TDS on interest for dealy payment

In this connection, a reference to the judgement of the Bombay High Court, in the case of Islamic Investment Co Vs Union of India [2004] 265 ITR 254 (Bom), is also relevant. It was, inter alia, held in this case that interest component of decretal amount loses its original character and assumes the character of a judgement-debt. Once such an amount becomes part of a judgement-debt, the decree passed by the Court must be executed, subject to the deductions and adjustments permissible under the Code of Civil Procedure. It was further held that there was no provision under the Income-Tax Act, 1961, or under the Code of Civil Procedure to show that from the amount of interest payable under a decree, tax was deductible from the decretal amount, on the ground that it was an interest component on which tax was liable to be deducted at source. The aforesaid amount of interest cannot retain its character of interest.

In the light of the aforesaid discussion and conjoint reading of the provisions of the aforesaid sub-sections 61(1) and 61(2), it has to be concluded that –

(i) The component of interest payable for delay in payment of purchase price of goods, will partake the nature of damages.

(ii) Further, the aforesaid interest will be a part of judgement-debt, in case a suit is filed by the seller of goods, for the recovery of the sale consideration of the goods.

(iii) No tax is deductible at source in respect of damages or judgement-debt.

Therefore, no tax is deductible at source, in respect of interest payable by the purchaser of goods for delay in payment of purchase consideration.