The Income Tax Appellate Tribunal (ITAT), Kolkata has held that the finance charges to Non-Banking Financial Companies (NBFCs) are not subject to Tax Deduction at Source (TDS) under the provisions of section 194A of the Income Tax Act.

1. The assesse has debited in his profit and loss account an aggregate sum of Rs. 5,68,40,472/- under the head interest and finance charges. While completing the assessment proceedings, the Assessing Officer held that such amounts were payable/paid to different non-banking financial companies and no tax has been deducted at source under section 194A of the Act.

2. According to the assesse, the finance charges do not interest and hence, section 194A is not attracted since his business was that of hiring out industrial crane and equipment which are acquired on hire purchase finance from the bank and other financial companies.

3. The Tribunal noted that all such loans, monthly deduction of principal and proportionate interest had been paid by the assesse and claimed in the accounts as finance charges. The total interest debited during the year amounted to Rs. 4,41,12,661/- without any deduction of TDS.

4. However, out of the four finance Companies, two companies, namely, M/s L & T Finance and M/s SREI Equipment and Finance Pvt. Ltd. had issued a confirmation to payer Company that they have duly included the same in their income. For the other two companies, chartered accountant’s certificates confirming that the interest so received have all been duly credited to their income, were also received by the payer company.

1. Full Text of the ITAT Judgement

The captioned appeal filed by the Revenue, pertaining to Assessment Year 2012-13, is directed against an order passed by the Ld. Commissioner of Income Tax (Appeals)-7, Kolkata, in Appeal No.82/CIT (A)-7/ Kol /Cir-25/15-16, dated 29.09.2017, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961.

2.  The grievances raised by the Revenue are as follows:

1. That on the facts and circumstances of the case ld. CIT (A)-7/Kol/ had erred in deleting the addition on a/c of disallowance of interest paid to different parties amounting to Rs. 4,41,12,662/- u/s 40(a) (ia).

2. That the ld. CIT(A)-7/Kol was wrong in holding that the second proviso to section 40(a)(ia) is applicable to the instant case for Assessment Year 2012-13 although second proviso to section 40(a) was not applicable to the Assessment Year 2012-13 since this proviso was inserted by Finance Act 2012 i. e w. e. f.

3. In response to the above, the assesse submitted that his business was that of hiring out industrial crane and equipment which are acquired on hire purchase finance from bank and other financial companies. Monthly hire-purchase installments were paid in which financial charges were also included. The assesse felt that the finance charges are not interest and hence section 194A is not attracted and as such no TDS had been deducted.

3. Aggrieved by the stand so taken by the Assessing Officer, the assesse carried the matter in appeal before the CIT (A), who has deleted the addition made by the Assessing Officer.

4. Aggrieved by the order of the ld. CIT (A), the Revenue is in appeal before us. The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, the ld. Counsel for the assesse relied on the order passed by the CIT(A) and submissions made before the authorities below.

5. We have given a careful consideration to the rival submissions and perused the material available on record, we note that from the details submitted by the assesse it is abundantly clear that equipment loans had been availed by the assesse from four finance companies, namely, M/s Tata Capital and Finance Services Ltd., M/s L & T Finance, M/s SREI Equipment & Finance Pvt. Ltd and M/s Sreeram Equipment Finance Co. Ltd. We note that on all such loans, monthly deduction of principal and proportionate interest had been paid by the assesse and claimed in the accounts as finance charges.