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Interest Income By Way Of Compensation In Motor Accident Claims Is Not Taxable

In Shri Rupesh Rashmikant Shah Vs Union of India & Ors., compensation was paid to the victim of an accident after a long legal battle but the insurance company paid the same after deducting TDS.

The contention of the petitioner was interest component on the motor accident claim compensation paid to the petitioner is not taxable as it is a capital receipt. The other contention is that the interest is compensatory in nature. It is meant to offset the erosion of the principal compensation because of passage of time and the reduction of purchasing power of rupee due to inflation. According to the petitioner since the compensation itself is not taxable, the interest pendente lite which also forms part of the compensation, would not be taxable. When the receipt itself is not taxable, the question of deducting tax at source while making payment thereof would not arise. It was lastly contended that in any case, such interest should be spread over the entire period for which it is paid. The interest accrues from year to year. Merely because it is paid at a single point, would not mean the entire amount is taxable in the year of payment.

The Revenue Dept objected that the interest is an income distinct from the compensation and is, therefore, taxable. A conjoint reading of 1181 ITR 400 clause (viii) of sub-section (2) of section 56, clause (b) of section 145A and section 194A (3) of the Act would lead to an inescapable conclusion that interest on the compensation or enhanced compensation would be chargeable as income from other sources at the point of time when the same is actually received by the claimants.

The High Court on appeal first decided to address nature of compensation under the Motor Vehicles Act. The court found that even the Assessing Officer has proceeded on the basis that the compensation by itself is not taxable. Income of the deceased or the injured for earmarking compensation is ascertained after deducting income tax. In certain decisions, the Courts have held  that such compensation is by way of reimbursement of the loss and cannot be treated as income. These decisions suggest that the interest is awarded for delayed computation of compensation. Right to award interest flows from section 170 of the Motor Vehicles Act, 1988. Culmination of discussion in these judgments would be that such interest is compensatory in nature and will thus, form part of the compensation itself. Compensation is computed with reference to the date of accident. All calculations of multiplicand and multiplier are based on such reference point. But computation by the Tribunal takes time. If compensation is revised by the High Court it takes further time. Interest is awarded keeping in mind the rate of inflation. Effort thus is to award just compensation. Awarding interest for delayed computation of compensation is therefore integral part of this exercise. In the context of interest, there are three crucial dates. The date of the accident is a date in reference to which the entire compensation is calculated. The date of filing of the claim petition is the date from which the claimant can seek interest on the compensation awarded by the Claims Tribunal. Under section 170 of the Motor Vehicles Act, the interest cannot be awarded for a period prior to filing of the Claim Petition. The date of passing of the award by Claims Tribunal is the date on which the compensation is determined and the right to receive interest pendente lite ceases. The interest for the period between the filing of the claim petition and passing of the award thus, is for the period when the claimant for the first time approached the Claims Tribunal asking the Tribunal to assess and award compensation and the time consumed in disposing of the Claim Petition.

Therefore, the court decided that the interest awarded in the motor accident claim cases from the date of the Claim Petition till the passing of the award or in case of Appeal, till the judgment of the High Court in such Appeal, would not be exigible to tax, not being an income. The provision of deducting tax at source cannot govern the taxability of the amount which is being paid.

The court futher clarified that these observations and conclusions would apply to interest on compensation or enhanced compensation awarded by the Motor Accident Claims Tribunal or High Court from the date of the Claim Petition till passing of the award or the judgment. Further interest which may be paid for delay in depositing the awarded amount, would not form part of the compensation and, therefore, would fall in the bracket of interest income and would be exigible to tax under the normal provisions.





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