Section 194A of TDS not applicable on Compensatory Interest paid by builder on failure to construct flat

Facts of the Case

• The builder failed to hand-over possession of flats on time. Thus, Real Estate Regulatory Authority directed him to refund the advance amount paid by the assessee, along with compensatory interest for loss or injury suffered.
• However, builder deducted 10 per cent tax deductible at source (TDS) on the amount of interest.
• In this matter, the contention of assessee is that TDS in such amounts could not, in law, be deducted.

Judgment

• The Court was 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.
• Further, the court also considered the view that the amounts payable are in the nature of compensation on account of failure to comply with their statutory and contractual obligations.
• In coming to this conclusion we are also supported by the well settled principle that taxing statutes must be read strictly and in the event of there being any ambiguity an interpretation favouring the tax payer ought to be adopted.
• Court held that the amounts payable being in effect a refund, along with compensatory interest thereon, such a relationship does not spell out a debtor-creditor relationship nor is the payment discharge of any pre-existing obligation, so as to attract section 2(28A) of the IT Act.