The interest income by way of compensation in Motor Accident claims is not taxable: Bombay High Court
The Bombay High Court ruled that the interest awarded in motor accident claims would not be eligible to tax, not being an income. The question as to whether the income earned under section 194A of The Motor Vehicles Act, 1988 makes the interest income chargeable to tax was answered in negative by the Bombay High Court.The petitioner Rupesh currently about 48 years, met with an accident at the...
The Bombay High Court ruled that the interest awarded in motor accident claims would not be eligible to tax, not being an income. The question as to whether the income earned under section 194A of The Motor Vehicles Act, 1988 makes the interest income chargeable to tax was answered in negative by the Bombay High Court.
The petitioner Rupesh currently about 48 years, met with an accident at the age of 8 while trying to cross road accompanied by a household servant when a car insured by Oriental Insurance Company Ltd. collided with the young boy causing serious injuries thereby severely damaging his brain. He remained in the hospital in an unconscious state for several months and even after returning home, a nursing station had to be set to administer all necessary treatment. Though several months later, he regained consciousness, his brain injuries left him paraplegic. His mental growth was stunted.
His father on his behalf had filed a Motor Accident Claim Petition before the Motor Accident Claims Tribunal, Greater Mumbai. The Tribunal awarded total compensation of Rs.4,12,000/- under various heads such as future loss of income; pain; shock and suffering; loss of amenities of life; cost of medical treatment, etc. 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.
The petitioner attained majority by the time the Tribunal disposed of the Claim Petition. He was brought on record in his personal capacity. He filed First Appeal before the Bombay High Court against the said judgment and award of the Claim Tribunal and sought enhancement of the compensation. The Judge awarded total compensation of Rs.39,92,000/- to be paid with interest at the rate of 9% per annum.
The insurance company challenged the said judgment of the High Court before the Supreme Court by filing Special Leave Petition which was dismissed. In an Execution Petition filed by the petitioner, the insurance company deposited an amount of Rs.1,42,04,415/- pursuant to the judgment of the High Court after deducting tax at source (TDS).
The petitioner claimed that TDS should not have been deducted.
A Bench of Justices Akil Kureshi & S.J. Kathawalla presided over the case.
Senior Counsel Jehangir Mistry who assisted the Court as Amicus Curiae analysed that the taxability of the interest depends on the nature and the purpose for which it is granted. The Court noted that interest is compensatory in nature and therefore form part of the compensation itself. Compensation is computed with reference to the date of accident. Awarding interest for delayed computation of compensation is therefore integral part and therefore not taxable.
The Court cited certain important landmark judgements such as case of Rama Bai, Ghanshyam (HUF) and that of Gujarat High Court in the case of Movalia Bhikhubhai Balabhai and cited that be it a fatal case or an injury case, compensation includes future loss. In case of fatal accidents, compensation is awarded under the head of loss of dependency benefits. In case of injury cases, such future loss may either be in the form of loss of future income or even for future medical treatment and other expenditure.
It was further held that Courts do not award interest on future expenditure since the amount is being paid to the claimant for an expenditure which may be incurred at a later point of time. The Court noted that awarding interest on future income while not awarding interest for future expenditure brings out the true character of the interest being awarded.
The Court held that “Section 194A of the Motor Vehicles Act, 1988 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 Court concluded that the interest awarded in such 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 would not be eligible to tax. The Court further observed that the Assessing Officer committed an error in levying tax on the interest component of the compensation awarded to the petitioner and therefore disposed off the writ petition.