TDS u/s 194 A

This query is : Resolved

CA Ysil Karunai (Querist)
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30 October 2009 Dear Sir,
Consider the following example and clarify my queries:
A Ltd selling goods to B Ltd worth Rs. 200000/- with a condition of payment should be made within 2 months. In case of default, interest will attract 10% for every month (or part of the month) during such default continues.
Consequently, B Ltd not able to settled their dues within due date. However, they settled their dues (with 3 months interest)as Rs. 260000/-. (including interest Rs. 200000*10%*3).
Query:
1. whether interest paid by B Ltd to A Ltd is allowed as deduction?
2. If yes, Whether the payment of interest will attract TDS u/s 194A?
3. The interest is compensatory in nature or penal interest?

CA Kapil Aggarwal

CA Kapil Aggarwal (Expert)
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30 October 2009 1. Yes this is allowed as deduction.
2. Yes.
3. This is compansatory in nature as this is as per contract condition that if payment will get delay than interest will be paid.

CA Kartik Pandya

CA Kartik Pandya (Expert)
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30 October 2009 I think the interest should be considered as Penal interest as it is payment for default in contract amount as we also considered the int. which is paid for the late pmt of tax as penal int eventhough it is very well stipulated in the act.

Dear Kapil if u have ny further evidence abt same then pls let it me know.

Feel free to discuss on my cell :99241 95661.

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CA. Sandhya Deepak Aggarwal

CA. Sandhya Deepak Aggarwal (Expert)
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30 October 2009 Mr. Kapil is right.

The Interest paid for default in contract amount is very much compensatory in nature and allowed as deduction as related to pure business matters. TDS also attracted.

Interest paid for late pmt of tax have specifically been disallowed under various case laws as not related to business matters rather with Revenue Deptt.

Jinesh Bansal

Jinesh Bansal (Expert)
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30 October 2009 Mr kapil is right.