When considering whether an additional amount of compensation was income arising or accruing to the taxpayer there was a clear distinction between the cases where the right to receive payment was in dispute and cases where the right to receive payment was admitted and only the quantification of the amount payable was left to be determined in accordance with settled or accepted principles; and

The TDS provisions in section 195 of chapter XVII of the ITA (relating to collection and recovery of tax) and the charging provisions of the ITA formed one single, integrated, inseparable code and, therefore, the provisions relating to TDS applied only to those sums which were chargeable to income tax under the ITA.

The Karnataka High Court in earlier rulings had held that:

In the context of the receipt of an interim award, when a taxpayer received money, either under an award or decree of the court, or under an award passed by the arbitrator and the amount paid was not in dispute, that amount represented the taxpayer’s income and the taxpayer should offer the amount to tax in the FY in which the amount was paid. Where the amount due was in dispute and subject to litigation, any payment made in accordance with an interim order passed while the litigation was pending was subject to the final result of the proceedings;

The primary factor to apply section 194J of the ITA was the ingredient of “income comprised therein;” if there was no income embedded in a payment, the TDS provisions did not apply as TDS is only an alternative method of the collection of taxes; and

If no income was attributable to the payee, there was no liability to deduct TDS in the hands of the payer.
-courtesy Deloitte