Section 2(28A) of the Income Tax Act, 1961 defines the term ”interest” to mean interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.
The term has been exhaustively defined and includes in its scope the service fee or other charges in respect of the borrowings, debts and even unutilised credit facilities. It not only includes interest, as understood generally, which is payable on any kind of borrowing or debt, but also includes payment on a deposit, claim or other similar right or obligation.
On reading of section, it can be said that interest Should be one which is payable in respect of:
- any moneys borrowed
- debt incurred
- deposit
- claim
- other similar right or obligation
- credit facility, utilised or not.
The issue is whether interest should be entirely relatable to money borrowed or debt incurred. Can it be argued that a payment cannot be treated as interest in case there is no borrowing or debt incurred. Also issue arises is whether the words in parenthesis should also have the element of borrowing of money or incurring of debt.
In the case of Principal CIT vs West Bengal Housing Infrastructure Development Corporation Ltd (2018) 96 taxmann.com 610 (Calcutta), the assessee had paid a sum of Rs.9.71 crores towards compensation for delay in delivery of plots. As per the terms of Agreement, the assessee had to pay interest on instalments already paid by the allottee in case there was delay in delivery of the plots. The interest was to be paid at the rate as per SBI fixed term deposit rate. The AO disallowed the interest under section 40(a)(ia) on the ground that the assessee has not deducted the TDS on interest paid. The Tribunal deleted the addition. On Appeal by Revenue, the High Court held that the payment by the assessee was purely contractual and in the nature of compensation or damages. Since there is neither any borrowing of money nor incurring of debt on the part of the assessee, interest as defined in section 2(28A) is not attracted. The HC held that expression interest used in the relevant clause of the housing scheme can be seen merely has quantification of the liability. The disallowance was accordingly deleted.
In the case of CIT vs HP Housing Board (2012) 18 taxmann.com 129, 340 ITR 388 (HP), the High Court held that money was paid on account of damages suffered by the allottee for delay in completion of flats and could not be treated as interest.
In case of Chit Funds, various High Court have taken a view that bid discount and dividend to contributors does not amount to interest. The rationale for this is that amount distributed to subscribers/members is not in respect of any money borrowed by chit fund company or any debt incurred by it [Sahib Chits 328 ITR 342 (Delhi), Avenue Super Chits 375 ITR 76 (Karn) and Panchajanya Chits 232 Taxman 592 (Kar)]
The Courts have held that bill discounting and factoring charges where the bill is assigned to bank/financial entity does not amount to interest [MKJ Enterprises 228 Taxman 61 (cal), M Sons Gems N Jewellery 69 taxmann.com 373 (Del)].
In the case of Cargill Global 335 ITR 94 (Del)[i] (affirmed by SC in 21 taxmann.com 496), theAssessee was trader exporter. The Assessee discounted the bill with Singapore bank. Held that discounting charges are not interest and therefore it is taxable as business income. The HC held that since the Singapore Bank had no PE in India, there was no liability to deduct TDS. Same view is adopted in ABC International Inc USA, AAR 840 of 2010, 241 CTR 289 and Cargill Financial Services Asia Pte Ltd. [TS-137-ITAT-2016(DEL].
Relevant Circulars
Circular No. 65 dated 02.09.1971 issued by CBDT provides that where the supplier of goods makes over the usance bill to his bank which discounts the same and credits the net amount to the supplier’s account without waiting for realization of the bill on the due date, the property in usance bill passes on to the bank and the eventual collection on due date is receipt by the bank on its own behalf. Such payment cannot technically be held as including any interest and therefore, no tax need to be deducted at source from such payment.
The CBDT Instruction O.P No. 275/9/80-IT(B) dated 25.1.1981 has held that part of the amount of the hire purchase price is towards the hire and part is towards purchase price. Such payment cannot be characterised as interest u/s 2(28A).
Contra View
In the case of Viswapriya Financial Services & Securities Ltd v CIT 258 ITR 496 (Madras HC), the taxpayer floated an innovative scheme under which the investor would entrust funds to assessee and assessee would ensure minimum return of 1.5 percent. The AO held that assessee was liable to deduct TDS. The Tribunal upheld the order. Before HC, the taxpayer argued that it received the funds as fiduciary and there was no debtor/creditor relationship between the parties. The HC held that debtor/creditor relationship was not necessary. The HC held that the taxpayer had obligation to pay guaranteed return and this obligation was akin to a claim or a deposit and was regarded as interest.
The Tribunal in the case of Overseas Trading and Shipping 99 taxmann.com 136 (Rajkot ITAT) has held that usance interest paid for delay in payment of purchase price is interest u/s 2(28A) and liable for TDs u/s 195.
In the case of Bhura Exports Ltd. v. ITO ( 2011) 202 Taxman 88 (Cal HC), theAssessee company utilized unspent credit limit of other company for importing goods for which bank charged interest. The amount was paid by said company on behalf of Assessee. The Assessee reimbursed such amount of interest to said company. The Assessee did not deduct TDS and contended that in reality it paid commission to that company for utilising its unspent credit limit and therefore, provisions of section 194A were not applicable. The Court held that amount paid by the assessee would fall come within the definition of ‘interest’ under section 2(28A) and assessee was liable to deduct TDS from the said amount in terms of section 194A.
[i] Tribunal decision at 126 TTJ 516, 34 SOT 424, 9 ITR (Trib) 558