TDS under Section 194A – Delayed Payment of Purchase Bills
Issue: Whether there is any requirement of withholding tax (“TDS”) under section 194A of the Income tax Act, 1961 (‘Act’) on the Interest charged by the party on account of delayed payment made for purchase bills effected from company?
General:
The person (other than an Individual or a Hindu Undivided Family if provisions of Tax Audit were not applicable in the immediately preceding financial year) responsible for paying to a resident any income by way of interest other than ‘Interest on securities’ is liable to deduct TDS at the rate of 10% as per section 194A. The tax is not required to deducted when the aggregate amount of such interest to be paid or credited to the account of payee during the said financial year does not exceed Rs. 5000 or Rs. 10000(in special cases). Further, the tax is not required to be deducted at source in respect of the provision for interest accrued but not due. The logic behind this is that the TDS mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained.
The relevant extracts of the section 194A of the Act are reproduced as follows:
“194A. Interest other than “Interest on securities”: (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of 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:
Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.
Explanation: For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.”
Firstly, it has to be determined whether such payment qualifies to be in the nature of interest under section 2(28A).
The relevant extracts of the section 2(28A) of the Act are reproduced as follows:
“(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 utilised;”
From the simple reading of the above clause, it cannot be disputed that the interest paid is not for any loan or debt incurred by the assessee but for the delay in payment of purchase bills.
In the case of ITO vs. Parag Mahasukhlal Shah, the Hon’ble tribunal (Ahmedabad Bench) held that a payment which has direct nexus with the trading liability being connected with the delayed purchase payments will not be regarded as Interest as defined in Section 2(28A).{ 2011 (46) SOT 302 }
Recently, similar view has been taken by the Hon’ble Tribunal (Hyderabad Bench) in case of Sri Venkatesh Paper Agencies (Hyd.) Pvt. Ltd. vs. DCIT. {ITA No. 636 of 2011}
Conclusion:
Therefore, relying on the above provisions and the decision of Hon’ble Bench we can safely conclude that no TDS should be deducted on the excess amount paid by the party on account of delay payment on purchase bills.
Disclaimer: Although every precaution has been taken in writing the article. Author will not be responsible for any damage or loss in whatever manner consequent to any action taken on the basis of any content of this Article.
By: CA. Ankit Gupta
CAclubindia
