TaxTMI 
TaxTMI 
2011 (6) TMI 148
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....ling in trading of ball-bearings. It was noticed by the Assessing Officer that the assessee has claimed interest expenses of Rs. 12,47,746 as per Profit & Loss Account. Bifurcation of the interest account was submitted according to which out of the total interest claimed an amount of Rs. 7,83,666 was towards interest to FAG Bearing (India) Ltd. Admittedly, on the said amount of interest no tax was deducted at source. Explanation of the assessee was that since the assessee was having dealership of FAG Bearing (India) Ltd. and reselling the ball-bearings, therefore as per the terms of payment he was allowed 2.5 per cent cash discount on payments made within 15 days and 1.5 per cent cash discount in case of payment made within 30 days. It was also explained that as per the terms, the assessee was allowed interest-free credit period for 60 days. It was further informed that in case of overdue payment the cost of purchase is paddled with a liability to pay a compensatory sum which was termed as interest. Whenever there was default in making payment beyond the normal credit period, then the same was agreed to be compensated accordingly. It was, therefore, explained that the said amount w....
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.... added sales price of the said commodity. Inter alia, it has also been argued that the impugned nature of payment was not within the definition of interest as prescribed under section 2(28A) of the Income-tax Act. With this factual back ground, the case laws relied upon is Nirma Industries Ltd. (supra), which now stood upheld and SLP of revenue was dismissed as per the citation CIT v. Nirma Industries Ltd. [2008] 166 Taxman 95 (SLP No. 28). In addition to this precedent, Learned Authorised Representative has also placed reliance on following decisions :- Sl. No(s). Decision in the case of... Reported in... 1. CIT v. Indo Matsushita Carbon Co. Ltd. [2006] 286 ITR 201/122 Taxman 516 (Mad.) 2. British Bank Middle East v. CIT [1998] 233 ITR 251 (Bom.) 3. CIT v. Jackson Engineers Ltd. [2010] 231 CTR 348 (Delhi) 4. CIT v. Advance Detergents Ltd. [2010] 228 CTR 356 (Delhi) 5. Phatela Cotgin Industries P. Ltd. v. CIT [2008] 303 ITR 411/166 Taxman 9 (Punj. & Har.) 6. Tata Sponge Iron Ltd. v. CIT [2007] 292 ITR 175/165 Taxman 191 (Ori.) 6. We have carefully perused the decision of the Hon'ble Jurisdictional High Court, Nirma Industries Ltd. (supra) wherein observation i....
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....erest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligation. This definition further includes service charges but those charges should be in respect of the money borrowed. By this definition, therefore, it is evident that if the charges are in respect of a debt or in respect of any credit facility then such charges are inclusive in the definition of "interest". Therefore, the interest is a payment of money in lieu of use of borrowings. It is payable by a debtor to the creditor. But it is also worth to note that the said definition is not wide enough to include other payments. There ought to be distinction between the payments not connected with any debt, with a payment having connection with the borrowings. A payment having no nexus with a deposit, loan or borrowings is out of the ambits of the definition of interest as per section 2(28A) of the Income-tax Act. While pondering upon the issue, we have come across a decision of Respected National Consumer Disputes Redressal Commission, wherein in the case of Ghaziabad Development Authority v. Dr. N.K. Gupta [2002] 258 ITR 337 (NCDRC), it was held as under :- "Held, affirming the or....
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....f payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force." 8.1 If a person is responsible for paying any income by way of interest shall at the time of credit or at the time of payment is required to deduct income-tax. Vide an Explanation annexed to this section, it is clarified that where any income by way of interest is credited either under the "suspense account" or "interest payable account" or "by any other name", then also such person is liable to deduct tax. On plain reading of this section, it is apparent that the term "interest" used in this section relates to and in connection of a debt or a loan or a deposit. The circumstances under which the assessee is required to deduct the tax has also been narrated. Therefore, a conclusion can be drawn that if a payment is compensatory in nature and not related to any deposit/debt/loan, then such a payment is out of the ambits of the provisions of section 194A of the Income-tax Act. To buttress this legal proposition, we hereby placed reliance on the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), where....
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...., it was held that the interest being directly relatable only to the amounts receivable by the assessee during the course of its business on account of sale, the interest would have to be included as the profits and gains derived from the business of the assessee. An another decision cited therein was CIT v. Madras Motors Ltd. [2002] 257 ITR 60/122 Taxman 516 (Mad.). 10. In the case of Phatela Cotgin Industries (P.) Ltd. (supra) the verdict was that the interest being received on delayed payment on account of sale to customers could clearly be termed to be an income derived from Industrial Undertaking. It was observed that such an interest is distinct from interest income which is being received from Fixed Deposit. Case laws referred were CIT v. Paras Oil Extraction Ltd. [1998] 230 ITR 266/96 Taxman 234 (MP) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC). 11. An another interesting feature involved to resolve this controversy is that the revenue otherwise cannot allow the claim of payment under section 36(1)(iii) of the Act because as per this section, the deduction is provided in respect of the amount of interest paid in respect of capital borrowed for ....