Income Tax on money received from a litigation

[Malay Kapat]

I have received an amount as a result of a verdict of a court case. I paid an amount to a builder with the promise of an apartment which was never delivered, hence I went to the consumer court (State and then National level). Finally after a decade court has directed the developer to pay me back the amount I paid plus interest for all these years. I have received around 80% of the amount last year in my bank account. 

Can you please let me know if this amount is taxable or not? If taxable, which schedule and how should I calculate the taxable amount? An example calculation with an imaginary amount and interest rate will be extremely helpful. 

[TANAY GHILDIYAL]

Assuming that you paid the amount other than in case and that being already taxed amount. Whatever was paid by you and on which the litigation stood initially for example you paid total of 50 lakh to the builder in parts over a span of 2 years as per the completion of the phase as they mentioned. Once the delivery was denied for whatsoever reason a litigation was filed for recovery of 50 Lakh plus interest. 

Now let us assume the court granted you 50 Lakh plus 3 lakh as interest aggregating 53 Lakh. Now 50 lakh shall not be taxed as it was your original taxable amount but the interest portion of 3 lakh shall be taxed under the head other sources. As stated by you that only 80% was received last year in your bank account, so it must be 42.40 lakh as per our assumed amount. Applying the proportionate base the principle amount comes to 40 Lakh that shall remain tax free but the interest part of 2.40 lakh shall be treated as income u/h other sources and shall be fully taxed as a regular source of income invested by you and on which you have derived the interest Income. As far as the remaining amount i.e. 10.6 lakh is concern you can represent in your next year ITR after applying the proportionate basis.

 

Tanay Ghildiyal

9873938771 

AI Summary

Taxation of litigation recoveries: interest awarded is taxable as income from other sources, principal is non-taxable.
Principal repayments recovered by court are not taxable; court-awarded interest is taxable under Income from Other Sources. If only part of the award is received in a year, apportion the receipt proportionately between principal (non-taxable) and interest (taxable) and report the remaining amounts in the year they are received.