2021 (8) TMI 1009 - HC - Income Tax

Deduction of TDS - Interest u/s 2(28A) - Refund amount with interest to the flat purchasers/Petitioners as per the decree of the High Court - whether the Respondent Nos. 4 to 7 are entitled to deduct TDS on the interest payable under the Recovery Warrant dated 15th October 2018, the Consent Terms and the Order of this Court both dated 4th March 2021? HELD 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. This is in line with the decision of the Hon ble Supreme Court in ALL INDIA REPORTER LIMITED VERSUS RAMCHANDRA D. DATAR 1960 (11) TMI 21 - SUPREME COURT as also the judgment of our Court in MADHUSUDAN SHRIKRISHNA VERSUS EMKAY EXPORTS 2010 (1) TMI 1200 - BOMBAY HIGH COURT . In the present case, the amounts payable being in effect a refund of the amounts paid by the Petitioners to the Respondent No. 4 to 7, along with compensatory interest thereon, such a relationship does not spell out a debtor-creditor relationship nor is the payment made by the Respondent Nos. 4 to 7 to the Petitioners one in discharge of any pre-existing obligation, so as to attract Section 2(28A) of the IT Act. The compliance of the Respondent Nos. 4 to 7 with the Schedule of Payments under the Consent Terms dated 4th March, 2021 and our Order dated 4th March 2021, is to be made without making any deduction of tax at source. The Respondent Nos. 4 to 7 are directed to pay to the Petitioners the balance sum of ₹ 5,05,989/- deducted from the 5th instalment which became due on 20th July 2021, in compliance with the Consent Terms, within a period of one week from today. Place the Interim Application No. 2545 of 2020 and Interim Application No. 1151 of 2021 on 25th August 2021 for consideration.

Summary

Issues Involved:
1. Recovery of arrears under a Recovery Warrant dated 15th October 2018.
2. Deduction of Tax Deducted at Source (TDS) on the interest payable under the Recovery Warrant and Consent Terms.

Detailed Analysis:

1. Recovery of Arrears under Recovery Warrant:
The Petitioners entered into agreements with Respondent Nos. 4 to 7 for the purchase of flats between 2013 and 2016. Due to non-fulfillment of obligations by Respondent Nos. 4 to 7, a Recovery Warrant was issued by the Maharashtra Real Estate Regulatory Authority on 15th October 2018. Respondent Nos. 4 to 7 made part payments amounting to ?1,80,00,000/-. Further, Consent Terms were agreed upon on 4th March 2021, where Respondent Nos. 4 to 7 undertook to pay ?2,75,00,000/- with 10.05% interest in installments. The Court accepted these terms and ordered compliance.

2. Deduction of TDS on Interest Payable:
Respondent Nos. 4 to 7 deducted 10% TDS on the interest component of the July 2021 installment, which the Petitioners contested. The Petitioners argued that the amounts payable are compensatory and not liable for TDS under the Income Tax Act, 1961. They cited various judgments, including All India Reporter Ltd vs Ramchandra D Datar, and PCIT v West Bengal Housing Infrastructure Development Corporation, to support their claim that the amounts are compensatory and hence outside the purview of Section 194A and Section 2(28A) of the Income Tax Act.

The Respondents initially defended the deduction under Section 194A but later agreed with the Petitioners' legal position, acknowledging that the interest payable is compensatory.

Court's Analysis and Judgment:
The Court examined the relevant provisions of the Income Tax Act, particularly Sections 192 to 195 and Sections 196A to 196D, focusing on Section 194A and the definition of "interest" under Section 2(28A). The Court referenced multiple judgments to conclude that the amounts payable are compensatory and do not establish a debtor-creditor relationship. Therefore, they are not subject to TDS under Section 194A.

Key Judgments Referenced:
- PCIT v West Bengal Housing Infrastructure Development Corporation: Clarified that compensatory payments do not attract TDS.
- Beacon Projects (P) Ltd v CIT: Established that payments without a debtor-creditor relationship are not subject to TDS.
- All India Reporter Ltd vs Ramchandra D Datar: Held that judgment debts are not liable for TDS.
- Madhusudan Shrikrishna v Emkay Exports: Affirmed that court-ordered payments are not liable for TDS.

Final Order:
The Court directed Respondent Nos. 4 to 7 to pay the deducted amount of ?5,05,989/- to the Petitioners within one week and to comply with the remaining payments without TDS deductions. The matter regarding the 6th installment was scheduled for further consideration on 25th August 2021.