SECTION 2(28A) OF THE INCOME-TAX ACT, 1961 â BROKERAGE PAID TO BROKERS â WHETHER INCLUDIBLE WITHIN MEANING OF INTEREST IN CLAUSE (28A)
LETTER F.NO.164/18/77-IT(A-I),Â DATED 13-7-1978
Please refer to your letter No. 1/93/2709, dated 1-9-1977Â [Annex]Â 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,Â payments in the nature of brokerage or manager’s remuneration are not includible within the meaning of the word “interest”.
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.