2025 (12) TMI 552 - HC - Indian Laws

No TDS deductible on arbitral award payments without statutory mandate; mistaken deduction to be refunded, no interest granted

HC, in execution proceedings, held that no TDS is deductible at source from amounts payable under a decree or arbitral award absent specific statutory ... Seeking enforcement of the arbitral award read with the Additional Award - correct calculation pf decretal amount and future interest or not - Deductibility of TDS - HELD THAT:- It is a well-settled principle of law that no tax is deductible at source from amounts payable under a decree or an arbitral award, unless expressly authorised by statute. In view of the said legal position, the Award Debtor is under an obligation to refund to the Award Holder the amount of TDS that was erroneously deducted at the time of releasing the decretal amount. The Award Holder has further sought interest on the TDS component. However, this Court finds no merit in any claim for interest on the said amount. It is an admitted fact that the Award Debtor, while releasing the decretal amount, mistakenly deducted TDS, despite the settled principle that no tax is deductible at source from sums payable under an arbitral award - Allowing interest on the TDS component would, therefore, be inequitable and inappropriate. Imposing an interest burden would penalise the Award Debtor for a bona fide procedural error, notwithstanding that the amount is already lying with the statutory authorities. Such a direction would run contrary to the principles of equity, fairness, and restitution. Accordingly, this Court directs that the Award Debtor shall refund the erroneously deducted TDS amount to the Award Holder, without any interest. The Award Debtor shall remit to the Award Holder the TDS amounts of Rs. 54,06,844/- and Rs. 8,56,800/-, without any interest within four weeks from today - The Award Debtor shall be at liberty to approach the Income Tax Authorities seeking recovery/refund of the said amounts, in accordance with law. The Execution Petition stands disposed of. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the Award Debtor's computation of the decretal amount, including the period for which future interest @ 12% per annum is payable under the arbitral award and additional award, correctly reflects the directions contained therein. 1.2 Whether tax was lawfully deductible at source (TDS) from the sums paid under the arbitral award and, if not, whether the Award Debtor is obliged to refund the deducted TDS amounts to the Award Holder. 1.3 Whether the Award Holder is entitled to interest on the amounts deducted as TDS and deposited with the Income Tax Department. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Correct computation of decretal amount and future interest Interpretation and reasoning 2.1 The Court examined the arbitral award dated 24.01.2024 and the additional award dated 28.03.2024, together with the rival computation statements filed by the parties. 2.2 The original award quantified: (i) unpaid rent, (ii) unpaid mesne profits, (iii) interest @ 10% per annum on those sums from 01.07.2021 until the date of the award, (iv) unpaid Service Tax/GST, (v) costs of arbitration, and (vi) future interest @ 12% per annum in the event of non-payment within four weeks from the date of the award. 2.3 The additional award only corrected a typographical error in paragraph 16 of the original award and did not alter the operative directions. 2.4 Comparing the rival calculations, the Court found that the Award Debtor's computation correctly implemented the award, especially regarding the period of liability for future interest. 2.5 The Court held that future interest @ 12% per annum is payable only from the date of the additional award, i.e., 29.03.2024, until the date of payment of the principal sum, i.e., 23.07.2025, and not beyond. Conclusion 2.6 The computation furnished by the Award Debtor was accepted as correctly reflecting the directions in the arbitral award and additional award, including the period for which future interest @ 12% per annum is payable. Issue 2: Legality of TDS deduction from arbitral award sums and obligation to refund Legal framework 2.7 The Court referred to the settled legal principle that no tax is deductible at source from amounts payable under a decree or an arbitral award unless such deduction is expressly authorised by statute. Interpretation and reasoning 2.8 It was admitted that the Award Debtor deducted TDS of Rs. 54,06,844/- and Rs. 8,56,800/- from payments made towards the decretal sum and deposited the same with the Income Tax Department. 2.9 Applying the above legal principle, the Court held that such deduction of TDS from sums payable under the arbitral award was erroneous, as there was no statutory authority permitting such deduction in the circumstances. Conclusion 2.10 The Award Debtor is under an obligation to refund to the Award Holder the TDS amounts of Rs. 54,06,844/- and Rs. 8,56,800/-, without interest, within four weeks. 2.11 The Award Debtor is at liberty to approach the Income Tax Authorities to seek refund/recovery of the amounts deposited with them, in accordance with law and applicable principles. Issue 3: Entitlement to interest on the TDS component Interpretation and reasoning 2.12 The Award Holder claimed interest on the TDS component on the footing that the decretal amount stood reduced by the deduction. 2.13 The Court noted that the deduction of TDS was a bona fide mistake by the Award Debtor, made while releasing the decretal amount, despite the legal position that no TDS is deductible from arbitral award sums. 2.14 It was undisputed that the deducted amounts were deposited with the Income Tax Department, in compliance with statutory requirements, and were not retained by the Award Debtor, who derived no benefit therefrom. 2.15 The Court held that imposing an interest burden on the Award Debtor in such circumstances would be inequitable and inappropriate, as it would penalise a bona fide procedural error when the money is already lying with statutory authorities. 2.16 The Court further held that directing payment of interest on the TDS component would be contrary to principles of equity, fairness, and restitution, since the Award Debtor had not enjoyed or utilised the deducted sums. Conclusion 2.17 The claim for interest on the TDS component was rejected. The Award Debtor is required only to refund the TDS amounts to the Award Holder, without any interest. 2.18 With these directions, the execution proceedings were disposed of.