A bech of the National Consumer Disputes Redressal Commission (NCDRC) comprising of Justice Ram Surat Ram Maurya, (Presiding Member), Bharatkumar Pandya (Member) and Dr. Sadhna Shanker (Member), in New Park Elite Welfare Association v. BPTP Ltd. & Anr. (Execution Application No. 225 of 2020 in CC/1395/2016, decided on 21 February 2024), held that Tax Deducted at Source (TDS) cannot be deducted on interest awarded as part of compensation in consumer disputes. The ruling marks a significant step in protecting consumer interests, clarifying the nature of interest awarded under consumer protection laws, and addressing unnecessary financial burdens imposed by developers through the wrongful deduction of TDS.

The case arose when developers, in compliance with a decree ordering them to refund the amounts paid by allottees along with interest, deducted TDS on the awarded interest. The decree holders (DHs), represented by New Park Elite Welfare Association, objected to the deduction, arguing that the interest component was not in the nature of income but rather compensatory damages for deficiency in service. The crux of the dispute revolved around whether interest awarded in consumer complaints, as part of compensation, falls within the ambit of “interest” under Section 2(28A) of the Income Tax Act, 1961, thus attracting TDS under Section 194A.

The judgment extensively examined the definitions and legal interpretation of “interest” under Section 2(28A) of the Income Tax Act. Section 194A mandates the deduction of TDS on interest other than interest on securities. The respondents (developers) contended that they were under a statutory obligation to deduct TDS, relying on the Supreme Court’s decisions in Prateek Infra Projects v. Nidhi Mittal and Nexgen Infracon Pvt. Ltd. v. Manish Kumar Sinha. They argued that any failure to comply with Section 194A would attract penal consequences under Section 201 of the Income Tax Act.

The decree holders, however, contended that the interest awarded was compensatory in nature and not “interest” as contemplated under Section 2(28A). They argued that such amounts were meant to restitute losses caused by the developers’ failure to deliver possession and not to satisfy a debt or borrowings, which is the essence of the statutory definition of interest.

The DHs relied on precedents, including Sainath Rajkumar Sarode and PCIT v. West Bengal Housing Infrastructure Development Corporation, where courts held that compensatory interest does not establish a debtor-creditor relationship and, therefore, does not fall under the purview of TDS.

The NCDRC noted that the purpose of awarding interest in consumer complaints is to compensate the complainants for the time value of money and the developers' failure to deliver possession. The Commission rejected the argument that such interest could be equated with income or interest on borrowed money, observing:

“The word ‘interest’ used in the decree is not in the nature of interest defined under Section 2(28A) of the Income Tax Act, as it does not arise from any debt incurred or deposit made by the decree holders.”

The Commission referred to landmark judgments of the Supreme Court and High Courts, particularly LDA v. M.K. Gupta and GDA v. Balbir Singh, which established that compensation awarded under the Consumer Protection Act includes not only actual losses but also damages for mental and emotional suffering. Similarly, the ruling cited the Bombay High Court’s judgment in Rupesh Rashmikant Shah and Gujarat High Court’s decision in Oriental Insurance Co. Ltd. v. CCIT (TDS), which held that interest awarded on compensation for delay does not constitute income under Section 2(24) of the Income Tax Act.

The Commission clarified that consumer compensation awarded with interest is restitutory and compensatory in nature and does not fall within the taxable ambit. The NCDRC observed that subjecting such compensation to TDS places an unnecessary financial and administrative burden on consumers who have already suffered losses. The Commission reasoned that while the deductee may claim a refund from tax authorities, such a process amounts to unwarranted harassment:

“It is unnecessary harassment of a consumer, who has already been harassed by the developer. If income-tax is not chargeable on compensation, then the developer cannot be permitted to deduct TDS.”

The NCDRC, therefore, answered the question in the negative, holding that TDS under Section 194A is not applicable to interest awarded as compensation in consumer cases. 

Case Title: New Park Elite Welfare Association v. BPTP Ltd. & Anr.

Case Number: Execution Application No. 225 of 2020 in CC/1395/2016

Bench: Justice Ram Surat Ram Maurya, (Presiding Member), Bharatkumar Pandya (Member) and Dr. Sadhna Shanker (Member)