Can income tax be levied on motor accident compensation?

Can income tax be levied on motor accident compensation?

NISHANT PRATAP SINGH 

BACKGROUND

In Shri Rupesh Rashmikant Shah Vs Union of India & Ors. Rupesh who is presently 48 years old, when he was about 8 years old, he was trying to cross The Nepensea Road in South Mumbai accompanied by a household servant when suddenly a car insured by Oriental Insurance Company Ltd. Collided with him causing serious injuries to him. This accident takes place on October 18, 1978.

In this accident, his brain got severely damaged which resulted in the admission of him into the hospital in an unconscious state for several months. His parents soon brought him Home setting up a nursing station at home and provided their son all the necessary treatment. Several months later, he regained consciousness, his brain injuries had left him paraplegic. His mental growth also affected. Ever since the accident, Rupesh is completely on bed rest and needs constant assistance even for routine activities.

Soon his father filed a claim petition before the Motor Accident Claims Tribunal on his behalf and asked for a compensation of Rs.1 lakh from the driver, owner and the insurer of the vehicle, which was subsequently revised to Rs.15 lakhs. Soon another application was filed to raise the claim to Rs.50 lakhs.

MAIN ISSUE (INCOME TAX CANNOT BE LEVIED ON MOTOR ACCIDENT COMPENSATION):

The ruling for the case was given by a division of bench of Justices Akil Kureshi and SJ Kathawalla.

However, the court disposed of the petition 12 years later by an award dated March 30, 1990. Court held that the driver of the car was responsible for the accident due to his carelessness and awarded a compensation of Rs.4,12,000 with interest @6% per annum from the date of the claim petition.

Thereafter, Rupesh filed his first appeal before the HC which was disposed of several years later by a judgment dated November 21, 2014. The total compensation of Rs.39.92 lakh was awarded. The Insurance Company challenged the judgment before the Supreme Court which was dismissed.

Finally, an execution application was filed by the petitioner. And hence the insurer deposited Rs.1.42 crore as the interest of 36 years at the rate of 9% had been added. But the tax on the said interest was deducted at the origin.

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CONCLUSION (JUDGEMENT)

Referring to the said judgment, the court noted –

“The Legislature felt that this decision would cause undue hardship to the assesses. Even otherwise, it can be seen that this position would cause severe hardship to the assessees. Interest would be charged to tax on accrual basis before the compensation is enhanced. The assessee who seeks enhanced compensation would go on paying tax on notional interest for years together till the reference or appeal for enhancement is allowed. To mitigating such hardship, Section 145A was amended by the Finance Act of 2009 w.e.f. 1.4.2010.”

The bench further added –

“To ascertain the taxability of interest on compensation or enhanced compensation in motor accident claim cases, we, therefore, would have to ascertain the true nature of interest. Even the Assessing Officer has proceeded on the basis that the compensation by itself is not taxable. As noted earlier, the income of the deceased or the injured for earmarking compensation is ascertained after deducting income tax.

Interest is awarded keeping in mind the rate of inflation. The effort thus is to award just compensation. Awarding interest for delayed computation of compensation is, therefore, an integral part of this exercise.”

Finally, Court said-

“We, therefore, hold 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 eligible to tax, not being an income."

Hence, the Bombay High Court has held that the Interest earned by the victim for the Period between the filing of the claim and awarding of compensation should not have been considered as Income, and therefore, not taxed under ‘The Income Tax Act 1961'. Hence, INCOME TAX CANNOT BE LEVIED ON MOTOR ACCIDENT COMPENSATION.

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