Prepayment charges on home loans are deductible as 'interest' under Sec. 24(b): Mumbai ITAT

Facts:

a) The assessee had been claiming deduction on account of payment of interest to six bankers from whom the assessee had taken loan for construction of property.

b) The assessee took fresh loan from Axis Bank which was utilized for exclusive purpose of repayment of loans to the aforesaid six parties. In the process of change over of lender, it paid prepayment charges and processing charges to these six bankers.

c) It claimed deduction of such prepayment charges and processing charges under Section 24(b). The AO disallowed assessee's claim. The CIT(Appeals) upheld order of AO. The aggrievedassessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The only issue that needed to be decided was whether 'pre -payment charges' and 'processing fee' shall form part of 'interest' under section 24(b). The term 'interest' has been defined in section 2(28A) as under:

“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 moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”

Excess money refunded on cancellation of booking of flats couldn't be held as interest for purpose of sec. 194A TDS

Builder could not be held liable to deduct tax on excess amount refunded to purchasers on cancellation of booking of apartments as such excess payment could not be qualify as interest as defined under section 2(28A)

Facts

a)  Assessee-Builder entered into construction agreements with various customers.

b)  After entering into the agreements and making certain payments, some purchasers opted out of the agreement and, accordingly, assessee entered into fresh agreements with new buyers at prices that were higher than what was agreed with the old purchasers.

c)  Out of the receipts from the new buyers, the assessee refunded to the old purchasers the amount paid by them and a portion of the excess amount received from the new buyers.

d)  The Assessing Officer (AO) held that the excess amount so paid by the assessee to old purchasers had to be treated as interest paid on deposit and, hence, liable for TDS under section 194A and that having failed to do so, assessee was an assessee-in-default and, accordingly, assessment was completed under section201.

e)  The order of AO was set aside by the first appellate authority. However, the said order was reversed by the Tribunal.

f)  Aggrieved by the order of the tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

1)  Section 2(28A) which defines ‘interest’ can be attracted only in cases where there is debtor-creditor relationship and payments are made in discharge of a pre-existing obligation.

2)  The amount refunded to the purchasers represented 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 assessee-builder.

3)  Such a relationship between assessee and purchasers could not spell out a debtor-creditor relationship nor was the payment made by the assessee to the purchaser in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A).

4)  Further, there was 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 for as deposit or advance received from them or that there was any debtor-creditor relationship between the parties, obliging the assessee to pay the amount to the purchasers.

5)  There was also no case for the revenue that the excess amount paid by the assessee was based on any agreement between them or that it was quantified at rates that were already agreed between the parties.

6)  In such circumstances, the payments made would not qualify to be interest as defined in section 2(28A) of the Act and the assessee did not have the obligation to deduct tax at source as provided under section 194A nor could they be proceeded against under section 201A, treating them as assessee-in-default- Beacon Projects (P.) Ltd. v. CIT [2015] 62 taxmann.com 177 (Kerala)

Excess premium paid by builder while refunding booking amount to be deemed as interest; attracts sec. 194A TDS

Where assessee, a builder, having collected certain booking amount from purchasers of flats, sold those flats subsequently to some other parties at a higher price, amounts refunded by assessee to original purchasers with a margin, amounted to payment of interest to attract TDS under Sec. 194A.

Facts:

a)The assessee, a builder, received certain payments from customers who initially booked flats by making advance payments and a few installments; but due to various reasons the customers could not fulfill the payment schedule and they requested for refund.

b)The assessee had sold those flats at a higher price to other parties and returned the payment received from previous customers with a margin. The Assessing Officer (‘AO’) opined that the excess amount paid to previous customers was to be deemed as payment of interest, which would attract TDS under section 194A.

c)The AO disallowed these payments as assessee had failed to deduct tax at time of making interest payments to previous customers. The CIT(A) deleted disallowance made by AO. The aggrieved revenue filed that instant appeal.

The Tribunal held in favour of revenue as under:

1)It was clear from the plain reading of section 2(28A) that money paid in respect of amount borrowed or debt incurred, was interest payable in any manner. The definition of interest in section 2(28A) proceeds to include in the terms money borrowed or debt incurred, deposits, claims and 'other similar rights or obligations'.

2)The definition of interest has been carried to the extent that even the amounts payable in transactions had not been borrowed and those that had not been incurred, were brought within the scope of its definition.

3)Undisputedly, in the instant case, the amounts were paid in respect of an obligation in respect of purchase of flats through agreement, therefore, no fault could be found on the part of the AO for treating these charges as interest and liable for TDS under section 194A.

4)The mere fact that the assessee did not choose to characterize such payment as interest, would not take such payment out of the ambit of the definition of 'interest', in so far as payments made by the assessee was in respect of an obligation incurred with earlier flat holder. Thus, impugned payments had to be treated as interest under section 2(28A) and it were liable for tax deduction under section 194A. - INCOME-TAX OFFICER (TDS), TRIVANDRUM V. BEACON PROJECTS (P.) LTD. [2014] 49 taxmann.com 173 (Cochin - Trib.)