Tax Implications For Judgment Debtor And Judgment Creditor While Paying Or Receiving The Amount Under A Court Decree Or Arbitration Award

• Published date: 03 April 2024
• Law Firm: R & D Law Chambers LLP
• Author: Mr Ravish Bhatt

In our experience while dealing with corporate clients in representing them in an action for damages, contractual claims etc. in arbitration proceedings or in court of law and in advising them afterwards, we have seen many companies having a question as to whether a receipt pursuant to settlement in a lawsuit or in an arbitration matter or a receipt pursuant to court decree or arbitration award after successful prosecution of claims is taxable under Income Tax Act, 1961("ITA"). We have indeed seen some clients offering such amount under ITA and some settlements prescribing that the payee will raise invoice along with Goods and Service Tax("GST") and payor will consequently remit amount along with GST.

Such amount may or may not be liable to be offered as income (although payor may be able to claim reduction in profit treating such payment as revenue expenditure) and may or may not be subject to GST.

Broder proposition is that a receipt under decree or settlement towards supply of specific goods or services will be both liable to be offered under ITA and be subject to GST whereas receipt pursuant to settlement of a claim for damages or compensation for loss suffered or a receipt pursuant to decree to that effect may be out of the purview of GST and also may not be liable to be offered under ITA while allowing the payor to deduct such amount from taxable income.

We...