• Compensation in form of interest for failure to give the property as per promise by builder

My mother received in one lump sum the award of interest along with principal amount kept by builder for 10 yrs on directions of consumer court last year.
Since she is a senior citizens.
Due to the amount her slab has gone to 30 percent bracket.
Is the interest income taxable as normal income or as capital gain .
Second for 10 years case was fought in various courts including SC can one claim average expenditure of 75K per year to include lawyer's fees which r often given in cash with no receipt , traveling expenditures,salary loss of person attending court hearings and other misc expenditures.
Request Ur valuable advice on above issue.
Regards 
Chetan Singla
Asked 8 days ago in Income Tax from Chandigarh, Chandigarh
Good Morning Chetan Ji 
As per my opinion This interest income transaction covered under capital gain and yes you can claim exp of lawyers as cost, in some cases reasonable exp allowed without even documentary proof but it’s much better if we have documentary evidences
Lalit Bansal
CA, Delhi
529 Answers
36 Consultations

5.0 on 5.0

Hi,

Hope you are doing well !

If the document is properly worded, the sums received from the builder could be classified as a capital gain, which would result in a lower tax outgo for the buyer.

“A ‘transfer’ of a capital asset results in a capital gain. The definition of ‘transfer’ in section 2(47) of the I-T Act is wide. It also includes ‘the extinguishment of any rights in a capital asset’. At the time of booking, the buyer acquires a right in the ownership of the flat. When he settles with the builder he is extinguishing this right. Thus, the amount paid to him is characterised as sale proceeds of the capital asset,” .

“The sale proceeds so received, less the indexed cost, in the case of a long term capital asset, would be a long term capital gain (LTCG), which attracts a lower I-T rate of 20% plus surcharge and cess,” .

Thanks & Regards,
Payal Chhajed
Payal Chhajed
CA, Mumbai
286 Answers

5.0 on 5.0

Hi,

On the other hand if the settlement agreement is not properly drafted, there would be an I-T levy on the entire interest component @ 30%., while refund of the principal amount would be treated as non-taxable (it is return of one’s own money.

Thanks & Regards,
Payal Chhajed
Payal Chhajed
CA, Mumbai
286 Answers

5.0 on 5.0

Hi Chetan,

It depends upon the wordings of court order. If court order Specifically says that it's in the nature of interest, then it will be taxable as Interest.

In my opinion, you can claim legal expenses against it but only those expenses for which you have documentary evidence.

Capital gain generally arises in cases where you settle the case with the builder. Generally courts orders mention that the amount should be paid along with interest.
Abhishek Dugar
CA, Mumbai
3078 Answers
135 Consultations

5.0 on 5.0

Hi Chetan

Since such award is a result of dispute, the interest income shall be taxable normally and shall be included as income from other sources.

As regards the costs involved, expenses directly related to earning such income from other sources are allowed as deduction. However, there should be valid proofs to substantiate such expenses.
Lakshita Bhandari
CA, Mumbai
1647 Answers
43 Consultations

5.0 on 5.0

Hi,
Since the amount received is in the nature of interest , it will be treated as income from other sources and taxed as per the slab rate of the individual.

As far as the costs are concerned, reasonable expenses are allowed as deduction and if you have the proofs then you can claim all such expenses. Hope that clarifies.

Regards,
Nikhil
Nikhil Khanna
CA, Mumbai
830 Answers
4 Consultations

5.0 on 5.0

It will be in nature of interest and will be included in income from other sources. 
Yes you can claim the expenses which are directly attributable with these. Documentary evidence will be required in these case.however sometimes it mentioned in court orders also about eligibility of expenses that can be claimed so refer order also.
Swati Agrawal
CA, Indore
407 Answers

5.0 on 5.0

Based upon the language of the order only, decision can be taken.

You can share the copy of order at aroravivek1982@gmail


Thanks
Vivek Kumar Arora
CA, Delhi
995 Answers
19 Consultations

5.0 on 5.0

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