Interest on delayed purchase payments not subject to TDS under Section 194A as it's not borrowed capital interest

The ITAT Kolkata ruled in favor of the assessee regarding TDS u/s 194A on delay interest charged by brokers. The tribunal held that interest paid on delayed purchase consideration payments does not constitute "interest" under Section 2(28A) of the Income Tax Act, as it was not incurred on borrowed capital during normal business operations. Section 194A applies only to interest on borrowed capital, not delayed payment charges. Following the precedent in Harbhajan Singh case, the tribunal directed the AO to delete the addition and allowed the assessee's appeal.

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Issues:
Confirmation of addition of interest paid on delayed payment to share broker without TDS deduction.

Analysis:
The appeal was against the order of the Commissioner of Income-tax (Appeals) regarding the addition of Rs. 24,68,080 as interest paid on delayed payment to a share broker without TDS deduction. The Assessing Officer observed that interest was charged for delayed payments to the share broker without TDS deduction, leading to the addition. The AO contended that the interest falls under Section 2(28A) of the Act, making it subject to TDS. The CIT(A) upheld the AO's decision.

Upon review, the ITAT found that the interest payments were for delayed payments to the broker and not on borrowed capital, thus not falling under Section 2(28A) of the Act. The ITAT referenced a similar case where TDS was duly deducted, supporting the assessee's argument. The ITAT emphasized that Section 194A applies to interest on borrowed capital, not on delayed payment of purchase considerations. The ITAT cited various judgments to support the distinction between interest on borrowings and compensatory payments unrelated to debt.

Additionally, the ITAT highlighted that the payment did not qualify for deduction under Section 36(1)(iii) or under Section 37, as it was not related to income from other sources or capital borrowed for business purposes. The ITAT concluded that the payment was compensatory and directly linked to trade liability, not falling under the definition of "interest" for TDS purposes. Relying on precedents, the ITAT allowed the appeal and directed the AO to delete the addition.

Considering the similarities with the referenced case, the ITAT set aside the CIT(A)'s decision and instructed the AO to remove the addition. The appeal by the assessee was allowed, and the decision was made on 8th January 2024 in Kolkata.

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