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Interest on delayed payment of purchase bills – Whether TDS deductible

TDS is deductible under section 194A from payment made for interest (other than interest on securities). Now the question arises whether TDS is also deductible when interest is payable due to delayed payment of purchase bills.

Section 2(28A) defines interest as

2(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 reading of the above section it can be concluded that interest paid for delayed payment of purchase bills cannot be considered as interest for income tax act.

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]

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].

Therefore it can be concluded that such interest doesn’t fall under section 194A and therefore no TDS is deductible under such a case.

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