Interest from Motor Accident Compensation not subject to Income Tax: Bombay High Court [Read Order]

Motor Accident Compensation - Bombay High Court - Taxscan

A two-judge bench of the Bombay High Court comprising Justices Akil Kureshi and S J Kathawalla has held that the income tax should not have been deducted from the interest on the motor accident compensation awarded by the court.

The petitioner, an eight-year-old city boy was left maimed for life in a car accident. The victim Rupesh Shah, is now 48. Shah, a resident of South Mumbai, was crossing a road when a car hit him in 1978. He remained in coma for six months, and after regaining consciousness, he learnt that the accident had left him with severe injuries including permanent brain damage.

His parents approached the Motor Vehicles Accident Claim Tribunal seeking that Oriental Insurance, the company that had insured the car, be directed to pay compensation.

His plea was allowed but the insurance company went in appeals, first to the high court and then to the Supreme Court. The Supreme Court finally in 2015 upheld the Bombay High Court’s ruling that awarded Shah a compensation of Rs. 39.92 lakh.

The High Court also ruled that Shah be paid an interest of 9% on this principal amount of the compensation since the time he filed the insurance claim. Inconsequent to this, he received Rs. 1.42 crore in total in compensation.

The income tax department has held that 30% tax should be levied on the said amount.

He approached the Court challenging the notice and also contended that the department should not have deducted tax on the interest amount that he had received as part of compensation.

Under the Motor Vehicles Act, the principal amount of compensation is not taxable, so the interest accrued on the same should not have been taxed either, he argued.

The interest too was compensatory in nature, its rate decided after taking into account factors such as the passage of time, inflation, etc, he said.

The Income Tax Department, however, contended that the interest being distinct from the principal amount of compensation is taxable as income from an additional source.

The High Court on Thursday held that the interest earned by Shah for the period between filing of the claim and awarding of compensation by the high court in 2014 should not have been considered as income, and therefore, not taxed.

“We 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 for tax, not being an income,” it said.

“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 forwp.2902.2016(J).doc 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 bench also said the IT Department assessor made a mistake in issuing the further tax liability notice to Shah. It sent back the notice, directing the department to re-assess the same.

Subscribe Taxscan Premium to view the Judgment
taxscan-loader