UNITEDWORLD SCHOOL OF LAW

PRINCIPLES OF TAXATION LAW

CASE COMMENT: SAINATH RAJKUMAR SARODE VS.

SUBMITTED TO:
NITESH
NANAVATI

PREPARED BY:

PREETI BAFNA GAURAV LALL YASHVARDH

SUMMARY OF THE CASE..............................................................................................................3

FACTS..................................................................................................................................................3

ISSUES.................................................................................................................................................3

CONTENTIONS OF THE PARTIES................................................................................................4

PETITIONER CONTENTION......................................................................................................4

RESPONDENT CONTENTION....................................................................................................4

ANALYSIS...........................................................................................................................................5

JUDGEMENT.....................................................................................................................................6

CONCLUSION....................................................................................................................................7

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SUMMARY OF THE CASE
A. Name of the Case: Sainath Rajkumar Sarode vs. State of Maharashtra, AIR 2021
B. Details of Parties: Sainath Rajkumar Sarode and others – Petitioners
State of Maharashtra and others – Respondents
C. Citation: [2021] 131 taxmann.com 332 (Bombay) / [2021] 283 Taxman 494
(Bombay) [18-08-2021]
D. Name of Court and Authority: Bombay High Court
E. Date of Judgement: 25th August, 2021
F. Act involved and Section No.: Income Tax Act.
Section 2(28A), Section 192-195, Section 196A-196D.

FACTS
1) The assessees were individuals who entered into an agreement with Respondent 4 who is
builder for the purchase of various flats proposed to be constructed by him.

2) The builder failed to handover possession of flats on time. Thus, Real Estate Regulatory
Authority (RERA) directed builder to refund the advance amount paid by the assessee,
along with compensatory interest for loss or injury suffered by the assessee. The builder
paid the assessee an amount of Rs. 1.80 crore as part payment under the recovery warrant.

3) Subsequently, in view of there being balance amounts due and payable by respondent
under the recovery warrant, the assessee and builder entered into consent terms. By these
consent terms, builder undertook, jointly and/or severally, to pay the assessee a sum of
Rs. 2.75 crore with compensatory interest. Such sums were to be paid in the form of
instalments.

4) In pursuance of the schedule of payments and the consent terms builder made payments
of the instalments from March 2021 till June 2021 to the satisfaction of the assessee.

5) However, for the instalment due on 20/7/2021, builder deducted 10 per cent tax
deductible at source (TDS) on the amount of interest. It was the case of the assessee that
such amounts could not, in law, be deducted.

ISSUES
Whether deduction of 10% TDS by the builder on refundable amount paid to home buyers is
valid?

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CONTENTIONS OF THE PARTIES
PETITIONER CONTENTION:
1. Learned Counsel for the Petitioners submits that the amounts payable to the Petitioners
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
Respondent Nos. 4 to 7 to satisfactorily discharge their contractual and statutory
obligations under the Real Estate (Regulation & Development Act), 2016 ("RERA Act")

RESPONDENT CONTENTION:
1. The Learned Senior Counsel for the Respondent Nos. 4 to 7 had submitted that the
Respondents deducted the said amount as TDS as per the provisions of section 194A of
the Income-tax Act, 1961. The Learned Senior Counsel had further stated that the TDS
has not been filed before the concerned authority and that they have no objection to
paying the amount deducted as TDS, to the Petitioners, so far as it is in compliance with
the statutory provisions and no penalties are imposed upon these Respondent Nos. 4 to 7
due to non- payment of the same.

2. The Learned Senior Counsel on behalf of the Respondent Nos. 4 to 7 has now considered
the legal position with respect to deduction of the tax in the facts of the present matter and
has tendered a Note dated 18th August 2021 in support of the contention that the
provision for payment of interest to the flat purchasers/Petitioners in the present matter is
by way of compensation, and hence outside the purview of section 194A and section
2(28A) of the Income-tax Act, 1961. The Learned Senior Counsel for Respondent Nos. 4
to 7 has no objection to this legal position being clarified.2

ANALYSIS
The bench after hearing all the contentions of both the parties and the cases relied by them
analyse the issue in hand and has passed the judgement relying on various precedents.

While analysing the issue of payment of interest as compensation by a builder and

“from the definition of interest as occurring in section 2(28A) of the IT Act, 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.”
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In the case of Beacon Projects (P.) Ltd.4, the Kerala High Court held that: It is obvious that
section 2(28A) is not attracted to every payment made and that the provision can be attracted
only in cases where there is debtor-creditor relationship and that payments are made in
discharge of a pre-existing obligation.

It has also been held by the Hon'ble Supreme Court in the case of Ramchandra D Datar5 that
when the claim is merged in the decree of the court, the claim assumes the character of a
judgment debt, which is not liable to deduction of tax at source.

In Madhusudan Shrikrishna,6 a Single Judge of the Bombay High Court held that once a
decree is passed, it is a judgment and the order of the court which culminates into a final
decree being passed which has to be discharged only on payment of the amount due under the
said decree. The judgment debtor, therefore, cannot deduct tax at source, since it is an order
and direction of the court and, as such, would not be liable for penal consequences for non-
deduction of the tax due.

In the case of HP Housing Board, Shimla,7 wherein the Assessee Board was liable to pay
interest to allottees for the delay in construction, the High Court of Himachal Pradesh held
that if the houses were ready within the stipulated period, then Board would not be liable to
pay interest but when there is delay in construction of the house it affects the rights of the
allottees. In such circumstances the amount which is paid by the Board is not payment of
interest but in

3
West Bengal Housing Infrastructure Supra note.1.
4
Beacon Projects (P.) Ltd. Supra note.1.
5
Ramchandra D Datar Supra note.1.
6
Madhusudan Shrikrishna Supra note.1.
7
HP Housing Board, Shimla Supra note.2.

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their view is payment of damages to compensate the allottee for the delay in the construction
of his house/flat and the harassment caused to him. It may be true that this compensation has
been calculated in terms of interest but this is because the parties by mutual agreement agreed
to find out a suitable and convenient system of calculating the damages which would be
uniform across the Board for all the allottees.

It further relies on the judgment of the Dr. NK Gupta,8 wherein a bench of 4 members of the
Commission states that:

“The word interest used in the order of the State Commission is not what interest is as
defined in Section 2(28A). There in the order of the State Commission interest means
compensation or damages for delay in construction of the house or handing over possession
of the same causing consequential loss to the Complainant by way of escalation in the price
of the property and also on account of distress, disappointment faced by him. Interest in the
order has been used merely as a convenient method to calculate the amount of compensation
in order to standardise it. Otherwise, each case of the allottee will have to be dealt with
differently. Nomenclature does not decide the issue.”

Held that: Therefore, considering the definition of ‘interest’ as contained in section 2(28A) of
the Income-tax Act, provisions of Section 194A were not applicable and the GDA was clearly
wrong in deducting the TDS from the interest payable to the Complainant.

JUDGEMENT
On perusal of all the facts and evidences in the case, the Honourable Bombay High Court
adjudicated that the amount so payable is in the nature of a judgment debt, and the payment
of which cannot establish a debtor-creditor relationship between the parties, therefore, the
said sum or any part thereof cannot be liable to deduction at source under the relevant
provisions of the IT Act. This is in line with the decision of the Hon’ble Supreme Court in
Ramchandra D Datar9 as also passed in the judgment of our Court in Madhusudan
Shrikrishna10

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

8
Dr. NK Gupta Supra note.2.
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9
Supra note.5.
10
Supra note. 6.

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in discharge of any pre-existing obligation, so as to attract Section 2(28A) of the Income Tax
Act. The situation being present in these judgments of HP Housing11, Dr. NK Gupta12 and
West Bengal Housing Infrastructure Development Corporation13 with which the Bombay
High Court is in respectful agreement. While concluding the same the bench does also
support 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.

The bench also stated that they are in respectful agreement with the Judgment of the Kerala
High Court in Beacon Projects (P) Ltd v CIT14 which takes the same view, in facts similar to
those that they were 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 fifth installment which became due on 20th
July 2021, in compliance with the Consent Terms, within a period of one week.

CONCLUSION
On perusal of all the facts and evidences in this case, Section 194A deals with the provisions
relating to TDS on interest other than on securities. Tax should not be deducted under section
194A, if interest (other than interest on securities) is paid to a resident the Hon’ble Bombay
High Court adjudicated that the amount so payable is in the nature of a judgment debt, and
the payment of which cannot establish a debtor-creditor relationship between the parties,
therefore, the said sum or any part thereof cannot be liable to TDS under the relevant
provisions of the IT Act. From consideration of the case laws cited, the Hon’ble Bench 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.

In view of the above, builder was not obligated to deduct TDS and, thus, builder was directed
to pay to the assesse.

11
Supra note.7.
12
Supra note.8.
13
Supra note.3.
14
Supra note.4.

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