Payment of interest by assessee for delayed delivery/allotment of plot was not in the nature of interest specified in Section 194A, and thus TDS provision was not applicable on it.

• November 30, 2018
• CA Chandan Agarwal's Office

Commissioner of Income Tax, Kolkata
Vs
West Bengal Housing Infrastructure Development Corporation Ltd.
9th August, 2018

Payment of interest by assessee for delayed delivery/allotment of plot was not in the nature of interest specified in Section 194A, and thus TDS provision was not applicable on it.

The assessee is a government owned company engaged in the business of development of land, housing and infrastructural facilities in NEw Town Projects, Kolkata. The assessee claimed deduction amounting to Rs. 9.71 crores as compensation for delay and delivery of plots developed by it. Assessee stated that as per the offer of allotment of plot of land developed by the assessee, the assessee was under an obligation to hand over physical possession of the plot to the allottees on payment of the entire cost of the land. If possession of handing over of the plot was delayed for more than six months from the scheduled date of possession, the assessee has to pay the interest on instalments already paid by the allottee. Further assessee stated that though the relevant clause in allotment letter mentioned the expression “interest”, the actual nature of payment was in the nature of damages for delayed allotment of a plot and not in the nature of interest.

AO held the payment to be in the nature of interest and disallowed the interest under section 40(a)(ia) contending that TDS under section 194A was not made by the assesseee. CIT(A) ruled in favour of AO; however, the ITAT ruled in favour of the assessee. Aggrieved, the Revenue filed an appeal before the High Court.

High Court analysed provisions of Section 2(28A) and observed that the term ‘interest’ has been entirely relatable to money borrowed or debt incurred and various gradations of rights and obligations arising from either of the two. High Court relied on ruling in Commissioner of Income Tax vs. H.P. Housing Board (2012) 340 ITR 388 (HP), wherein it was held on similar facts that the amount paid by H.P. Housing Board was not ‘interest’ but was on account of damages suffered by the allottee for delay in completion of the flats. High Court observed that there was neither any borrowing of money nor incurring of debt on the part of the assessee and thus ‘interest’ as defined under section 2(28A) had no application to impugned payments.

High Court observed that the payment made by the assessee to the allottee was in terms of the agreement entered between them where the liability of the assessee would arise only if it failed to make the plots available within the stipulated time. Thus the payment was purely contractual and in the nature of compensation or damages for the loss caused to the allottee in the interregnum for being unable to utilise or possess the flat. As per the High Court, the expression ‘interest’ used in Clause 7 of agreement was merely a quantification of the liability of the assessee in terms of the percentage of interest payable by the State Bank of India. High Court held that consequently no disallowance could have been made under section 40(a)(ia).

High Court, thus ruled in favour of the assessee.