Interest received from builder against amount paid

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This query is : Resolved

MANISH KR. SHARMA (Querist)

22 October 2018 My client and others filed a case in court and after about 10-12 years, the court issued orders that the amount advance paid against flat along with interest at 15% p.a. be returned to my client and others like him by the builder. So, my client received a big lump sum amount which included original amount paid by my client plus interest for all the years together. My query is that how should this amount be treated for taxability in his Income tax return? as my client is not received flat but received a huge amount of interest

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)

22 October 2018 The order has to be carefully looked into to see the basis for giving interest. If it
is to mitigate the mental agony, can be argued as a tax free capital receipt or
else to compensate the monetary loss,it partake the character of taxable interest..

Anand

Anand (Expert)

23 October 2018 I agree with Mr Warrier on the point that how the agreement is drafted will have an impact on the taxability. The Income Tax Department will of course attempt to tax this amount as Interest.
I think that if it is viewed as a payment by the builder to the assessee to purchase back from him the right in the property which the assessee got when he paid the advance, the same could be treated as Capital Gains. If it is long term, i.e. holding period of more than 2 years, he would be eligible for indexation and the tax rate will be 20% plus surcharge and cess.

My guess though is that the supreme court has awarded the interest as a compensation and therefore, the assesee will have to show the money as Income from other sources and offer it to tax at the applicable slab rate. In case he has borrowed the money to give as an advance, then you may consider claiming the interest paid on said borrowing as a deduction. This will of course create an issue as to year of claim-ability because the interest if any would have been paid in respective years. It is quite a catch-22

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