Bombay HC: No TDS deductible by Builder on Refundable Amount paid to Home-Buyers

The Bombay High Court has ruled that builders cannot deduct Tax Deducted at Source (TDS) on refundable amounts paid to home buyers. This decision stems from a case where a builder deducted TDS on interest payments made under a recovery warrant. The court determined that these payments were in the nature of a judgment debt, not interest from a debtor-creditor relationship, and therefore not subject to TDS under the Income Tax Act.

In Sainath Rajkumar Sarode and Ors. v. State of Maharashtra and Ors. [WRIT PETITION (L) NO. 4804 OF 2020 dated August 18, 2021], Sainath Rajkumar Sarode ("the Petitioner") has been filed seeking directions for the recovery of arrears due to the Petitioners under a Recovery Warrant dated October 15, 2018 passed by the Maharashtra Real Estate Regulatory Authority against Respondent Nos. 4 to 7.

In the instant case, the Respondents 4 to 7 were to pay payment under the Recovery Warrant to the Petitioner in terms of installments. Nevertheless, for the instalment due on July 20, 2021, Respondent Nos. 4 to 7 deducted 10% of the amount, as tax deductible at source ("TDS") on the amount of interest under the Recovery Warrant and the Consent Terms.

The Petitioner contended that the amounts payable to the Petitioners under the Recovery Warrant is in the nature of a judgment debt, being compensatory amounts payable to the Petitioner, 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").

The Respondent Nos. 4 to 7 had submitted that they deducted the said amount as TDS as per the provisions of Section 194A of the Income Tax Act, 1961 ("the IT Act"). They 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.

On perusal of all the facts and evidences in the case, the Honorable 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.