Interest paid by Builder on failure to construct flat is compensatory in nature out of preview of sec. 194A: HC

Case Details: Sainath Rajkumar Sarode v. State of Maharashtra - [2021] 131 taxmann.com 332 (Bombay)

Judiciary and Counsel Details

• • S.J. Kathawalla and Milind N. Jadhav, JJ.
  • Subit Chakrabarti, Vidhii, P.H. Kantharia, Hemant Haryan, AGP, Zal Andhyarujina, Sr. Adv., Ms. Akanksha Agrawal, Makarand Raut, Akanksha Agrawal, Manoj Nikam, Anosh Sequiera and Naresh Chheda for the Appearing Parties.

Facts of the Case

The assessee was an individual who entered into an agreement with Builder for the purchase of various flats. However, the Builder failed to hand over possession of flats on time. Thus, Real Estate Regulatory Authority (RERA) directed Builder to refund the advance amount paid by the assessee with compensatory interest.
Builder deducted TDS under section 194A on the amount of compensatory interest paid to the assessee. The assessee filed the writ petition before the Bombay High Court, contending that tax deduction on the interest portion wasn’t in accordance with the law.

High Court Held

The Bombay High Court held that the term ‘interest’ is defined under section 2(28A) of the Income-tax Act. From such definition, it appears that the term ‘interest’ has been made entirely relatable to money borrowed or debt incurred and various gradations of rights and obligations arising from either of the two.
In the instant case, the assessee had not given the money to Builder by way of deposit, nor had the Builder borrowed the amount from the assessee. The sum paid to the assessee was a refund of the advance given to Builder. The interest was paid on account of damages suffered by the assessee for failure in delivering the flats.
Since the payment couldn’t establish a debtor-creditor relationship between the assessee and the Builder, the said sum or any part thereof cannot be liable to tax deducted at source under the relevant provisions of the Act.
Therefore, the provisions of Section 194A were not applicable, and the Builder was clearly wrong in deducting the TDS from the interest payable to the assessee.

Case Review

• • Beacon Projects (P.) Ltd. v. CIT [2015] 62 taxmann.com 177/234 Taxman 706/377 ITR 237 (Ker.) (para 26);
  • CIT v. HP Housing [2012] 18 taxmann.com 129/205 Taxman 1/340 ITR 388 (HP) (para 25);
  • Pr. CIT v. West Bengal Housing Infrastructure Development Corpn. Ltd. [2019] 105 taxmann.com 64 (SC)
  • Ghaziabad Development Authority v. Dr. NK Gupta 2002 SC Online NCDRC 39 (para 25) followed.

List of Cases Referred to

• • All India Reporter Ltd. v. Ramchandra D Datar [1961] 41 ITR 446 (SC) (para 8)
  • Madhusudan Shrikrishna v. Emkay Exports [2010] 188 Taxman 195 (Bom.) (para 8)
  • Pr. CIT v. West Bengal Housing Infrastructure Development Corpn. [2018] 96 taxmann.com 610/257 Taxman 570/[2019] 413 ITR 82 (Cal.) (para 8)
  • Pr. CIT v. West Bengal Housing Infrastructure Development Corpn. Ltd. [2019] 105 taxmann.com 64/263 Taxman 237 (SC) (para 8)
  • Beacon Projects (P.) Ltd. v. CIT [2015] 62 taxmann.com 177/234 Taxman 706/377 ITR 237 (Ker.) (para 8)
  • Estate Officer, Greater Mohali Area Development Authority v. Gaurav Mutneja 2020 SCC Online NCDRC 278 (para 10)
  • Ghaziabad Development Authority v. Dr. NK Gupta 2002 SC Online NCDRC 39 (para 10)
  • Ghaziabd Development Authority v. Naresh Kumar Sharma [2005] 9 SCC 477 (para 10)
  • Rajnish Bhardwaj v. CHD Developers Ltd. 2019 SCC Online NCDRC 739 (para 10)
  • Central India Spg. & Wvg. & Mfg. Co. Ltd. v. Municipal Committee
  • Wardha AIR 1958 SC 341 (para 10)
  • CIT v. HP Housing Board [2012] 18 taxmann.com 129/205 Taxman 1/340 ITR 388 (HP) (para 10).