When a payment is compensatory in nature and not related to any deposit/debt/loan, then such a payment is out of ambits of provisions of section 194A

ORDER

Mukul Kr. Shrawat, Judicial Member –

The revenue is in appeal and the respondent­assessee has filed a cross-objection, both have emanated from the order of Learned CIT (Appeals)-VII, Ahmedabad, dated 26-3 -2008 passed for assessment year 2005-06.

(A) Revenue’s appeal; ITA No. 2075/A hd./2008 – Assessment year 2005-06

2. The only ground of the revenue is as follows :—

“1. The CIT(A) erred in deleting the addition made on account of interest payment of Rs. 7,83,666 out of the total payment of Rs. 12,47,746 under section 40(a)(ia) of the Income-tax Act by holding that such interest payment was additional purchase price.”

2.1 Facts in brief and the issue involved as emerged from the corresponding assessment order passed under section 143(3) of the Income-tax Act dated 28-9-2007 were that the assessee in his individual capacity is a proprietor of a concern dealing 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 was nothing but in the nature of additional sale price paid. As per the assessee since it was not in the nature of interest in strict terms, hence there was no liability to deduct the tax at source. However, the Assessing Officer was not convinced and according to him as per section 2(28A) of the Income-tax Act interest means, interest payable in any manner in respect of any money borrowed or debited. In his opinion, for such payment the provisions of section 1 94A of the Income-tax Act were applicable. Finally, it was concluded that in terms of the provisions of section 40(a)(ia) of the Income-tax Act, the expenditure of the said interest payment was to be disallowed. The matter was carried before the first appellate authority.