Interest awarded in motor accident claim cases from the date of the Claim Petition till passing of award/judgment not taxable, being not an income.
ABCAUS Case Law Citation:
ABCAUS 3142 (2019) (09) HC
Important case law relied upon by the parties:
Rama Bai and ors. vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad and Ors.
Gauri Deepak Patel & ors. vs. New India Assurance Co. Ltd.
Khorshed Shapoor Chenai vs. Assistant Controller of Estate Duty, A.P.
Commissioner of Income Tax, Faridabad vs. Ghanshyam (HUF)
Abati Bezbaruah vs. Dy.Director General Geological Survey of India
Kaushnuma Begum vs. New India Assurance Co. Ltd
United India Insurance Company Ltd. and others vs. Patricia Jean Mahajan and Others
Dharampal vs. U.P. State Road Transport Corporation
Movaliya Bhikhubhai Balabhai vs. Income-Tax Officer (TDS) and another
Commissioner of Income Tax vs. Oriental Insurance Co. Limited
The Managing Director, Tamil Nadu State Transport Corporation (Salem) Ltd. vs. Chinnadurai
The petitioner was aged about 48 years who at the age of 8 years, while crossing the road was hit by a car causing serious injuries to his brain. His brain injuries left him paraplegic. His mental growth got stunted. Ever since the date of the accident, he was left completely bed ridden, needing constant attention even for routine activities.
On his behalf, his father had filed Motor Accident Claim Petition before the Motor Accident Claims Tribunal. More than 10 years after the accident, the Tribunal disposed of the Claim Petition. The Tribunal held that the driver of the car was solely negligent in causing the accident. The Tribunal awarded compensation under various heads such as future loss of income; pain; shock and suffering; loss of amenities of life; cost of medical treatment, etc. and awarded a total compensation of Rs. 4.12 lakhs to be paid jointly and severally by the owner and the insurance company with interest @ 6% p.a. from the date of the Claim Petition till realisation. The Tribunal also directed that if this amount is not paid within three months, the rate of interest payable would be 12% p.a. on the unpaid amount.
On further appeal by the Petitioner, the Single Judge of the Hon’ble High Court enhanced the compensation to Rs. 39.92 lakhs to be paid with interest at the rate of 9% per annum. The SLP of the insurance company challenging the said judgment of the High Court was dismissed by the Hon’ble Supreme Court.
The insurance company deposited an amount of Rs. 1.42 crores including interest for 36 years after deducting tax at source @ 10% on the interest component.
However, according to the petitioner, such interest was not taxable. However, by way of caution, he filed the return of income for the relevant Assessment Year showing the interest received as taxable. His also deposited the due taxes thereon.
In the return of income, the Petitioner put a note to dispute the taxability of the interest stating that
the interest amount on such insurance income received should be treated as capital receipt and hence Income Tax should not be applicable on it and that the tax has been paid under protest.
Subsequently, the Petitioner had filed the instant Petition with a prayer for a declaration that no tax at source is required to be deducted on the interest component of the compensation in motor accident claims. The petitioner had also prayed for a direction to refund the tax paid to the Income Tax department while filing the return of income. The petitioner had also challenged the vires of section 194A (3)(ix) and (ixa) as also section 145A(b) and 56(2)(viii) of the Income Tax Act, 1961 (‘Act’).
During the pendency of the instant petition, the Assessing Officer passed an order of assessment under section 143(3) of the Act and assessed the petitioner’s total income which comprised of the interest received on the compensation minus available deductions. He rejected the petitioner’s contention that such interest was not taxable. He was of the opinion that the interest on compensation was distinct and independent of the principal and the interest therefore, would be income from other sources. Most unkindly, he also ordered issuance of notice of penalty under section 271(1)(c) of the Act completely ignoring the fact that the petitioner himself had filed the return of income, disclosed the interest income and subject to his objection to its taxability, also paid the full tax thereon.
As a result, the petitioner amended the instant petition and challenge the order of the assessment.
Considering the fact that the petition involved complex issues, answers to which would have wider ramifications, the High Court had appointed an Amicus Curiae. The learned Amicus Curiae had presented various propositions on the interpretation of the relevant sections. He had also presented the decisions of various Courts adopting different view points.
The Court took note of the various decisions at length and particularly with respect to the nature of compensation under the motor vehicles act, nature of interest payable, interpretation of the provisions contained in the Income Tax Act.
The Hon’ble High Court opined that the decision of the Supreme Court relied upon by the Revenue was not an authority on the question of taxability of interest on compensation or enhanced compensation in motor accident claim cases. It was observed that in another case, the Supreme Court had held that interest under section 28 of the Land Acquisition Act would invite capital gain tax. This judgment was rendered before amendment in section 145A of the Act. The Gujarat High Court had held that the ratio of the said judgment of the Supreme Court would continue to apply post amendment in section 145A by virtue of Finance Act, 2009 also.
The Hon’ble High Court stated that in order to ascertain the taxability of interest on compensation or enhanced compensation in motor accident claim cases, true nature of interest is to be ascertained. The Supreme Court in various decisions explained the nature of interest awarded in motor accident claims cases. 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.
The Hon’ble High Court explained that 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.
The Hon’ble High Court held 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 Hon’ble High Court further held that this position would not change on account of clause (b) of section 145A of the Act as it stood at the relevant time amended by Finance Act, 2009 which provision now finds place in sub-section (1) of section 145B of the Act. Neither clause (b) of section 145A, as it stood at the relevant time, nor clause (viii) of sub-section (2) of section 56 of the Act make the interest chargeable to tax whether such interest is income of the recipient or not.
The Hon’ble High Court further clarified that section 194A of the Act is only a provision for deduction of tax at source. Any provision for deduction of tax at source in the said section would not govern the taxability of the receipt. The question of deduction of tax at source would arise only if the payment is in the nature of income of the payee. The provision for deduction of tax at source is not a charging provision. It only makes deduction of tax at source on payment of same, which, in the hands of payee, is income. If the payee has no liability to pay such income, the liability to deduct tax at source in the hands of payer cannot be fastened. In other words, the provision of deducting tax at source cannot govern the taxability of the amount which is being paid.
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