Tax on Penalty amt paid by Builder for Delayed Possession

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  1. ZED

    ZED Well-Known Member

    Sir you are really really saying way too high of me and gave so much respect of which I am really not worth . I sincerely respect you a lot sir and when you wrote your comment , what was most intriguing was that you were not just analysing what I wrote but you were even analysing me and this thing ameliorated me .

    It makes me wonder if you were a judge or perhaps at a similar position at some point of time, you were even analysing my analysis . You probably have handled several representations aswell. Your writing style, grammar made me feel very high of you.

    You are a CA right? you even used the phrase "as a Chartered Accountant we.".and the example you gave and the success you talked about, it all makes me feel so . It could be that am not a CA and also most certainly it could be that I am not at the level you are thinking about me.
    I will definitely participate in that thread.

    Something tells I am going to enjoy a lot. I will enjoy your company and other senior members
     
    Nikil Mohan and Karan Batra like this.
  2. ZED

    ZED Well-Known Member

    Sir may I say something?
    First and foremost Thanks for your comments (I didn't even mentioned this) , your comments did boosted my confidence.

    Second, is more like a request.

    Its that , it would be gross injustice to call it my analysis. The analysis is of the judge who gave the judgement in the case we cite, its of that advocate who prepares the grounds of appeals and the assessee who provide significant support and sometimes prepares grounds of appeals.

    I just put a phrase from their discussion and put it here. If I take the credit then it would be gross injustice to all of aforesaid people. 100% of the credit goes to them.


    While I am extremely happy to hear your such comments, I would feel like top of the world if you could say what you said earlier, but on my own analysis. That is the level I desire.

    Thank you Sir/
     
    Nikil Mohan likes this.
  3. RPSINGH

    RPSINGH New Member

    Thank you all for your comments and guidance. In our case, there was no assured rental scheme. Builder adjusted the penalty amount with the final payment to be made at the time of possession. The penalty amount was around 4.5 lacks. But in the final sale deed/registry made, the actual cost of the flat was not reduced by 4.5 lacks. So, can we still say the cost of acquisition of the property is reduced ?

    Though the builder had not paid it through any cheque or transaction of 4.5 lacks to my son and neither deducted any TDS, can builder show it as a loss in his account or filing their returns ?
     
  4. ZED

    ZED Well-Known Member

    Note-What I am going to say might appear contradictory but please understand that
    Multiple Acts are applicable in this case and each Act,though related, has its own purpose and hence the opinion has been given on the basis of the purpose(s) of each Act.



    For the purposes of Income Tax Act 1961
    Since the final payment was arrived after adjusting the penalty, your cost of acquisition for the purposes of S.48/43 has definitely been reduced. [Despite the value appearing on sale deed] [Capital gain or business income, as may arise at the time of sale of such property]
    As I said earlier, dominant factor would be as how the cheques been issued. No, cheque has been issued towards penalty, (its fine)
    There should not be any income u/h Income from other sources in current scenario.
    There is no applicability of TDS either.


    For builder, yes it is a loss and can be claimed as deduction u/s 37. It is a normal transaction, no issues. Penalty for breach of contract is allowable since there is no infraction of law. There are judgements also in this behalf.




    [You may take value in registry at higher value] (Advisable)

    [You may ignore the text below]



    I was referring to S.4 of Transfer of Property Act, 1882, it said

    "The Chapters and sections of this Act which relate to contracts shall be taken as part of the Indian Contract Act, 1872 (9 of 1872).

    And sections 54, paragraphs 2 and 3, 59, 107 and 123 shall be read as supplemental to the Indian Registration Act, 1908 (16 of 1908)."

    If I see what is the contracted value[As per Indian Contract Act], then definitely it is GROSS value as indicated in original sale deed.


    S.54 of the , Transfer of Property Act, 1882
    CHAPTER III
    OF SALES OF IMMOVABLE PROPERTY
    54.
    "Sale" is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.

    If I ask what is the price promised then definitely its the gross value
    Hence registry is at proper value.

    If I ask what is the price PAID
    Then 2 views are possible once is the amount paid in NET and the other is GROSS


    Further it also says that
    "A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties.

    It does not, of itself, create any interest in or charge on such property."

    Whereas S.10 of the Specific Relief Act says

    Except as otherwise provided in this Chapter, the specific performance of any contract may, in the discretion of the court, be enforced

    (a) when there exists no standard for ascertaining actual damage caused by the non-performance of the act agreed to be done; or
    (b) when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief.
    Explanation : Unless and until the contrary is proved, the court shall presume—

    (i) that the breach of a contract to transfer immovable property cannot be adequately relieved by compensation in money; and
    (ii) that the breach of a contract to transfer movable property can be so relieved except in the following cases :—
    (a) where the property is not an ordinary article of commerce, or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market;
    (b) where the property is held by the defendant as the agent or trustee of the plaintiff.





    [Multiple Acts being-Income Tax Act,Indian Registration Act, State Stamp Duty Act, Transfer of Property Act, Specific Relief Act, Indian Contract Act (and others which I might not even know of) are applicable]

    See, there are certain contradictions and it is because the purpose of each Act is different.
    S.54 of Transfer of Property Act says that no interest or charge is created whereas S.10 of the Specific Relief Act (whose purpose is to provide relief) is allowing you to enforce the contract. And Stamp duty Act is for stamp revenue collection.

    Therefore go as per the intent of law.
     
  5. Surbhit Jain

    Surbhit Jain New Member

    I have got Rs10 lacs interest compensation from builder as per supreme court order. will i have to pay tax on this inetrest part or can i get it adjusted as compensation. flat delay was of 3 years and no tax or tds have been cut by builder on this. payment has been made through court.kindly advise on tax part
     
  6. ZED

    ZED Well-Known Member

    Recently there have been several developments in this area.
    I wish to see the copy of the order in your case.

    Now if you go against the builders in the court then the compensation awarded is bifurcated as -
    • Repayment
    • Interest
    • Compensation
    • In some cases, an amount due to increase in the cost
    Although any amount in excess of the amount which you are receiving is the compensation only.
    Interest is something which you receive when something is borrowed (When a debt is incurred). This interest is not that interest because there the contract was not for borrowing the money.

    Since the authorities/courts awarding the compensation to the buyers are using the nomenclature "interest", the tax department will use this in their favour.


    Unless one is willing to prefer an appeal, one should show it as interest and offer it to tax.
     
  7. Surbhit Jain

    Surbhit Jain New Member

    I AM attching my court order copy, i need to know will i need to pay tax on interest paid by builder and he has not cut any TDS on the same.
     

    Attached Files:

  8. Surbhit Jain

    Surbhit Jain New Member

    I have also paid pack my home loan with this amount in which i have paid interest and claim home loan rebate.
     
  9. ZED

    ZED Well-Known Member

    The judgement is not coming from the Supreme court, but its coming from State dispute redressal commission. Any how, In this case also the court has used the words "interest" and "compensation" separately.

    As per my understanding, this interest is not the interest taxable u/s 2(24A), which states-

    "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;



    However, If you are not prepared to go to court then do declare this as interest income.
    Recently I discussed this matter with a very senior & highly knowledgeable practicing CA in Delhi and he mentioned that he advices his client to show it as interest income.

    It's better to be on safer side, unless I meet a client who himself is willing to take the risk, my advice would be on safer side.




    In respect of home loan, the deduction on account of interest u/s 24(b) can be availed only after construction of the property. Further, deduction u/s 80C on account of home loan repayment can be availed if the house is acquired/constructed and remains in your possession for 5 years.

    Since you can not have this property under your possession for 5 years, you are not eligible for claiming the deduction.

    Further, if deduction was claimed then it shall now be deemed to be your income to the extent of deduction claimed.

    Extracts from S.80C

    "Where, in any previous year, an assessee—
    transfers the house property referred to in clause (xviii) of sub-section (2) before the expiry of five years from the end of the financial year in which possession of such property is obtained by him, or receives back, whether by way of refund or otherwise, any sum specified in that clause,

    then,—

    the aggregate amount of the deductions of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year."
     
    Last edited: Jul 15, 2017
  10. Seeker

    Seeker New Member

    Dear ZED,
    After completing the registry of the flat, i received penalty for late delivery of flat (as per the builder buyer agreement done on a stamp paper), the builder deducted 1% TDS under section 194C (payment done to contractor & sub contractor).
    The TDS is reflected in my 26 AS.

    Kindly help me, what should be done,

    a) Pay full tax on amount received 30%
    b) Pay tax but after showing 10-30% expenses.
    c) Pay no tax & claim 1% TDS refund also.

    My fellow society residents have gone for all the three options through their CAs.

    Am also getting multiple views from CAs, it's quite confusing.
     
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