The Bombay High Court in its recent ruling in the case of Sainath Rajkumar Sarode has ruled that the no tax (TDS) is deductible by Builder on interest on Refund Amount paid to the Home-Buyers by the builder as payment of such interest is by way of compensation, and hence outside the purview of Section 194A and Section 2(28A) of the Income Tax Act, 1961.
Section 194A deals with the provisions relating to TDS on interest other than on securities. Tax is to be deducted under section 194A, if interest (other than interest on securities) is paid to a resident.
Facts of the Case:
The petitioner, Sainath Rajkumar Sarode has sought the directions for the recovery of arrears due to the Petitioners under a Recovery Warrant passed by the Maharashtra Real Estate Regulatory Authority against Respondent.
For the installment due on 20th July 2021, Respondent deducted 10% of the amount, namely, Rs. 5,05,989/- from the total of Rs. 50,59,887/- payable towards the July installment, as tax-deductible at source (TDS) on the amount of interest under the Recovery Warrant and the Consent Terms.
The petitioner filed an appeal before High Court against such tax deduction stating that the amounts payable to them under the Recovery Warrant and the Order dated 4th March 2021 and the Consent Terms is in the nature of a judgment debt, being compensatory amounts payable to the Petitioners under Orders of this Court and a Recovery Warrant owing to the failure of Respondents to satisfactorily discharge their contractual and statutory obligations under the Real Estate (Regulation & Development Act), 2016 (RERA Act).
Order of Bombay High Court: Deliberation and Ruling
We are of the view that the amount so payable is in the nature of a judgment debt or akin to a judgment debt, the payment of which cannot establish a debtor-creditor relationship between the parties. As such, the said sum or any part thereof cannot be liable to tax deducted at source under the relevant provisions of the IT Act.
The amounts payable being in effect a refund of the amounts paid by the Petitioners to the Respondent, along with compensatory interest thereon, such a relationship does not spell out a debtor-creditor relationship nor is the payment made by the Respondent to the Petitioners one in discharge of any pre-existing obligation, so as to attract Section 2(28A) of the Income Tax Act.
The bench also stated that they are in respectful agreement with the Judgment of the Kerala High Court in Beacon Projects (P) Ltd v CIT (supra) which takes the same view, in facts similar to those that we are dealing with in the present matter.
In view of the above deliberations, the division bench of Justice Milind N.Jadhav and Justice S.J.Kathawalla held that future payments to flat buyers are to be made without making any deduction of tax at source. Further, the Respondents are directed to pay to the Petitioners the balance sum of Rs. 5,05,989/- deducted from the 5th installment which became due on 20th July 2021, in compliance with the Consent Terms, within a period of one week.
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