No TDS on Interest Paid for Delayed Payment of Compensation: Punjab & Haryana HC [Read Judgment]

Late Fee - TDS Default -ITAT - Taxscan

In New India Assurance Co.Ltd. Vs Savitri Devi & Ors., the High Court of Punjab and Haryana held that the interest paid on account of delayed payment of compensation cannot be subjected to TDS.

The Court was considering revision petitions against the orders passed by Motor Accidents Claims Tribunal, whereby the Insurance Company was directed to deposit the TDS amount within 15 days. The Insurance company was allowed to withdraw the TDS amount from the Income Tax Department.

The issue before the court was whether the Insurance Company could Tax Deduction at source (TDS) on the interest paid on the compensation paid under Motor Vehicles Act, 1988.

The court appointed Amicus Curiae argued that the income tax on the interest to the extent of Rs. 50,000/- is exempted, whereas beyond that it is to be deducted at source. While the Counsel for the respondents submitted that at the first instance, the tax on the interest is payable in the year in which it was credited and payable and secondly, TDS on interest part is not payable.

After reaching to the conclusion that compensation & interest doesn’t fall under the term ‘income’ defined under the Act, the court observed that a person seeking compensation doesn’t readily receive the claim from the insurance company and that he has to move the Tribunal or before the higher courts to finally determine the compensation payable to him. The determination of compensation may take years or even decades.

The Court further clarified “There can be two scenarios. One is when interest is paid as a part of the compensation and the second is when the victim receives the compensation along with interest and deposit the same in the bank and thereafter, he receives interest thereon. Admittedly, in the second scenario, the interest on such compensation, if otherwise liable for deduction is to be deducted at source, if it exceeds the limit of `50,000/-, as per Section 194(ixa) of the Act.”

Reaffirming the decisions of the Division Bench of Himachal Pradesh High Court in Court on its Motion vs. H.P. State Co-operative Bank Ltd., and the Single bench of the High Court of Punjab and Haryana in The Managing Director, Tamil Nadu State Transport Corporation (Salem) Ltd. vs Chinnadurai, the Bench comprising of Justice Kuldip Singh observed “ It is observed when there is conflict between the Social Welfare Legislation and Taxation Legislation, then the Social Welfare Legislation should prevail, since, it sub-serves larger public interest. Admittedly, Motor Vehicles Act, 1988, is a Social Welfare Legislation. Considering the object of the Motor Vehicles Act, 1988, regarding grant of compensation to the victim, it will not only be unjust but cruel to ask the hapless victim to first pay the interest received along with compensation on account of delayed payment, for which he is not responsible, and then to file the income tax return and claim the refund. As a result of the foregoing discussion, it is held that the interest paid along with the compensation as a result of the order of the Tribunal or of the Superior Court is not liable for TDS.”

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