When it comes to financial phraseology under the Income Tax Act, “interest” plays a crucial role in decide taxable income. The Finance Act, 1976 introduced the definition of “interest” under Section 2(28A) to remove ambiguities regarding its scope. Effective from June 1, 1976, this definition is pivotal in understanding fees, charges, and repayment related to debt capital or debt incurred. Let’s dive deep into its meaning, scope, and judicial expound to provide a clear apprehension.
Definition of Interest Under Section 2(28A)
Section 2(28A) defines “interest” as follows:
- Interest Payable in Any Manner:
- Includes payments in respect of:
- Moneys borrowed.
- Debts incurred.
- Deposits, claims, or other similar rights and obligations.
- Includes payments in respect of:
- Service Fees or Other Charges:
- Covers fees or charges related to:
- Borrowed money.
- Debts incurred.
- Credit facilities that remain unutilized.
- Covers fees or charges related to:
This definition encompasses all provisions of the Income Tax Act.
Scope of Interest: main Features
- Wide Applicability:
- The definition of “interest” includes fees for commitment charges, unutilized credit facilities, and other service fees.
- For instance, charges unrelated to borrowed funds do not qualify as “interest” [CIT v. Cargill Global Trading P. Ltd. (2011) 335 ITR 94 (Del)].
- Judicial Interpretations:
- Courts have clarified that “interest” must relate to moneys borrowed or debts incurred. Payments arising purely out of statutory liabilities are excluded from this definition [CIT v. Oriental Insurance Co. Ltd. (2012) 27 taxmann.com 28 (All)].
Magisterial explanations of Interest
Indemnification for Deprivation of Money
Interest is seen as indemnification for the deprivation of money. The Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [(1997) 227 ITR 172] clarified that interest earned on borrowed funds, even during the formative period of a business, is taxable as income.
Interest on Unpaid Price
Interest on delayed payments for goods or services is treated as return in nature:
- CIT v. Vijay Ship Breaking Corporation [(2003) 261 ITR 113 (Guj)] held that usance interest on delayed payments qualifies as interest under Section 2(28A).
- This was later overturned by the Supreme Court due to retrospective amendments in [(2009) 314 ITR 309 (SC)].
Recompense vs. Interest
Payments made as damages are distinct from interest:
- In CIT v. H.P. Housing Board [(2012) 340 ITR 388 (HP)], compensation for delays in flat delivery was not considered “interest” since it was not related to borrowed money or debt.
Special Cases of Interest
Deep Discount Bonds
The difference between the issue price and redemption price of deep discount bonds is treated as interest income. The CBDT Circular No. 2 of 2002 clarified:
- Redemption gains are treated as interest income.
- Gains on transfer before maturity are considered capital gains.
Chit Fund Businesses
In chit funds, contributions by members are not treated as borrowed money. Hence, amounts distributed are not “interest” under Section 2(28A) [CIT v. Sahib Chits (Delhi) (Pvt.) Ltd. (2010) 328 ITR 342 (Del)].
Discounting Charges
Charges for discounting sale consideration are not considered interest since they do not relate to borrowed funds or debt incurred [CIT v. Cargill Global Trading P. Ltd. (2011) 335 ITR 94 (Del)].
FAQs
1. What is the significance of Section 2(28A)?
Section 2(28A) provides clarity on what constitutes “interest” for taxation purposes. It ensures that all payments related to borrowed money or incurred debt are taxed appropriately.
2. Does compensation for delayed delivery qualify as interest?
No, payments made as compensation for delays are not considered interest unless they relate to borrowed money or debt incurred.
3. Are gains on deep discount bonds taxable as interest?
Yes, the difference between the issue price and redemption price is treated as interest income under the Income Tax Act.
4. Does interest on unpaid sale price qualify as revenue?
Yes, interest on delayed payments for goods or services is taxable as revenue in the hands of the recipient.
Conclusion
The definition of “interest” under Section 2(28A) highlights its extensive scope, covering not just conventional interest but also service fees and charges related to borrowed funds and unutilized credit facilities. Judicial precedents have further clarified its applicability, ensuring a robust framework for taxation. Understanding this definition is essential for both taxpayers and professionals dealing with finance and taxation.
