THE issue before the Bench is - Whether when the assessee, on cancellation of purchase of flats, refunds the sum with a part of the excess amount collected from new purchaser, such excess payment is to be construed as interest, liable to TDS u/s 194A. NO is the answer.
Facts of the case
The assessee is a builder. The assessee had entered into an agreement which provided for construction of a flat by the assessee for and on behalf of the purchaser. Payments were to be made by the purchaser in instalments. Subsequently, the purchaser opted out of the agreement and the assessee entered into fresh agreements with new buyers for prices that were higher than what was agreed with the purchasers. Out of the receipts from the new buyers, the assessee refunded to the purchasers the amount paid by them and a portion of the excess amount received. Thereafter, a survey was conducted. During such assessment, the AO noticed that assessee had debited amounts under the head 'indirect expenses' being excess payments refunded. The AO held that the said amount had to be treated as interest paid on deposit liable for TDS under section 194A and that having failed to do so, assessee was in default. Accordingly, assessment was completed under section 201. The CIT(A) dismissed the order of AO, whereas the Tribunal confirmed AO's order on appeal.
The HC held that,
++ from the principles laid down in the decisions referred, it is obvious that section 2(28A) is not attracted to every payment made and that the provision can be attracted only in cases where there is debtor-creditor relationship and that payments are made in discharge of a pre-existing obligation;
++ in so far as these cases are concerned, facts stated by us itself would show that the purchaser had paid certain amounts to the assessee. At a later point of time, the purchaser opted out of the agreement and the assessee entered into fresh agreements with new buyers for prices that are higher than what was agreed with the purchasers. Out of the receipts from the new buyers, the assessee refunded to the purchasers the amount paid by them and a portion of the excess amount received. The amount thus refunded to the purchasers represents 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, being the builder. Such a relationship does not spell out a debtor-creditor relationship nor is the payment made by the assessee to the purchaser one in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A);
++ further, there is 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 as deposit or advance received from them or that there is any debtor-creditor relationship between the parties, obliging the assessee to pay the amount to the purchasers. There is 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. In such circumstances, the payments made do 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 can they be proceeded against under section 201A, treating them as an assessee in default.