SECTION 2(28A) l INTEREST

19. Brokerage paid to brokers - Whether includible within the meaning of “interest” in clause (28A)

Please refer to your letter No. 1/93/2709, dated 1-9-1977 [Annex] on the above subject. Interest is the nature of a payment of money or money’s worth for the use of borrowing and is payable by or on behalf of the debtor to the creditor or to any other person on his behalf. Brokerage or manager’s remuneration is payable to a broker or a middleman who helps in securing the deposits. The money secured by him does not belong to him. Therefore, payments in the nature of brokerage or manager’s remuneration are not includible within the meaning of the word “interest”.

Letter : No. F. 164/18/77-IT(A-I), dated 13-7-1978.

ANNEX - LETTER, DATED 1-9-1977 REFERRED TO IN CLARIFICATION

The Finance Act, 1976 has, with effect from 1-6-1976, incorporated clause (28A) in section 2 of the Income-tax Act, whereby the meaning of the term “interest” has been defined.

In this connection, it has been represented to the Chamber that the interpretation of section 2(28A) causes difficulties to industry and commerce when payments are made to financial brokers. Brokers are remunerated for performing the work of procuring fixed deposits or loans for companies or when they act as managers to fixed deposit schemes introduced by companies. This remuneration, in common parlance, is known as “brokerage” and cannot be termed as “interest” as no money is lent for use or retention by one person a sum of money belonging to or owed to another.

In situations such as the one cited above, tax is required to be deducted before payment or credit under section 194A of the Act as it has been clarified by the Board that such payment falls within the meaning assigned to the term “interest” in section 2(28A). There is an urgent need to review the position which is creating a lot of hardship to finance brokers. In their case, often payments have to be made to sub-brokers for securing business and the gross amount is not their income.

It is, therefore, urged that this matter be given your urgent consideration so as to remove the hardship caused to the finance brokers. It is suggested that the Board issue directions under section 119 of the Act, limiting application of section 2(28A) of the Act to payments made by the borrower to those whom the money is owed and not extend it to payments to third parties.

20. Agreed amount payable by hirer under hire-purchase agreement in periodical instalments

In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them on a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. It may be pointed out that part of the amount of the hire-purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical instalments cannot, therefore, be characterised as interest payable in any manner with the meaning of section 2(28A) of the Income-tax Act, as it is not in respect of any money borrowed or debt incurred. In this view of the matter, it is clarified that the provisions of section 194A of the Income-tax Act are not attracted in these transactions.

Instruction : 1425 in F. No. 275/9/80-IT(B), dated 16-11-1981 [N.K. Leasing & Construction (P.) Ltd. v. Dy. CIT [2001] 79 ITD 658 (Hyd.)].