2011 (11) TMI 364 - HC - Income Tax

High Court rules interest paid by Housing Board to allottees for delayed possession not taxable under Income-tax Act. Detailed analysis provided.

The High Court ruled in favor of the assessee, determining that the interest paid by the Housing Board to allottees for delayed possession of flats was ... Interest paid/credited by the Housing Board on the amount deposited by the allottees on account of delayed allotment of flats – whether covered under definition of interest stated in section 2(28) – applicability of section 194A – Held that:-In the present case the allottees had not given the money to the Board by way of deposit nor had the Board borrowed the amount from the allottees. The amount was paid under a self financing scheme for construction of the flat and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats. In the case of Bikram Singh and others vs. Land Acquisition Collector and others (1996 - TMI - 5560 - Supreme Court) it was held that though it was termed as interest on delayed payment, it was actually a revenue receipt and therefore the provisions of Section 194A of the Income tax Act would have no application – Decided in favor of assessee. Issues:1. Interpretation of whether interest paid by Housing Board to allottees on delayed allotment of flats falls under the definition of interest as per Income-tax Act.2. Determination of whether interest paid by Housing Board to allottees is of capital nature and not subject to tax deduction at source.Analysis:Issue 1:The case involved a self-financing scheme by the Housing Board where allottees deposited money for flats, and interest was paid for delayed possession. The Income-tax Officer held that tax should have been deducted at source on the interest paid. The Commissioner of Income-tax, however, considered it as compensation for delay, not interest. The High Court analyzed Sections 2(28A) and 194A of the Income-tax Act. The appellant relied on a Madras High Court judgment regarding the definition of interest. Still, the High Court distinguished the case, emphasizing the compensation nature of the payment due to construction delays. The court cited the Apex Court's decision in a land acquisition case to support the view that such payments are not interest but damages.Issue 2:The court further elaborated that the payment was not a deposit or borrowed amount but part of a construction scheme. The interest was viewed as compensation for damages due to delayed completion of flats. Referring to legal precedents, including the Apex Court and National Consumer Dispute Redressal Commission, the court concluded that such payments do not fall under Section 194A of the Income-tax Act. The judgment favored the assessee, dismissing the appeal against the revenue, with no costs awarded.In summary, the High Court ruled in favor of the assessee, determining that the interest paid by the Housing Board to allottees for delayed possession of flats was not taxable as per the Income-tax Act. The court established that the payments were compensatory in nature for construction delays, not falling under the definition of interest subject to tax deduction at source. The judgment provided a detailed analysis of relevant legal provisions and precedents to support its decision, emphasizing the distinction between interest and compensation in the context of the case.