No Income Tax on pendente lite interest on compensation in motor accident cases, Bombay HC

In a notable judgement, the Bombay High Court has held that interest awarded on compensation in motor accident cases cannot be considered as taxable income under the Income Tax Act, 1961. As noted in the judgment passed by a Division Bench of Justices Akil Kureshi and SJ Kathawalla, .“…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.”It was further clarified that tax cannot be deducted at the source in such matters either. In this regard, the judgment states,“Section 194A of the Act [Income Tax 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.“Notably, the Court has clarified that the ruling would not apply to interest accumulated owing to delays in paying the compensation, after the verdict of the tribunal/court awarding compensation.“We may clarify 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.”.The judgment was passed on a writ petition filed by 48-year-old Rupesh Laxmikant Shah, who had been awarded compensation following a car accident in 1978..The petitioner filed the plea before the High Court through his father, challenging a decision of the Income Tax department of taking away 30% of the Rs 1.42 crores interest on the compensation amount awarded by the High Court in 2014, nearly thirty six years after the accident..Case background.In 1978, the then 8-year old petition was hit by a car insured by the Oriental Insurance Company Ltd., while crossing a road, causing him serious injuries..After an accident, Rupesh’s brain was severely damaged and he remained in a coma for six months. Several months after his parents brought him home, he regained consciousness. However, his brain stem injury left him paraplegic. Till date, Rupesh is bed-ridden and requires assistance for routine activities..His father had filed a petition before Motor Accident Claims Tribunal on his behalf and sought a compensation of Rs. 1 lakh from driver, owner and insurer of the vehicle. The amount was subsequently revised to Rs. 15 lakhs..In 1990, the tribunal awarded a compensation of Rs. 4.12 lakh with an interest of 6% per annum accumulated from date of the claim..Subsequently, an appeal was filed before the Bombay High Court. In 2014, the High Court awarded a total compensation of Rs 39.92 lakhs. The appeal filed by the Insurance Company challenging the High Court verdict was thereafter dismissed by the Supreme court..The High Court directed the insurer to deposit nearly Rs. 1.42 crore as an interest accumulated on the compensation over the 36 years since the accident, at the rate of 9% per annum..However, before depositing the amount, the insurance company deducted tax of nearly Rs. 11.80 lakhs (10% of the interest component) at source..Moreover, on further assessment by the Income Tax department, the tax liability of the petitioner was estimated at Rs. 37. 97 lakh (30 % of the interest amount). The petitioner deposited the same under protest..Thereafter, he challenged the levying of income tax thus and filed a writ petitioner before the High Court..While this plea was pending before the High Court, the Income Tax Assessing Officer passed another order in November, 2018 rejecting the petitioner’s claim against the imposition of tax on his compensation interest and held that the interest amount was taxable..Submissions.Appearing for the petitioner, Advocate Avinash M Gokhale argued that since compensation is not taxable, the interest pendente lite, which also forms part of the compensation would not be taxable..Advocate Gokhale also pointed out that the interest is spread over the entire period for which it is paid. He argued that merely because the interest amount cannot be taxed in the year of payment merely because it was paid at a single point. The petitioner also opposed deducting tax on the interest at the source..Appearing for Income Tax department, Additional Solicitor General Anil Singh argued that the interest on compensation was distinct and independent of the principal amount. It was contended that this meant that the interest would be considered as income from other sources and therefore it was taxable..Senior Counsel Jehangir Mistri assisted the court as the Amicus Curie. Inter alia, he was of the view that the taxability of the interest would depend on the nature and the purpose for grant of interest. He submitted that if the interest is compensatory in nature and forms part of the compensation, the same may not be exigible to tax since both sides have proceeded on the basis that the compensation per se is not taxable..Interest on compensation is part of the compensation itself, High Court.The Court disagreed with the view forwarded by the Income Tax department that the interest on compensations is distinct from the principal compensation amount. After examining various judgments of the Supreme Court and High Courts on the topic, the Bench ultimately found that,.“…such interest [interest on compensation] is compensatory in nature and forms a part of compensation itself.”.The Court proceeded to explain that the the compensation is revised by the High Court keeping in mind the rate of inflation and that the process would take time. The interest awarded ultimately is an integral part of this exercise. As noted in the judgment..“Effort thus is to award just compensation. Awarding interest for delayed computation of compensation is therefore integral part of this exercise.”.The Court ultimately set aside the order imposing tax on the interest paid to the petitioner on the award of his compensation, stating,.“We find that the Assessing Officer had committed an error in levying tax on the interest component of the compensation awarded to the petitioner till the date of the judgement of the High Court.”.The Court, however, clarified,.“On any interest paid to him post the judgement, tax has to be collected as income from other sources.”.With these observations, the Court directed the income tax department to decide afresh on the tax assessment of the petitioner in line with the judgement..[Read judgement].Bar & Bench is available on WhatsApp. For real-time updates on stories, Click here to subscribe to our WhatsApp.