Referring Two Cases
- Case Details: Sawhney Builders (P.) Ltd. v. ACIT (TDS) – [2023] 151 taxmann.com 97 (Delhi-Trib.)
- M/s Pratibha Housing Pvt. Ltd. Vs Commissioner of Income Tax ITA No. 84 of 2018
Sawhney Builders (P.) Ltd. v. ACIT (TDS) – [2023] 151 taxmann.com 97 (Delhi-Trib.)
Judiciary and Counsel Details
- Chandra Mohan Garg, Judicial Member & Pradip Kumar Kedia, Accountant Member
- Manoj Kumar, CA for the Appellant.
- Ms Meenakshi Dohre, Sr. DR for the Respondent.
Facts of the Case
Assessee was a builder and had taken registration amounts from applicants for allotment of plots/flats for its upcoming projects. However, he could not deliver the promises of allotment of plot/flat on time to the applicants, and due to said delay, the assessee had to pay compensation for non-compliance.
During the survey proceedings, the Assessing Officer (AO) noticed that the assessee had paid interest to the parties for a certain period of time. However, later, the name of expenses thereto had been changed as compensation on cancellation in its books of account by the assessee and in the auditor’s report after survey proceedings. Considering that tax was not deducted on such interest under section 194A, the AO treated the assessee as assessee-in-default as per section 201(1)/201(1A)
On appeal, the CIT(A) upheld the order of AO, and the matter reached Delhi Tribunal.
ITAT Held
The Tribunal held that till a certain period, the assessee deducted tax under section 194A treating the amount of compensation as interest under inadvertent mistake which was later corrected. In fact, it’s an amount of compensation/damages to the allottees to compensate for the delay as the assessee could not deliver the promises to them. This factual position had not been controverted except alleging that when the assessee itself was treating the amount of payment as interest, then what prompted the assessee to convert the nomenclature of payment from interest to compensation and non-complying the TDS provision of section 194A.
The assessee was consistently committing mistakes, treating the compensation amount as interest, and making the payment after deducting the tax. Thereafter, keeping in view the tax expert’s advice to rectify the mistake, the assessee was right in changing the nomenclature as per the factual position and intention of payment.
Therefore, merely because under an advertent mistake, the assessee was treating the payment as interest, it cannot be compelled to commit the same mistake continuously after the advice of a tax consultant. Thus, such inadvertent mistake of the assessee does not entitle the AO to treat the assessee-in-default for taking action against the assessee on account of non-deduction of tax.
Since the impugned payment was nothing but compensation paid by the assessee to its allottees, it cannot be tagged as interest under section 2(28A). Therefore, the TDS provision of section 194A was not applicable towards such payment.
List of Cases Reviewed
- Pr. CIT v. West Bengal Housing Infrastructure Development Corpn. Ltd. [2018] 96 taxmann.com 610/257 Taxman 570/[2019] 413 ITR 82 (Cal.) (para 4)
- Delhi Development Authority v. ITO [1995] 53 ITD 19 (Delhi) (para 9) followed.
List of Cases Referred to
- Pr. CIT v. West Bengal Housing Infrastructure Development Corpn. Ltd. [2018] 96 taxmann.com 610/257 Taxman 570/[2019] 413 ITR 82 (Cal.) (para 4)
- Delhi Development Authority v. ITO [1995] 53 ITD 19 (Delhi) (para 9).
Pratibha Housing Pvt. Ltd. Vs Commissioner of Income Tax ITA No. 84 of 2018
In the case of Pratibha Housing Pvt. Ltd. Vs Commissioner of Income Tax ITA No. 84 of 2018, the Income Tax Appellate Tribunal (ITAT) held that payment by builder/ developer for compensation/damages to allottees is not interest u/s 2(28) of Income Tax Act, 1961. This means that there is no requirement to deduct tax at source (TDS) on such payments.
Facts of the case
The appellant, M/s Pratibha Housing Pvt. Ltd., is a real estate developer. The appellant had entered into an agreement with certain allottees to sell them apartments in a project that was under construction. However, the appellant was unable to deliver the possession of the apartments on time.
The appellant paid compensation to the allottees for the delay in delivering the possession of the apartments. The appellant also paid interest on the delayed refund of the booking amount.
The Income Tax Department took the view that the payments made by the appellant to the allottees were in the nature of interest and that TDS was required to be deducted on such payments. The appellant challenged the Income Tax Department’s decision before the ITAT.
ITAT’s decision
The ITAT held in favor of the appellant and held that the payments made by the appellant to the allottees were not in the nature of interest. The ITAT also held that TDS was not required to be deducted on such payments.
ITAT’s reasoning
The ITAT based its decision on the following grounds:
- The payment of compensation/damages to allottees is not in the nature of interest. Interest is defined as “any consideration for which money is lent or forborne”. In the case of compensation/damages, the builder/developer is not lending money to the allottees. Instead, they are paying compensation for the delay in delivering the possession of the property.
- The payment of compensation/damages is not a regular income of the builder/developer. It is a one-time payment that is made due to the delay in completing the project.
Implications of the ITAT’s decision
The ITAT’s decision is a welcome relief for builders/developers. It will help to reduce their compliance burden and save them money on TDS payments.
The ITAT’s decision also provides clarity on the taxability of payments made by builders/developers to their allottees in the form of compensation/damages.
Conclusion
The ITAT’s decision in the case of Pratibha Housing Pvt. Ltd. Vs Commissioner of Income Tax ITA No. 84 of 2018 is a significant one. It provides welcome relief to builders/developers and provides clarity on the taxability of payments made to allottees in the form of compensation/damages.
Additional insights
The ITAT’s decision is in line with the earlier decisions of the Supreme Court and the various High Courts in India. In the case of Commissioner of Income Tax Vs M/s Ansal Housing & Estate Private Limited, the Supreme Court held that the payment of compensation by the builder to the allottees for the delay in delivering the possession of the property is not in the nature of interest.
The ITAT’s decision is also in line with the international tax practices. In most countries, payments made by builders/developers to their allottees in the form of compensation/damages are not considered to be interest.
Advice for builders/developers
Builders/developers should consult with a tax advisor to determine whether or not TDS is required on payments made to their allottees. However, in light of the ITAT’s decision in the case of Pratibha Housing Pvt. Ltd. Vs Commissioner of Income Tax ITA No. 84 of 2018, it is likely that TDS will not be required on payments made to allottees in the form of compensation/damages.
![CA Ankit Gulgulia (Jain)](https://charteredonline.in/wp-content/litespeed/avatar/c06fa3fef1ea744d2b92b0209f7eb183.jpg?ver=1725247701)
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