Rupesh Rashmikant Shah v. UOI (2019) 417 ITR 169 / 182 DTR 203 / 310 CTR 826 / 266
Taxman 474 (Bom.)(HC)
Sub: Whether Compensation awarded by Motor Accident Claims Tribunal - Interest on compensation awarded up to date of order of Tribunal or Court is taxable
FACTS OF THE CASE
Petitioner when he was 8 years old while crossing the Road knocked down by a speeding vehicle. He was in coma for six months. Compensation was determined after 36 years after the accident. Motor Accident Tribunal awarded compensation within three months and the rate of interest payable was 12 percent per annum on the unpaid amount. The insurance company before depositing the tax deducted the tax at source at 10 percent on interest component.
The petitioner filed the return and claimed the refund on the ground that the tax was wrongly deducted. The petitioner moved the petition challenging the vires of S. 194A(3)(ix), and (ixa) as also S. 145A(b) and 56(2) (viii) of the Act,1961.
When the petition was pending the AO has passed the order. The petition was amended accordingly.
ALLOWING THE PETITION THE COURT HELD THAT
Awarding interest for delayed computation of compensation is therefore an integral part of this exercise. Interest awarded in motor accident claims cases is, thus, compensatory in nature and forms part of the compensation itself hence not taxable. Court also held that clause (viii) of sub-section (2) of S. 56 by itself would not make the receipt of interest on compensation chargeable to tax as income from other sources if such receipt is not income. Clause (b) of S. 145A of the Act does not make interest on compensation or enhanced compensation taxable if it is otherwise not exigible to tax.
It merely provides for the point of time when it would be subjected to tax if otherwise taxable. The provision for deduction of tax at source is not a charging provision. It only provides for deduction of tax at source on payment of a sum, which, in the hands of the payee, is income.
If the payee has no liability to tax on such income, the liability to deduct tax at Charge of income-tax Section 4 source in the hands of the payer cannot be fastened. The provision for deducting tax at source cannot govern the taxability of the amount which is being paid. Accordingly the question of deduction of tax at source would arise only if the payment is in the nature of income of the payee. (AY. 2016-17)
LET’S CONSIDER PROVISIONS INVLOVED IN ABOVE CASE
Section 4- is changing Section of Income Tax Act, 1961, it provides that
(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.
Section 56(2)(viii) deals with - Interest on Compensation or Enhanced Compensation
As per section 145A(b), any interest received by an assessee on compensation or enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.
Further, as per section 56(2)(viii), income by way of interest received on compensation or on enhanced compensation referred to in section 145A(b) above shall be taxable under the head income from other sources in the previous year in which such interest is received.
TDS on interest payment on compensation amount awarded by Motor Accident Claim Tribunal at the time of payment instead of accrual
Under section 194A(3)(ix) of the Act, tax is not required to be deducted from the interest credited or paid on the compensation amount awarded by the Motor Accident Claim Tribunal if the amount of such interest credited or paid during a financial year does not exceed Rs.50,000/-. Finance (No.2) Act, 2009 amended the provisions of section 56 of the Act as well as substituted section 145A of the Act to, inter alia, provide that interest income received on compensation or enhanced compensation shall be deemed to be the income of the year in which the same has been received. However, the existing provisions of section 194A of the Act provides for deduction of tax from interest paid or credited on compensation, whichever is earlier. Section 145A (b) of the Act provides an exception to method of accounting contained in section 145 of the Act and mandates for taxation of interest on compensation on receipt basis only. Therefore, deduction of tax on such interest on mercantile/accrual basis results into undue hardship and mismatch. It is, therefore, proposed to amend the provisions of section 194A of the Income-tax Act, 1961 to provide that deduction of tax under section 194A of the Act from interest payment on the compensation amount awarded by the Motor Accident Claim Tribunal compensation shall be made only at the time of payment if the amount of such payment or aggregate amount of such payments during a financial year exceeds Rs.50,000/-.
These amendments will take effect from 1st June, 2015.
CONCLUSION
From above it is clear that the payment of interest on compensation awarded by the Motor Accident Claim Tribunal is not in the nature of income to the claimant. Since it forms part of compensation and which is not taxable under provisions of Section 56(2)(viii) of the Income Tax Act, 1961.
DISCLAIMER: The above write up is only for information and knowledge of readers. The view expressed above are the personal view of the author. It is advisable to consult with professional in case of necessity.
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