• Income tax on delay penalty adjusted by builder in final demand

I had booked a flat with a builder in Noida for which the possession got delayed, on approaching the NCDRC, the commission ordered the builder to pay a simple interest of 8 % on the amount already paid to the builder and adjust the calculated penalty in the final demand to which the builder agreed. 

The penalty was adjusted in final demand and not given as a cheque or cash component.
The builder subtracted the penalty from the final demand and sent a demand In July 2018 for the remaining amount but he has also deducted TDS on penalty @ 10 %.

I have two questions:

1. Should there be a TDS deduction at all as the builder is only adjusting the penalty from the final demand and not paying any real compensation in this case?

2. Even if the builder insists on deducting TDS, can this TDS be claimed in refunds in next year ITR?

Thanks
Asked 5 years ago in Income Tax

Hi,

Hope you are doing well !!

1. Yes, the penalty amount will be treated as income from other sources (interest) even if it not actually received.

So, tds would be required to be deducted.

2. Yes, you can claim tds (credit) refund in next year ITR by mentioning the receipt as income from other sources.

However, you can also consider this amount as capital receipt and reduce the same from cost of acquisition of property subject to sales agreement. So, you can avoid taxation (TDS deduction).

Thanks & Regards,

Payal Chhajed

Payal Chhajed
CA, Mumbai
5188 Answers
288 Consultations

5.0 on 5.0

The law provides that when there is any adjustment between creditor and debtor and the payments are adjusted interse, TDS provisions do apply.

The builder is required to deduct taxes on your behalf from the penalty payable by him to you. You can claim the credit of this TDS amount in the year in which this income is due to you ie in FY 2018-19. This will also reflect in the form 26AS, hence there won’t be any mismatch in your tax filing and 26AS.

Also note that TDS is to be deducted by you on the total payments to the builder and not net amount.

Jasmina Jain Shah
CA, Greater Mumbai
454 Answers
4 Consultations

5.0 on 5.0

Hi,

1. TDS provision will apply. The penalty amount will be considered as income. You will have to show this income in income from other sources head.

2. You can claim the TDS credit in your next year ITR. TDS paid by you will also reflected in form 26AS.

In order to avoid any mismatch, file the tax returns as per form 26AS.

Karishma Chhajer
CA, Jodhpur
2450 Answers
29 Consultations

5.0 on 5.0

Technically he is order to pay you interest which is his penalty and he is adjusting that interest against your installment.

So if we assume that he is not adjusting the interest against your installment then he is paying you interest and he might be deducting TDS u/s 194A for the interest he is paying you.

You can claim refund of such interest but first you will have to show such interest as your income because in the end when you will sell the property you will consider entire cost of acquisition eventhough you have not paid entire amount and that would be wrong so you need to tax that part and show such interest as your income and later when you sell the property you can claim entire cost.

Hope you find the information helpful if you do please rate it 5 and provide your valuable feedback for my improvement.

Thank you

Naman Maloo
CA, Jaipur
4265 Answers
96 Consultations

5.0 on 5.0

Hi,

- Penalty paid by the builder is in the form of interest which is taxable under the Incredit while filing ITRcome from other sources. TDS deducted by the builder is correct.

- Yes you can claim TDS credit while filing ITR.

Thanks

Vivek Kumar Arora
CA, Delhi
4825 Answers
1031 Consultations

5.0 on 5.0

Hi,

1. Yes, the penalty amount will be treated as income from other sources and so tds deducted by the builder is correct.

2. Yes, you can claim tds refund in next year ITR.

Regards,

Nikhil

Nikhil Khanna
CA, Mumbai
1429 Answers
19 Consultations

4.8 on 5.0

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