CA Sandeep Kanoi
Facts of the case-
There was a non-deduction of tax from payments made to certain customers debited in direct expenses under the head “excess payment refund” which was treated as indirect expenses by the assessee. It was submitted by the assessee before the lower authorities that some payments were received by the assessee from customers and who were initially booked the flat by making advance payment plus 1 or 2 installments; but due to various reasons the customers could not fulfill the payment schedule and they requested for refund. After certain period, the assessee identified some new customers and the flats were sold at higher rate than the previous price. After the sale, the assessee returned the payments received from previous customers with a margin, in order to maintain good business relationship and no TDS has been deducted. However, the AO observed that the expenses debited to P&L Account cannot be treated as refund and on the other hand it is a payment of interest on the amount paid by the original customers which is liable for TDS u/s 194A of the Act.
Observation by CIT Appeals
On appeal, the CIT(A) observed that the assessee is acting as an agent between the old customers and new customers. What the assessee is doing is passing on the sale consideration, including the excess amount received on sale of flats from new customers to old customers. The CIT(A) relied upon the decision of the Hon’ble Bombay High Court in the case of CIT vs Tata Teleservices Ltd reported in 122 ITR 592, wherein it has been held that the excess amount received on transfer of right in a property is in the nature of a capital receipt, and therefore, held that the provisions of section 194A is not applicable in the transactions undertaken by the assessee. Accordingly the CIT(A) directed the AO to delete the addition made on this count. Consequently, the interest charged u/s 201(1A) in both the years was also deleted. Aggrieved, the revenue is in appeal for both the years.
Observations by ITAT
We have heard the parties and gone through the orders of the authorities below. From the records, we find that during survey u/s 133A, it was found that the assessee has debited expenses in the P&L Account under the head “indirect expenses” an amount of Rs. 31,37,341/- for excess payment refund in AY 2012-13. Similarly for the AY 2013-14 an amount of Rs. 43,21,593/- on which the assessee has not made any TDS; though it was claimed as expenditure. The contention of the assessee that it is payment of excess amount collected by the assessee from the new customers as compared to the payment made by the original customers, who has entered into agreement for purchase of flat with the assessee. The assessee placed reliance on the Kerala Apartment Ownership Act, 1983 and pleaded before us that the original owner relinquished the right over the flats for which they entered into agreement and it is a capital gain in the hands of the purchaser and it cannot be treated as interest payment; so as to attract section 194A of the Act.
Herein, we are not concerned with the nature of receipt in the hands of recipients. We are concerned with the nature of payment in the hands of the assessee only. In the present case, the assessee debited to the P&L account as expenses under the head “ indirect expenses” (shown as excess refund). Admittedly, in this case, the person who has entered into agreement with the assessee for purchase of flats has paid money to the assessee which has been outstanding with the assessee. Meanwhile, due to change of circumstances, the original buyer of the flat was not able to purchase from the assessee which was sold to the new party. This necessitated the payment of excess amount over and above the amount paid by the original buyer of the flat and the assessee has debited the expenses in the P&L account under the head “excess payment refund”; but it was actually in the nature of interest being paid in respect of the amount lying with the assessee. Mere nomenclature in the books of account will not change the character of actual payment which was precisely in the nature of interest as defined u/s 2(28A) of the Act which reads as under:
“ (28A) “ interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.”
It is crystal clear that from the plain reading of sec. 2(28A) of the Act that money paid in respect of amount borrowed or debt incurred, is interest payable in any manner. The definition of interest in Sec. 2(28A) after referring to the interest payable in any manner in respect of any moneys borrowed or debt incurred proceeds to include in the terms money borrowed or that incurred, deposits, claims and ‘other similar rights or obligations’ and further includes any service fees or other charges in respect of the money borrowed or debt incurred which would include deposit, claim or other similar rights or obligations as also in respect of any credit facility which has not been utilized. Thus, the statutory definition given u/s 2(28A) of the Act regards amounts which may not otherwise be regarded as interest, as interest for the purpose of statute. The definition of interest has been carried to the extent that even the amounts payable in transactions were money has not been borrowed and that has not been incurred, are brought within the scope of its definition, as in the case of service fees paid in respect of a credit facility which has not been utilized. Undisputedly, in the instant case, the amounts were paid in respect of an obligation in respect of purchase of flat through agreement, therefore, no fault can be found on the part of the AO for treating these charges as interest and liable for TDS u/s 194A of the Act. The mere fact that the assessee did not choose to characterize such payment as interest, will not take such payment out of the ambit of the definition of “interest”, in so far as payment made by the assessee was in respect of an obligation incurred with earlier flat agreement holder . The assessee has essentially incurred an expenditure and the amount of charges paid was with respect to the amount incurred by the flat agreement holder and the period for which money was so utilized by the assessee.
In view of the above discussion, we do not find any merit in the argument of the ld counsel for the assessee and the payment should be treated as interest u/s 2(28A) of the as it is not liable for deduction at source u/s 194A of the Act. Accordingly, we reverse the order of the CIT(A) and restored that of the AO on this issue. Since we have decided the above issue relating to the payment made to the customers without deducting TDS in favour of the department.