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The High Court in (2022] 19 ITR-OL 128 (Bom) held that requirement to deduct tax on interest is only qua a transaction that transpire in a relationship of debtor and creditor. In this case the assessee managed recovery warrant through state RERA authority for refund of amounts paid for booking of flats. The Court held that there is no statutory mandate for deduction of tax on interest payable by way of compensation under a court decree. More particularly in this case the amounts payable were in effect refund of the amounts paid by the assessee to the Developers , along with compensatory interest thereon to which the Court held that such a relationship did not spell out a debtor-creditor relationship nor was the payment made by the State to the assessees one in discharge of any pre-existing obligation, so as to attract section 2(28A).
The Court directed the Developers to pay to the petitioners the amount of TDS deducted within a period of one week as it held that such amounts could not, in law, be deducted.
Income taxes are paid by the assessees as part of their statutory obligations. Payment of income tax with the revenue does not create any debtor-creditor relationship hence any amount determined as payable by the revenue to the assesses as refund of taxes and interest paid thereon should not warrant any withholding of tax.

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