Skip to main content

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.





Comments

Most viewed this month

The recovery of vehicles by the financier not an offence - SC

Special Leave Petition (Crl.) No. 8907  of 2009 Anup Sarmah (Petitioner) Vs Bhola Nath Sharma & Ors.(Respondents) The petitioner submitted that  respondents-financer had forcibly taken away the vehicle financed by them and  illegally deprived the petitioner from its lawful possession  and  thus,  committed  a crime. The complaint filed by the petitioner had been  entertained  by  the Judicial Magistrate (Ist Class), Gauhati (Assam) in Complaint Case  No.  608 of 2009, even directing the interim custody of the vehicle (Maruti  Zen)  be given to the petitioner vide order dated  17.3.2009.  The respondent on approaching the Guwahati High  Court against this order, the hon'ble court squashed the criminal  proceedings  pending   before  the  learned Magistrate. After hearing both sides, the Hon'ble Supreme Court decided on 30th...

Vanishing promoters and languishing shareholders

Over Rs 60,000 crore of shareholders’ wealth is stuck in 1,450 companies suspended by the stock exchanges. More importantly, near 100 per cent pledging of promoter holding appears to be common in many of these companies. This, almost rules out any chance of the companies bouncing back. The suspension is for non-compliance of the listing norms. Vanishing Companies - Definition As per the definition stipulated by SEBI, any listed company, which raised moneythrough initial public offer and, thereafter, stopped operations, did not file returnseither with the RoC or SEBI and did not exist on the registered premises wastermed as vanishing.There are provisions under Companies Act under which companies are termedvanishing companies on satisfying certain conditions. it is provided a companywould be deemed to be a vanishing company, if it satisfies all the conditions given below : a) Failed to file returns with Registrar of Companies (ROC) for a period of two years; b) Failed to fil...

Property can be sold on power of attorney - Delhi High Court

As reported in the Hindusthan Times on 5th May:-  http://www.hindustantimes.com/India-news/NewDelhi/Property-can-be-sold-on-power-of-attorney/Article1-1054964.aspx In a judgment that will benefit lakhs of Delhi residents living in co-operative housing societies and DDA flats, the Delhi High Court has quashed a Delhi government circular banning property sale in the Capital through general power of attorney (GPA). The court found that the directions in the circular, issued by the revenue department on April 27 last year, were contrary to the Supreme Court judgment dated October 11, 2011. The HC order will increase the number of saleable properties in Delhi and could bring down the value of freehold properties. According to realty watchers, on an average, around 20% of properties are registered through GPA transfers — a common way of selling leasehold properties and those that don’t have a clear title. The judgment came on a petition filed by a company, Pace Developers and ...