Page 17 - Banking Finance July 2024

LEGAL UPDATE

Legal

HC: Transit rent not in- duction of tax from the amount paid The IBBI data shows of the 383 admit-
by the developer. ted personal guarantors' insolvency
come, can't be taxed processes, 124 have been closed. Of
A tax expert attached to a developer
In a landmark decision, Bombay HC has company said the HC order provides these 12 have been withdrawn, 86
held that transit rent, which is paid by clarity. It is beneficial not only to flat have been closed because repayment
a developer to a flat owner/tenant on owners or tenants who receive transit plans were not submitted or rejected,
dispossession of the flat, is not a rev- fees but also developers. and for 26 the repayment plan has got
enue receipt. It cannot be taxed in the approval.
hands of the recipient. Thus, the ques- In January-March 2024, five plans
tion of deduction of tax at source (TDS) Only 2% personal guaran- were approved. The provision for insol-
by the developer from the amount tee claims recovered so far vency resolution of personal guaran-
payable to the flat owner/tenant does
Creditors have recovered 2.16 per tors was enabled in November 2019 by
not arise, it said. cent, or Rs 102.78 crore, of their ad- the IBBI. The rules in this regard were
On a writ filed by Sarfaraz S mitted claims from personal guaran- brought in as part of a phased intro-
Furniturewalla, the issue before HC tors under the Insolvency and Bank- duction of individual insolvency laws.
was whether there should be a deduc- ruptcy Code (IBC), the latest data from "There needs to be a recalibration to-
tion of TDS on the amount payable to the Insolvency and Bankruptcy Board wards stricter assessment, stronger
him as transit rent by the builder. of India (IBBI) shows.
creditor protection, and greater em-
TOI has earlier covered orders passed Personal guarantors' insolvency resolu- phasis on accountability from debtors.
by ITAT, which have held that transit tion, experts said, is an opportunity to Without such reforms, the future of
rent is a 'capital receipt' and it is not a balance debtor relief with creditor re- such an insolvency process is uncertain,
revenue stream of income. Thus, it is covery, but its trajectory leans on and its outcomes will not be equi-
not taxable in the hands of the recipi- debtor leniency. table," Chandwani added.
ent. "Providing avenues for debtors to reha- An initial challenge of the process was

HC said transit rent, which is commonly bilitate themselves financially is under- whether a banker's agreement with
referred to as hardship/rehabilitation/ standable, but the dismal 2.16 per cent the company and the personal guaran-
displacement allowance, is paid by the recovery rate indicates a systemic flaw. tor was inter-linked or separate. In
developer or landlord to a flat owner/ Emphasis on approving repayment plans February this year, the IBBI allowed
tenant who suffers hardship due to dis- without scrutiny or enforcement the same insolvency professional for
possession of his/her house. Transit mechanisms risks undermining creditor the resolution process of a company as
rent is not to be considered as a rev- confidence and perpetuates a moral well as its personal guarantor for bet-
enue receipt and is not liable to tax. hazard," said Sonam Chandwani, man- ter harmonisation and effective coor-
Thus, there will be no question of de- aging partner, KS Legal & Associates. dination.

16 | 2024 | JULY | BANKING FINANCE