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
• Subject Matter: Tax, Income Tax, Sales Taxes: VAT, GST, Tax Authorities
• 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 seek to deal with treatment of such amount under GST and under income Tax Act, 1961.

A. TREATMENT OF RECEIPT UNDER A DERCEE/ AWARD OR SETTLEMENT AMOUNT UNDER GST

Section 7(1) of the CGST Act provides that "supply" includes

1. all forms of supply of goods or services or both such as sale transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
2. The activities specified in Schedule I, made or agreed to be made without a consideration; and
3. The activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Apparently receipt of amount towards damages or compensation for loss is not supply. GST authorities however frequently treat such receipts towards damages / liquidated damages as supply of goods or services considering such receipt to be following within ambit of 'agreeing to obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' as appearing in Entry No.5, Clause (e). Sometimes, tax authorities treat such receipts as a...