The appellant company is a builder which had entered into construction agreements with various customers. A specimen of such an agreement is produced as Annexure I in these appeals. This agreement states that the purchaser of the apartment specified therein has already purchased the specified extent of undivided share in the land owned by the landlord, whose power of attorney is held by the appellant. The agreement provides for construction of a flat by the appellant for and on behalf of the purchaser. Payments are to be made by the purchaser in instalments which are also specified in the agreement. The agreement provides that in the event of any failure on the part of the purchaser to perform or observe any one of his obligations, the appellant shall be entitled to re-enter upon and resume possession of the flat and that the agreement shall cease and stand terminated and that all amounts already paid by the purchaser to the appellant shall stand absolutely forfeited to the appellant.
In so far as this case is concerned, after entering into the agreement and making certain payments, some purchasers wrote letters to the appellant expressing their inability to fulfil the further obligations under the agreement and requesting for its cancellation. According to the appellant, on receipt of such communications, they identified prospective purchasers and entered into fresh agreements with them for prices which are higher than what was agreed upon with the purchasers who opted out. It is stated that after execution of agreements with the new purchasers, out of the payments made by them, the amounts paid by the purchasers to the appellant together with a portion of the additional amount received from the new purchasers was refunded. The additional amount thus paid was shown in the P&L account of the appellant.
In the proceedings that continued, the Assessing Officer held that the said amount has to be treated as interest paid on deposit liable for TDS under section 194A of the Act and that having failed to do so, appellant is an assessee in default and accordingly, assessment was completed under section 201 of the Act. The order of assessment was set aside by the first appellate authority. However, the said order was reversed by the Tribunal. It is in this background, these appeals are filed.
Section 2(28A) of the Act defines ‘interest’ and While understanding the scope of this provision, it is important to remember the principle laid down by the Apex Court in Polestar Electronic (Pvt.) Ltd. v. Addl. CST [(1978) 41 STC 409] that ‘if there is one principle of interpretation more well settled than any other, it is that statutory enactment must ordinarily be construed according to the plain natural meaning of its language and that no words should be added, altered or modified unless it is plainly necessary to do so in order to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute’ is to be considered. If this is the principle to be borne in mind, the term ‘interest’ as defined in section 2(28A) of the Act has to be construed strictly. On such literal construction, it can be seen that before any amount paid is construed as interest, what is required to be established is that the sum paid is in respect of any money borrowed or debt incurred and that there is debtor-creditor relationship between the parties. These are the necessary ingredients of section 2 (28A).
It is obvious that section 2(28A) is not attracted to every payment made and that the provision can be attracted only in cases where there is debtor-creditor relationship and that payments are made in discharge of a pre-existing obligation.
Purchaser had paid certain amounts to the appellant. At a later point of time, the purchaser opted out of the agreement and the appellant entered into fresh agreements with new buyers for prices that are higher than what was agreed with the purchasers. Out of the receipts from the new buyers, the appellant refunded to the purchasers the amount paid by them and a portion of the excess amount received. The amount thus refunded to the purchasers represents the consideration the purchasers paid towards the undivided shares in the property agreed to be purchased and also the cost of construction of the apartment, which work was entrusted to the appellant, being the builder. Such a relationship does not spell out a debtor-creditor relationship nor is the payment made by the appellant to the purchaser one in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A).
Further, there is no finding in the assessment order or in the order of the Tribunal that the amount paid by the purchasers, which was refunded, was accounted as deposit or advance received from them or that there is any debtor-creditor relationship between the parties, obliging the appellant to pay the amount to the purchasers. There is also no case for the revenue that the excess amount paid by the appellant was based on any agreement between them or that it was quantified at rates that were already agreed between the parties. In such circumstances, the payments made do not qualify to be interest as defined in section 2(28A) of the Act and the appellant did not have the obligation to deduct tax at source as provided under section 194A nor can they be proceeded against under section 201A, treating them as an assessee in default.