General Rule:

• Section 194A of the Income Tax Act mandates TDS deduction on interest income exceeding a specific threshold (currently Rs. 10,000 per year). This applies to interest earned on various instruments, including bank deposits.

Deposits in Court Cases:

• Court Order and Purpose: The nature of the deposit Income Tax and the court order directing it play a crucial role. If the deposit is meant to be compensation awarded to a party in the litigation and is eventually paid out with accrued interest, then TDS might be applicable on the interest exceeding the threshold.
• Temporary Deposits: However, if Income Tax the deposit is merely a temporary measure for security purposes or pending final adjudication, and the interest itself isn’t meant for any party, then TDS might not be applicable.

Notifications and Circulars:

• Circular No. 275/30/2011-IT(B): This Income Tax circular clarifies that TDS applies to interest accruing on deposits made in court cases as per the court order’s purpose. However, it also provides an exemption for deposits made by government departments or bodies established by a statute, like the Registrar’s office itself.

Further Considerations:

• Identifying the Deductee: Determining the correct deductee (individual party to the case or the Registrar) might be complex, requiring careful analysis of the court order and purpose of the deposit.
• Tax Return Implications: Even if TDS Income Tax isn’t deducted by the bank, the interest income is still taxable in the hands of the eventual recipient as per their tax bracket.

 EXAMPLE

1. Deposits Ordered by Court as Security:
   • Interest: Generally, no Tax Income Tax Deducted at Source (TDS) is deducted on the interest earned by such deposits during the pendency of litigation. This is because the Registrar holds the money in trust and not as the taxpayer’s income. However, upon finalization of the case, the interest income may be attributed to the party Income Tax responsible for bearing the expenses and become taxable as per their income category.
   • Principal: When the principal Income Tax amount is withdrawn after the case is decided, it’s not considered income and therefore not taxable.
2. Deposits Made Voluntarily as Security:
   • Interest: Similar to court-ordered deposits, the interest earned might not be subject to TDS during the pendency. However, upon case completion, the tax treatment depends on the nature of the dispute and the final order.
   • Principal: Withdrawal of the principal remains non-taxable.

Important Points:

• The final tax treatment will Income Tax depend on the specific nature of the litigation, the source of funds used for the deposit, and the terms of the court order.
• Consulting a qualified tax advisor is crucial to understand the specific tax implications and potential exceptions relevant to your case.
• It’s always advisable to maintain proper documentation and records related to the deposit, its purpose, and the court order to clarify the tax liability when needed.

FAQ QUESTIONS

Q: Are deposits made in the name of the Registrar of the Supreme Court/High Court during litigation subject to TDS under the Income Tax Act?

A: No, deposits made in Income Tax the name of the Registrar of the Supreme Court/High Court during litigation are not subject to Tax Deducted at Source (TDS) under the Income Tax Act. This applies to both the principal amount and the interest earned on the deposit.

Q: Why are these deposits exempt from TDS?

A: These deposits are considered “court funds” and are held in trust by the court. They are not considered income of the depositor until the court decides Income Tax the case and orders the release of the funds. Therefore, the provisions of TDS on interest income do not apply.

Q: Are there any specific provisions in the Income Tax Act that exempt these deposits?

A: While there is no specific section in the Income Tax Act that explicitly exempts court deposits from TDS, various judicial pronouncements and circulars by the Central Board of Direct Taxes (CBDT) have clarified this position. Notably, the CBDT Circular No. 10/2013 and the decision of the Delhi High Court in the case of “Commissioner of Income Tax vs. M/s. Hindustan Petroleum Corporation Ltd.” have confirmed the non-applicability of TDS on court deposits.

Q: Do banks need to report the interest earned on these deposits to the Income Tax Department?

A: Yes, banks are required to report the interest earned on all deposits, including those made in the name of the Registrar of the Supreme Court/High Income Tax Court. However, the bank will not deduct TDS on this interest income.

Q: What happens to the interest earned on these deposits after the court case is decided?

A: The interest earned on these Income Tax deposits will become taxable income for the depositor in the financial year in which the court orders the release of the funds. The depositor is then responsible for reporting the interest income in their income tax return.

Q: What are the implications for the depositor?

A: While the deposits themselves are Income Tax exempt from TDS, the depositor should be aware of their tax liability for the interest earned once the funds are released. It is recommended to consult a tax advisor for guidance on reporting and claiming any applicable deductions or exemptions on the interest income.

 CASE LAWS

Circular No. 8/2011 issued by the CBDT:

• This circular clarifies that Income Tax if a court directs parties to deposit money in a time deposit as security during litigation, the interest on such deposit will be taxed in the name of the depositor, regardless of who holds the deposit account (court officer, joint account, etc.). This applies even if the depositor ultimately loses the litigation.

Relevant Judgments:

• Commissioner of Income Tax v. K.N. Baxi & Co. (1984): This Income Tax Supreme Court case established that deposits made in court orders by way of security or execution of a decree are not income of the court but remain the income of the party depositing the money.

Implications for Taxation:

• Based on the above, the interes Income Tax t earned on deposits made in the name of the Registrar during litigation would likely be considered income of the party depositing the money.
• TDS at the prevailing rate would be deducted by the bank if the interest income exceeds Rs. 10,000 in a financial year.
• The party depositing the money can claim exemptions like Section 80TTA (interest income up to Rs. 10,000) by submitting the required forms.