2024 (6) TMI 856 - AT - Income Tax

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 ... Interest on delayed payment of purchase consideration - interest as defined in Section 2(28A) - tax deduction at source under Section 194A - disallowance under Section 40(a)(ia) - compensatory payment outside the ambit of interestInterest on delayed payment of purchase consideration - interest as defined in Section 2(28A) - tax deduction at source under Section 194A - disallowance under Section 40(a)(ia) - compensatory payment outside the ambit of interest - Interest paid to broker for delayed payment of amounts due on share purchases is not interest within the meaning of Section 2(28A) and is not exigible to tax deduction at source under Section 194A, hence no disallowance under Section 40(a)(ia) is warranted. - HELD THAT: - The Tribunal found that the payments in question were charged by the broker for delayed settlement of purchase consideration and were not incurred as interest on borrowed capital. Applying the principle that the definition of 'interest' under Section 2(28A) contemplates payments connected with loans, deposits or borrowings, the Tribunal held that compensatory payments linked directly to trading liabilities for delayed purchases fall outside that definition. The Tribunal relied on coordinate-bench decisions reasoning that such payments are in the nature of an added cost of purchase (compensatory) rather than interest on credit; therefore Section 194A (which applies to interest in the sense of payments on borrowings) is not attracted. Consequentially, the statutory machinery for disallowance under Section 40(a)(ia) for non-deduction of TDS on such payments does not apply, and the addition made by the AO was not sustainable. [Paras 4, 5, 6]Addition of Rs. 24,68,080/- made for non-deduction of TDS on interest for delayed broker payments deleted and the appeal is allowed.Final Conclusion: The Tribunal allowed the appeal, set aside the findings of the authorities below, and directed the Assessing Officer to delete the addition made for non-deduction of tax at source on interest charged by the broker for delayed payment in respect of Assessment Year 2015-16. 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.