Interest on fixed deposit on other party's funds

This query is : Resolved

C.A. Deepak Kakkar (Querist)
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29 April 2014 Dear All

One of my client is facing legal suit on some property issues with other party say X. My client has received amount of Rs. 5 crores from X under an agreement to sell. Now whenever decision will be announced, my client will have to pay this amount alongwith interest to X. So to handle the burden of interest, my client has made FDR of this Rs. 5 crores. My query is how the interest income on this FDR will be dealt with?? because it is of funds of other party?? Whether my client has to bear the whole taxation??

Or, there is other way out in income tax.

Thanks

Nikhil Kaushik

Nikhil Kaushik (Expert)
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29 April 2014 Its a legal suit, there is a possibility that decision might not be averse to your position. Also, given that there is a dispute, it cannot be said that you are holding this money with beneficial ownership lying with another person.

therefore, as long as money is in your hands, you pay tax on the income earned on the same, unless there is an agreement with another party to the contrary.

C.A. Deepak Kakkar

C.A. Deepak Kakkar (Querist)
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29 April 2014 Thanks Nikhil Ji..

But, my client has given statement in writing in court that he is ready to pay principal amount with interest any time, but due to unavoidable reasons cannot fulfill the sale agreement. But X is not willing to agree anything less than property itself or value of property. So on the basis of statement given in court, my client has opted for this FDR option. Can Interest provision be made to X and TDS deducted thereon??

Nikhil Kaushik

Nikhil Kaushik (Expert)
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29 April 2014 well regardless FDR income is yours only. I don't see any reason for the same to be considered as beneficial interest in the other party's favor.

If the court ask you to pay any interest, the same is to be claimed as an expense in appropriate manner. But that doesn't affect the taxability of FDR interest.

C.A. Deepak Kakkar

C.A. Deepak Kakkar (Querist)
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29 April 2014 is there any other option to carry forward income and TDS in next year or we have to show it in the same year only in which it is credited by bank??

Nikhil Kaushik

Nikhil Kaushik (Expert)
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29 April 2014 if you are following accrual accounting, then you have to offer the said income to tax in the year in which it was earned on accrual basis only...

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