Opinion Of Eminent Legal Luminaries On Controversial Issues

When Tax Is Required To Be Deducted On Interest?

QUERY: Mr. Champaklal is a practising Advocate. His gross fees for the year ended 31st March, 2009 were Rs. 27,00,000/-. During the year ended 31st March, 2010 the following issues have arisen on which Mr. Champaklal seeks advice from you

(a) For academic interest, Mr. Champaklal wants to understand the meaning of ‘interest’ on which tax is required to be deducted at source u/s. 194A

(b) Mr. Champaklal has taken a loan of Rs. 2,00,000/- taken by him from his wife for investing in a new car which forms part of his block of fixed assets. The loan carries interest @ 10% p.a. The loan was taken on 1st February, 2008. No interest was paid in the F.Y. 2008-09. As per the term of the loan agreed upon between Mr. Champaklal and his wife, the loan is to be treated at par with a Cumulative Time Deposit and interest is to be actually paid over only on expiry of 3 years. Mr. Champaklal wants to know whether he should account for the interest in his books (he follows cash method of accounting) and if yes, whether tax is required to be deducted at source. Also, if he now accounts for interest for the period 1st February, 2008 to 31st March, 2009 then whether there is any likelihood of it being disallowed on the ground that it is a prior period expenses?

(c) Mr. Champaklal purchased three computers, a printer and office furniture from Departmental Store. For this purpose, he utilized a special card issued by the Store to him (as he was a regular customer in the store). The card entitled him to make payment in the same manner as a Credit Card. However Mr. Champaklal has chosen to take credit rather than pay the card dues. He has therefore not paid the dues. The Store has charged interest on the delay in payment. Now, Mr. Champaklal has decided to opt for Direct Debit facility offered by his bank for paying off the Departmental Store card payments. He wants to know how the TDS obligation on the interest paid to the Departmental Store is to be satisfied if the payment is made by direct debit to his bank account.

ANSWER: S. 2(28A) defines – Interest.

“Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including 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”.

– Personal loan of Rs. 2,00,000/- from his wife @ 10% p.a. interest – to be treated as Cumulative Time Deposit for 3 years and interest is payable on expiry of three years.

– Mr. Champaklal maintains books of account on cash basis, hence, the loan as well as interest would be due on February 1, 2011. TDS will have to be deducted at the time of payment or credit whichever is earlier, as there is no provisions like section 194C or second proviso to section 194J (1) which specifically provides that no tax is to be deducted if any sum is paid for personal purposes.

If interest amount payable over Rs. 5,000/- to Departmental stores, for giving credit, Mr. Champaklal is liable to deduct tax at source u/s. 194A. For complying liability he should recover tax amount from Departmental store or ask Department store to pay on his behalf and obtain challans under his PAN/TAN No. Otherwise, he could be considered as “an assessee in default”.
SECTION(S): , , ,

Posted in Income-tax

Leave a Reply

Your email address will not be published. Required fields are marked *


Credit: Several of the queries and answers are reproduced with permission from the AIFTP Journal. We thank AIFTP for generously allowing us to host their research material.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org