No tax deduction at source on compensatory interest

Chat Room

 In lieu of the price escalation and for distress faced, the authority has agreed to pay compensatory interest at the rate of 10 per cent for six months.

 But it wants to deduct tax at source at the rate of 10 per cent on the amount to be paid. Is such an interest is liable for tax deduction at source in terms of Section 194A of the Income Tax Act 1961?

 No. Interest payable will not be liable for tax deduction at source. In the Delhi Development Authority vs Income Tax Office case, (1995) 53 ITD 19 (Delhi), a similar issue was considered by the Delhi Bench of the Income Tax Appellate Tribunal (ITAT).

 It was held that the amount credited in accounts of allottees of flats was not in the nature of interest as defined under Section 2(28A) of the Income Tax Act 1961. So there had been no default in tax deduction at source by the DDA.

 The tax department seems to have accepted this decision because there is no report in tax journals about revenue authorities moving the high court under Section 256 of the Act against this order.

 Kindly indicate implications of a situation where a charitable trust is not able to accumulate or set apart sums for charitable purposes, required as per form No 10 in the Income Tax Rules 1962?

 Sub-section (3) of Section 11 provides for the situation where the assessee-trust has not been able to comply with terms of applying the accumulated or set apart income for charitable purposes, specified in Form No 10.

 If the income is applied for purposes other than charitable or the income ceases to be invested in the forms or modes specified in Section 11(5) or it is not used for purposes it is accumulated or set apart during the period or in the year immediately following the expiry thereof or is credited or paid to other registered trust, it shall be treated as deemed income of the year in which such an event takes place and will be chargeable to tax as per provisions of the Income Tax Act.

 Sometimes, such a situation arises because of circumstances beyond the assessee-trust