Taxability of Claim receieved under Motor Accident

This query is : Resolved 

20 September 2007

Some one receives claim under Motor Accident after 10 years and that also with interest. What is the position of taxability under the Income Tax Act for both claim and interest. Insurance Company has deducted tax at source on the interest amount.Please have your views

CA. Dashrath Maheshwari (Expert)
20 September 2007

Hello Mr. Mrugank,
Interest is taxable in the year of receipt but the principal claim amount is a capital receipt and can not be taxable.

Mrugank (Querist)
20 September 2007

The wordings of the awrd given by the Tribunal is such that compensation covers both i.e principal and interest also In that case what is the position? Means Interest is a part and partial of award. Ssecondly the interest is for 10 years (and that is also simple interest) Sec 89 Relief is available to Salary Gratuity What is the course of action ? If some one gets interest for these 10years say for example Rs 3 lacs That will attract Income tax @ 30 and education cess of 3% What he will get after this long span of 10years?

Jitender (Expert)
21 September 2007

claim will be deducted from the assets ofr calculation of dep on assets under act & interest is taxable but payment of claim is exempt.

Mrugank (Querist)
21 September 2007

Mr Jitendra This is not the claim of fire or so Here in accident man is getting claim with interest and taxability of both is a question mark... you have misunderstood the question

CA. Dashrath Maheshwari (Expert)
21 September 2007

Mr. Mrugank,
I have understand your query, please wait for a day.

Mallidi Ramabrahmananda Reddy (Expert)
21 September 2007

The nature of receipt is in two forms. one is for loss and the other is compensation for time value of money. The first one is not in the nature of income. The second one is in the nature of income. Only interest is taxable.

Late CA Sampat Jain (Expert)
26 September 2007

Interest on compensation

Interest awarded by arbitrator on compensation amount is income - Where a dispute arose between the assessee-contractor and the Government and the arbitrator awarded certain amount by way of compensation for the work done as also interest, interest awarded by arbitrator on compensation amount is income - CIT v. B.N. Agarwala & Co. [2003] 129 Taxman 78/259 ITR 754 (SC).

Court decree

Interest received under a court decree is a revenue receipt - Interest granted under the decree of the Court from the date of the institution of the proceedings in the Court and calculated upon the footing that it accrued de die in diem, has the essential quality of recurrence which is sufficient to bring it within the scope of the Act, and, thus, such interest is an income. Such interest received by virtue of a court decree under section 34 of the Code of Civil Procedure, in a suit for refund of tax is paid to the claimant for the use of his money by the State and the statutory interest paid is, therefore, a revenue receipt liable to income-tax - RM. AR.AR. RM. AR.AR. Ramanathan Chettiar v. CIT [1967] 63 ITR 458 (SC).

Mrugank (Querist)
23 September 2008

Gujarat High Court has directed to spread over the interest in the span of its receipt...If each year interest is exceeding Rs 50000 then only question of deductions of tax arises...that also learned court has directed that it should bring to the notice of Motor Vehicle Accident Tribunal and should be deposited in Tribunal and directly with IT

If Interest is spreadedc over in the span, either the taxability of the person injured doesn't come of if comes it is very very on lower side... If the person is injured and for its injury he is being paid interest and if it is taxed in one year 30% will straight away go to IT ,,,then what is the sense in giving......?

S.Srinivasaraghavan (Expert)
04 October 2008

True, but that is law.

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