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

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  • Last Updated on 9 November, 2021

Interest (Interest on compensation) - Income Tax Act 1961

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

Judiciary and Counsel Details

    • S.J. Kathawalla and Milind N. Jadhav, JJ.
    • Subit ChakrabartiVidhiiP.H. KanthariaHemant Haryan, AGP, Zal Andhyarujina, Sr. Adv., Ms. Akanksha AgrawalMakarand RautAkanksha AgrawalManoj NikamAnosh 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

List of Cases Referred to

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