being connected with the delayed purchase payment, hence, did not fall within the category of "Interest" as defined in section 2(28A) of the Income-tax Act for the purpose of deduction of Tax at Source as prescribed under section 194A of the Act - Resultantly, this assessee cannot be held a defaulter of non-deduction of tax at source under section 194A of the Act - Decided in favour of assesseee. - 2075 (AHD.) OF 2008 - - - Dated:- 30-6-2011 - MUKUL KR. SHRAWAT, A.K. GARODIA, JJ. Roop Chand for the Appellant. S.N. Divatia for the Respondent. ORDER Mukul Kr. Shrawat, Judicial Member The revenue is in appeal and the respondent-assessee has filed a cross-objection, both have emanated from the order of Learned CIT (Appeals)-VII, Ahmedabad, dated 26-3-2008 passed for assessment year 2005-06. (A) Revenue s appeal; ITA No. 2075/Ahd./2008 - Assessment year 2005-06 2. The only ground of the revenue is as follows : "1. The CIT(A) erred in deleting the addition made on account of interest payment of Rs. 7,83,666 out of the total payment of Rs. 12,47,746 under section 40(a)(ia) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court, namely, Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402/155 Taxman 330 (Guj.) and held that the interest received from the trade debtors for late payment of sales consideration is the amount derived from the sale proceeds. According to the judgment, purchaser pays higher sale price due to delay in payment. As per the argument the said payment is therefore out of the ambits of the TDS provisions. Accepting the defense, the Assessing Officer was directed to delete the addition. 4. From the side of the revenue Learned Departmental Representative Mr. Roop Chand and from the side of the assessee Learned Authorised Representative Mr. S.N. Divatia have appeared who have respectively placed reliance on the orders of the Assessing Officer and the Learned CIT (Appeals). 5. We have heard both the sides at some length. Admitted factual position is that the assessee is having a dealership of FAG Bearing (India) Ltd. and, therefore, in the business of sales of ball-bearings. This fact has also not been denied that there were certain terms and conditions agreed upon between the two parties in case of delay in payments. Whenever there was delay in payment or the payments got overd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed the additional sale proceeds as interest in case of contract as per illustration (a) above, such payment would not be profits derived from industrial undertaking, but in case of illustration (b) above, if the payment is described as sale price it would be profits derived from the industrial undertaking. This can never be, because in sum and substance these are only two modes of realising sale consideration, the object being to realise sale proceeds at the earliest and without delay. Purchaser pays higher sale price if it delays payment of sale proceeds. In other words, this is a converse situation to offering of cash discount. Thus, in principle, in reality, the transaction remains the same and there is no distinction as to the source. It is incorrect to state that the source for interest is the outstanding sale proceeds. It is not the assessee s business to lend funds and earn interest. The distinction drawn by Revenue is artificial in nature and is neither in consonance with law nor commercial practice." 7. In the light of the above precedent, we deem it proper to discuss the relevant provisions of Income-tax Act. 7.1 Section 2(28A) of the Income-tax Act has defined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion was not "interest" as defined in section 2(28A). Interest, in the order of the Commission, meant compensation or damages for delay in construction or handing over possession of the same causing consequential loss to the complainant by way of escalation in the price of the property and also on account of distress and disappointment faced by him. Interest, in the order, had been used merely as a convenient method to calculate the amount of compensation in order to standardize it. Otherwise, each case of an allottee would have to be dealt with differently. Nomenclature did not decide the issue. In view of the definition of "interest" in section 2(28A), the provisions of section 194A were not applicable and the petitioner Authority was wrong in deducting tax at source from the interest payable to the respondent (complainant)." 7.3 This decision is very helpful to decide this appeal because it was held that if the nature of payment is to compensate an allottee, then the provisions of section 194A not to be applied as far as the question of deduction of TDS on interest is concerned. Though the said compensation was mentioned as "interest" but the Hon ble Members have held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chaser pays a higher sale price on account of delay in payments of the sale proceeds, then the source being trade activity, therefore, held as eligible profit of the Industrial Undertaking for the purpose of computation of deduction. 8.2 Almost on identical situation in the case of Phatela Cotgin Industries (P.) Ltd. (supra), the Hon ble Court has stated that the interest which was received on delayed payment on account of sale to customers has to be termed as income derived from the Industrial Undertaking and such an income was held as distinct from interest income which is received from Fixed Deposit. The Courts have delivered these judgements by taking into consideration the immediate source of said receipt. If the immediate source is a loan, deposit, etc., then the payment is in the nature of "interest" but if the immediate source of receipt of payment is trade activity, then the nature of receipt is not "interest payment" but in the nature of payment of compensation. 9. In the case of Indo Matsushita Carbon Co. Ltd. (supra), the question was that whether overdues from trade debtors is eligible for relief under section 80HHC/80-I of the Income-tax Act. In that context the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of purchase, hence no TDS was required to be deducted. 12. In the light of the overall discussion made hereinabove, we are of the view that the impugned payment had a direct link and immediate nexus with the Trade liability being connected with the delayed purchase payment, hence, did not fall within the category of "Interest" as defined in section 2(28A) of the Income-tax Act for the purpose of deduction of Tax at Source as prescribed under section 194A of the Act. Resultantly, this assessee cannot be held a defaulter of non-deduction of tax at source under section 194A of the Act. The Learned CIT (Appeals) has rightly reversed the findings of the Assessing Officer. Ground raised of the revenue is, therefore, dismissed. (B) Assessee s Cross Objection No. 120/Ahd./2008 - A.Y. 2005-06 (Arising out of 2075/Ahd./2008 - A.Y. 2005-06) 13. The following grounds have been raised by the assessee in the cross objection : "1. Assuming for the sake of argument that payment of Rs. 7,83,666 was interest payment, the amended provisions of section 40(a)(ia) of the Act would not be applicable and as such no disallowance is called for under section 40(a)(ia) of the Act. 2. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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