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 exigible to tax, not being
an income. This position would not change on account of clause
(b) of section 145A of the Act as it stood at the relevant time
amended by Finance Act, 2009 which provision now finds place in
sub-section (1) of section 145B of the Act. Neither clause (b) of
section 145A, as it stood at the relevant time, nor clause (viii) of
sub-section (2) of section 56 of the Act make the interest
chargeable to tax whether such interest is income of the recipient
or not. Section 194A of the 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.
59. So far as the plain meaning of section 194A(1) read with
erstwhile clause (ix) and substituted clauses (ix) and (ixa) of subsection
(3) is concerned, there can be no doubt or dispute.
However, the fundamental question is does section 194A make the
interest income chargeable to tax if it otherwise is not. The answer
has to be in the negative. 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.
61. 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.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.
WRIT PETITION NO.2902 OF 2016
Shri Rupesh Rashmikant Shah Vs Union of India
CORAM: AKIL KURESHI &
S.J. KATHAWALLA, JJ.
Dated: AUGUST 8, 2019
JUDGMENT (Per Akil Kureshi, J.):
1. A young boy, barely aged 8 years, cheerful and full of life,
was trying to cross the road accompanied by his household help.
His life was full of joy, happiness, his future full of possibilities.
Before he crossed the road all that changed. Knocked down by a
speeding vehicle, he lost his consciousness, remained in coma for
six months. For the remainder of his life, he wished he had not
regained consciousness. He has filed this petition seeking our
opinion whether income tax department was justified in taking
away 30% of the interest on the compensation which was
determined nearly 36 years after the accident. Looking to the
issues involved, we have heard the learned Counsel for the parties
for final disposal of the petition. The petition arises in the following
background:
FACTS:
The petitioner is presently aged about 48 years. When he
was about 8 years old, on 18.10.1978, he was trying to cross
Nepensea Road in South Mumbai accompanied by a household
servant when a car insured by Oriental Insurance Company Ltd. -
Respondent No.4, collided with the young boy causing serious
injuries. His brain was severely damaged. He remained in the
hospital in an unconscious state for several months. His parents
brought him home setting up a nursing station at home and
administered all necessary treatment. Though several months
later, he regained consciousness, his brain injuries left him
paraplegic. Further, treatments, therapies and cures failed to have
the desired effect. His mental growth also stunted. Ever since the
date of the accident, he is left completely bed ridden, needs
constant attention even for routine activities.
2. On his behalf, his father had filed Motor Accident Claim
Petition before the Motor Accident Claims Tribunal, Greater
Mumbai. He had initially sought a compensation of Rs.1 lakh from
the driver, owner and insurer of the vehicle involved in the
accident, which was subsequently revised to Rs.15 lakhs. Yet
another application was filed before the Motor Accident Claims
Tribunal raising the claim to Rs.50 lakhs. The Tribunal, however,
did not find any evidence of such application having been allowed.
3. More than 10 years after the accident, the Tribunal disposed
of the Claim Petition by award dated 30.3.1990. The Tribunal held
that the driver of the car was solely negligent in causing the
accident. The Tribunal awarded compensation under various
heads such as future loss of income; pain; shock and suffering;
loss of amenities of life; cost of medical treatment, etc. and
awarded a total compensation of Rs.4,12,000/- 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 till
realisation. The Tribunal also directed that if this amount is not
paid within three months, the rate of interest payable would be
12% p.a. on the unpaid amount.
4. By the time the Tribunal disposed of the Claim Petition, the
petitioner had become major. 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. Several years
later his appeal was disposed of by a judgment dated 21.11.2014.
The learned Single Judge awarded total compensation of
Rs.39,92,000/- to be paid with interest at the rate of 9% per
annum.
5. The insurance company challenged the said judgment of the
High Court before the Supreme Court by filing Special Leave
Petition. The said SLP came to be dismissed on 5.5.2015.
6. 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.
According to the petitioner, no TDS should have been deducted.
Under protest, however, he withdrew the compensation amount of
Rs.1,42,04,415/-. The break-up of the amount payable to the
petitioner would show that on the principal sum of Rs.39,92,000/-
as awarded by this Court, interest @ 9% for 36 years came to
Rs.1,18,04,606/-. The insurance company before depositing the
amount, deducted tax at source a sum of Rs.11,80,461/- @ 10%
on the interest component.
7. The petitioner had received interest of Rs.1,18,04,606/-
during the period relevant to the A.Y. 2016-2017. According to the
petitioner, such interest was not taxable. However, by way of
caution, the petitioner filed the return of income for the A.Y. 2016 –
2017 in which he had presented the computation of his taxable
income if the interest received by him was made taxable. His tax
liability came to Rs.37,97,773/-, which also he had deposited with
the Income Tax department. In the return of income, he had put
the following note in order to dispute the taxability of the interest:
“NOTE: As per the stand taken by the Assessee the
interest amount on such insurance income received
should be treated as capital receipt and hence Income
Tax should not be applicable on it. The Assessee has
paid the Income Tax amount under protest.”
8. This petition was initially filed with a prayer for a declaration
that no tax at source is required to be deducted on the interest
component of the compensation in motor accident claims. The
petitioner had also prayed for a direction to refund the sum of
Rs.37,97,773/- which he had paid to the Income Tax department
while filing the return of income. The petitioner had also
challenged the vires of section 194A (3)(ix) and (ixa) as also
section 145A(b) and 56(2)(viii) of the Income Tax Act, 1961 (‘Act’
for short).
9. When this petition was pending, the Assessing Officer
passed an order of assessment under section 143(3) of the Act on
30.11.2018 and assessed the petitioner’s total income at
Rs.1,14,99,380/- which comprised of the interest received on the
compensation minus available deductions. He rejected the
petitioner’s contention that such interest was not taxable. He was
of the opinion that the interest on compensation was distinct and
independent of the principal and the interest therefore, would be
income from other sources. Most unkindly, he also ordered
issuance of notice of penalty under section 271(1)(c) of the Act
completely ignoring the fact that the petitioner himself had filed the
return of income, disclosed the interest income and subject to his
objection to its taxability, also paid the full tax thereon. The
petitioner was allowed to amend the petition and challenge this
order of assessment.
10. As noted, at the time of filing of the petition, the dispute was
with respect to deduction of tax at source on the interest
component of the enhanced compensation. Before this issue
could be resolved, the final assessment was made by the
Assessing Officer holding the entire interest receipt taxable as
income from other sources. The issue of validity of deducting tax
at source has thus, merged into the larger question of very
taxability of the receipt.
INCOME TAX PROVISIONS:
11. Before recording rival stands, we may briefly refer to
applicable provisions contained in the said Act.
12. Section 2(24) of the Act defines the term ‘income’. Section
2(28A) defines ‘interest’. Section 56 pertains to income from other
sources, relevant portion of which reads as under:
“Income from other sources.
56.(1) Income of every kind which is not to be excluded
from the total income under this Act shall be chargeable to
income-tax under the head "Income from other sources", if it
is not chargeable to income-tax under any of the heads
specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the
provisions of sub-section (1), the following incomes, shall be
chargeable to income-tax under the head "Income from other
sources", namely:-
(viii) income by way of interest received on compensation or
on enhanced compensation referred to in clause (b) of
section 145A.”
13. Sub-section (2) of section 56 thus provides that in particular
and without prejudice to the generality of the provisions of subsection
(1), the following incomes, contained in various clauses
therein would be chargeable to income tax under the head income
from other sources. Clause (viii) refers to income by way of
interest received on compensation or on enhanced compensation
referred to in clause (b) of section 145A. Subsection (1) of section
56 provides that income of every kind which is not to be excluded
from the total income would be chargeable to tax as income from
other sources if it is not chargeable under any of the heads
specified in items (A) to (E) of section 14.
14. Section 145A(b) as it stood at the relevant time reads thus:
Notwithstanding anything to the contrary contained in section
145 -
(b) interest received by an assessee on compensation or
on enhanced compensation, as the case may be, shall be
deemed to be the income of the year in which it is received.”
Sub-section (1) of section 194A of the Act enjoins any person
other than an individual or Hindu Undivided Family responsible for
paying to a resident any income by way of interest to deduct tax at
source at the prescribed rates. The relevant portion of section
194A reads thus:
194A (1) Any person, not being an individual or a Hindu
undivided family, who is responsible for paying to a resident
any income by way of interest other than income by way of
interest on securities, shall, at the time of credit of such
income to the account of the payee or at the time of payment
thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier, deduct income-tax thereon
at the rates in force:
Provided that an individual or a Hindu undivided family,
whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the
monetary limits specified under clause (a) or clause (b) of
section 44AB during the financial year immediately preceding
the financial year in which such interest is credited or paid,
shall be liable to deduct income-tax under this section.
(3) The provisions of sub-section (1) shall not apply -
(ix) to such income credited by way of interest on the
compensation amount awarded by the Motor Accident
Claims Tribunal.
(ixa) to such income paid by way of interest on the
compensation amount awarded by the Motor Accident
Claims Tribunal where the amount of such income or, as the
case may be, the aggregate of the amounts of such income
paid during the financial year does not exceed fifty thousand
rupees”
The controversy at hand revolves around these provisions
which would come up for detailed examination later.
RIVAL STANDS -
CASE OF THE PETITIONER -
15. The stand of the petitioner is that the interest component on
the motor accident claim compensation paid to the petitioner is not
taxable. The first contention of the petitioner is that the interest is
a capital receipt. The other contention is that the interest is
compensatory in nature. It is meant to offset the erosion of the
principal compensation because of passage of time and the
reduction of purchasing power of rupee due to inflation. According
to the petitioner since the compensation itself is not taxable, the
interest pendente lite which also forms part of the compensation,
would not be taxable. When the receipt itself is not taxable, the
question of deducting tax at source while making payment thereof
would not arise. It was lastly contended that in any case, such
interest should be spread over the entire period for which it is paid.
The interest accrues from year to year. Merely because it is paid
at a single point, would not mean the entire amount is taxable in
the year of payment.
THE STAND OF THE DEPARTMENT:
16. The Department contends that the interest is an income
distinct from the compensation and is, therefore, taxable. By virtue
of clause (b) of section 145A of the Act, such income is taxable on
actual receipt. Heavy reliance is placed on the provisions
contained in section 56(2)(viii), section 145A(b) and section 194A
of the Act. It was pointed out that section 145A was amended by
the Finance Act of 2009 in order to obviate the difficulties arising
out the judgment of the Supreme Court in the case of Rama Bai
and ors. vs. Commissioner of Income Tax, Andhra Pradesh,
Hyderabad and Ors.1. The learned ASG had argued that looking
to these statutory provisions, any interest on compensation or
enhanced compensation of motor accident claims would be
chargeable to tax as income from other sources and the point of
chargeability would be the actual receipt. A conjoint reading of
1 181 ITR 400
clause (viii) of sub-section (2) of section 56, clause (b) of section
145A and section 194A (3) of the Act would lead to an inescapable
conclusion that interest on the compensation or enhanced
compensation would be chargeable as income from other sources
at the point of time when the same is actually received by the
claimants.
ARGUMENTS OF AMICUS CURIAE:-
17. Considering the fact that the petition involved complex
issues, answers to which would have wider ramifications, the Court
had requested the learned Senior Counsel Mr.Jehangir Mistri to
assist the Court as Amicus Curiae. He had graciously accepted
the request and ably assisted the Court with painstaking
preparations and usual flare. He had presented various
propositions on the interpretation of the relevant sections. He had
also presented the decisions of various Courts adopting different
view points. His analysis is as follows.
i) Whether the interest received on compensation or
enhanced compensation is income would be the
fundamental issue. One way of interpreting section 194A(3)
(ix), section 145A(b) and section 56(2)(viii) would be that
none of these provisions make such interest chargeable to
tax if it is otherwise not taxable. The taxability of the interest
would depend on the nature and the purpose for grant of
interest. If it is held that 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.
ii) The question would also arise whether post-insertion of
section 145A(b), the spread-over theory of interest on
compensation, which was first time adopted by the Gujarat
High Court in the case of Gauri Deepak Patel & ors. vs.
New India Assurance Co. Ltd.2, would stand overruled.
iii) If the spread over theory is to be applied, deduction of
tax at source will be needed only if the payment of interest in
a year exceeds Rs.50,000/-.
CERTAIN IMPORTANT DECISIONS:
18. We will now notice the decisions of the High Courts and the
Supreme Court having a bearing on these aspects.
2 CAF/4923/2009 decided on 17.12.2009
19. In the case of Rama Bai (supra), a 3-Judge Bench of the
Supreme Court considered a situation where the assessee’s land
was acquired under the Land Acquisition Act. Aggrieved by the
compensation awarded by the Land Acquisition Officer, the
assessee sought enhancement of compensation before the
Reference Court. The Reference Court awarded enhanced
compensation. With solatium, the amount came to Rs.2,34,607/-.
Interest of Rs.37,529/- was awarded on the enhanced
compensation. The Income Tax officer while making assessment
for the A.Y. 1967-1968 and A.Y. 1968-1969, held that the right to
receive interest on enhanced compensation arises on the date
when the Reference Court passes the order. The assessee
contended that the interest should be distributed over the period
commencing from the date of dispossession of the assessee under
the Land Acquisition Act till the date of payment. The Supreme
Court considered the question whether in the facts of the case, the
interest was liable to be assessed in the A.Y. 1968-1969? The
Supreme Court noticed that different High Courts had given
divergent decisions. The Supreme Court held that the question of
accrual of interest will have to be determined in accordance with
the decision of the Supreme Court in the case of Khorshed
Shapoor Chenai vs. Assistant Controller of Estate Duty, A.P.3
The effect of the decision, it was clarified that the interest cannot
be taken to have accrued on the date of the order of the Court
granting enhanced compensation but has to be taken as having
accrued year after year from the date of delivery of possession of
the lands till the date of such order.
20. In the case of the Commissioner of Income Tax,
Faridabad vs. Ghanshyam (HUF)4, the Supreme Court
considered a question whether the enhanced compensation,
solatium and interest under the Land Acquisition Act would be
chargeable as capital gains tax in the year of receipt. In the
context of interest payable under section 28 of the Land
Acquisition Act, it was observed that the same is applicable only in
respect of excess amount which is determined by the Court under
a reference under section 18 of the Land Acquisition Act. Section
28 does not apply to cases of undue delay in making award of
compensation. It was observed that interest is not compensation
and section 45(5) of the Act refers to compensation but held that
3 (1980) 122 ITR 21 (SC)
4 (2009) 8 SCC 412
interest under section 28 of the Land Acquisition Act is an
accretion of the value of the land acquired. The Court drawing a
distinction between interest payable under section 28 and section
34 of the Land Acquisition Act held thus:
“50. It is true that "interest" is not compensation. It
is equally true that Section 45(5) of the 1961 Act refers
to compensation. But as discussed hereinabove, we
have to go by the provisions of the 1894 Act which
awards "interest" both as an accretion in the value of
the lands acquired and interest for undue delay.
Interest under Section 28 unlike interest under
Section 34 is an accretion to the value, hence it is a
part of enhanced compensation or consideration
which is not the case with interest under Section 34
of the 1894 Act. So also additional amount under
Section 23(1A) and solatium under Section 23 (2) of
the 1961 Act forms part of enhanced compensation
under Section 45(5)(b) of the 1961 Act.
54. Section 45(5) read as a whole [including clause
(c)] not only deals with re-working as urged on behalf of
the assessee but also with the change in the full value of
the consideration (computation) and since the enhanced
compensation/consideration (including interest under
Section 28 of the 1894 Act) becomes payable/paid under
1894 Act at different stages, the receipt of such enhanced
compensation/consideration is to be taxed in the year of
receipt subject to adjustment, if any, under Section 155
(16) of the 1961 Act, later on. Hence, the year in which
enhanced compensation is received is the year of
taxability. Consequently, even in cases where pending
appeal, the Court/Tribunal/Authority before which appeal
is pending, permits the claimant to withdraw against
security or otherwise the enhanced compensation (which
is in dispute), the same is liable to be taxed under Section
45(5) of the 1961 Act. This is the scheme of Section 45(5)
and Section 155(16) of the 1961 Act. We may clarify that
even before the insertion of Section 45(5)(c) and Section
155 (16) w.e.f. 1-4-2004, the receipt of enhanced
compensation under Section 45(5)(b) was taxable in the
year of receipt which is only reinforced by insertion of
clause (c) because the right to receive payment under the
1894 Act is not in doubt.
55. It is important to note that compensation,
including enhanced compensation/consideration
under the 1894 Act, is based on the full value of
property as on date of notification under Section 4 of
that Act. When the Court/Tribunal directs payment of
enhanced compensation under Section 23(1A), or
Section 23(2) or under Section 28 of the 1894 Act it is
on the basis that award of Collector or the Court,
under reference, has not compensated the owner for
the full value of the property as on date of
notification.”
21. In the case of Hansaguri Prafulchandra vs. The Oriental
Insurance Company5, a Division Bench of the Gujarat High Court
taking cue from the decision of the Supreme Court in the case of
Rama Bai (supra), applied the theory of spreading over of interest
on enhanced compensation for the purpose of levying tax. The
facts were that Hansaguri alongwith her four daughters had filed a
Claim Petition seeking compensation of Rs.20 lakhs on account of
the death of her husband, Prafulchandra, who died in a vehicular
accident. The Tribunal awarded compensation of Rs.11,78,000/-
to be recovered with interest @ 9% p.a. from the date of the Claim
5 2007 ACJ 1897
Petition till the date of payment. Pursuant to such directions, the
insurance company deposited a sum of Rs.25,27,812/- which
included the enhanced compensation, interest minus the tax
deduction of Rs.1,70,279/-. The claimants, who had filed appeal
before the High Court against the judgment of the Tribunal, moved
an application praying that the amount awarded by the Tribunal as
compensation and interest should be apportioned equally amongst
all claimants and tax deduction should be by spread over on year
to year basis, commencing from the date of filing of the Claim
Petition till payment. The Division Bench of the High Court
referring to and relying upon the decision of the Supreme Court in
the case of Rama Bai (supra), held and observed as under:
“(13).Accordingly, the income-tax liability of the concerned
claimants to pay tax on the interest accrued on the
compensation awarded to them shall arise if such interest
income accrued in the concerned financial year together with
other income of the respective claimants in that financial year
exceeds the chargeable limit as specified in the provisions of
the Income-tax Act, 1961 in force for the relevant years. It
will, therefore, be open to the claimants to make appropriate
applications/representations before the concerned incometax
authority for refund of such amount/s as may be due to
them out of the amount of Rs. 1,70,269/- which has already
been deducted by the Insurance Company as tax deducted
at source under the provisions of Section 194A of the Act.
14. It is necessary to obviate such a situation in future for
other claimants who may be awarded compensation with
interest thereon, and the amount of interest being deposited
exceeds Rs. 50,000/-, but who may not be liable to have any
tax deducted at source as per the interpretation placed by us
on the provisions of Section 194A of the Act. We, therefore,
direct that - I. The Insurance Companies or the owners of the
motor vehicles depositing the amounts in compliance with
the awards of the Motor Accident Claim Tribunals shall -
(a) first spread the interest amount over to the relevant
financial years for the period from the date of filing the claim
petition till the date of deposit. (b) thereafter, if the interest for
any particular financial year exceeds Rs. 50,000/-, separately
deposit before the Tribunal the amount liable to be deducted
at source under the provisions of Section 194A(3)(ix) of the
Income-tax Act, 1961. Such amount Page 2108 shall not,
however, straightaway, be paid over to the Income-tax
department. (c) produce before the Tribunal a statement of
computation of interest by spreading the amount over the
relevant years from the date of claim petition till the date of
deposit if the interest for any particular financial year
exceeds Rs. 50,000/- and also request the Tribunal to treat
the amount as a separate deposit. II. (i) The Tribunal shall
take into account the principles laid down in this judgment
and ensure that the amount of interest accrued each year is
apportioned amongst the claimants on year to year basis. (ii)
If the interest payable to any claimant for any particular
financial year exceeds Rs. 50,000/-, the Tribunal shall permit
the Insurance Companies/owners to pay over the amount
liable to be deducted at source under Section 193(3)(ix) of
the Income-tax Department in respect of that particular
claimant for that particular year, without prejudice to the
claimant's case that he is not liable to pay any income-tax for
that year. (iii) for the financial year/s for which the interest
payable to the concerned claimant does not exceed Rs.
50,000/-, the Tribunal may permit such claimant to withdraw
the amount deposited as per direction I(b) without producing
the certificate from the concerned income-tax authority that
there is no income-tax liability on the interest which has
accrued on the compensation awarded by the Tribunal. (iv)
It is clarified that the amount other than the amount liable to
be deducted at source under Section 194A(3)(ix) shall be
invested/disbursed by the Tribunal. III. When the claimants
make applications/representations before the authority under
the Income-tax Act, 1961 for refund of the amount deducted
under the provisions of Section 194A(3)(ix) of the Act, the
concerned authority shall decide such applications/
representations within six months from the date of receipt of
the applications/representations.”
22. This view was adopted by the Bombay High Court in the
case of Gauri Deepak Patel & ors. (supra), in which the following
observations were made:
6. Accordingly, we direct that the following procedure as
laid down in the case of Hansaguri (supra) shall be followed in
the present case and in all the similar cases arising in future
before the Motor Accidents Claims Tribunal:-
“(i) The insurance companies or the owners of the motor
vehicles depositing the amounts in compliance with the
awards of the Motor Accidents Claims Tribunal shall:
(a) first spread the interest amount over to the relevant
financial years for the period from the date of filing the claim
petition till the date of deposit,
(b) thereafter, if the interest for any particular financial year
exceeds Rs.50,000/-, separately deposit before the Tribunal
the amount liable to be deducted at source under the
provisions of section 194-A (3) to (ix) of the Income-Tax Act,
1961. Such amount shall not, however, straightaway be paid
over to Income Tax Department,
(c) produce before the Claims Tribunal a statement of
computation of interest by spreading the amount over the
relevant years from the date of claim application till the date of
deposit if the interest for any particular financial year exceeds
Rs.50,000/- and also request the Tribunal to treat the amount
as a separate deposit.
(ii) The Tribunal shall ensure that the amount of interest
accrued each year is apportioned amongst the claimants on
year to year basis.
(iii) If the interest payable to any claimant during any
particular financial year exceeds Rs.50,000/-, the Tribunal
shall permit the insurance companies/owners to pay over the
amount liable to be deducted at source under section 194-
A(3)(ix) to the Income Tax Department in respect of that
particular claimant for the particular year, without prejudice
to the claimant's case that he is not liable to pay any
income tax for that year.
(iv) For the financial year(s) for which the interest payable
to the concerned claimant does not exceed Rs.50,000/-, the
Tribunal may permit such claimant to withdraw the amount
deposited as per direction (i)(b) without producing the
certificate from the concerned income-tax authority that there
is no income-tax liability on the interest which has accrued on
the compensation awarded by the Tribunal.
(v)It is clarified that the amount other than the amount liable to
be deducted at source under section 194-A(3)(ix) shall be
invested/disbursed by the Tribunal.
(vi) When the claimants make applications before the
authority under the Income-tax Act, 1961 for the refund of the
amount deducted under the provisions of section 194-A(3) (ix)
of the Act, the concerned authority shall decide such
applications with utmost expedition.”
23. The Legislature took cognisance of the judgment of the
Supreme Court in the case of Rama Bai (supra) and certain
undue hardship caused to the taxpayers on account of taxing the
interest on compensation or enhanced compensation on accrual
basis. Section 145A of the Act was, therefore, amended by
Finance Act, 2009 to obviate such hardship. In the amended form,
as noted, clause (b) of section 145A of the Act provides that
notwithstanding anything to the contrary contained in section 145,
interest received by an assessee on compensation or on
enhanced compensation shall be deemed to be income of the year
in which it is received.
24. The Gujarat High Court in the case of Movaliya Bhikhubhai
Balabhai vs. Income-Tax Officer (TDS) and another6 considered
the effect of this amendment on the question of charging tax on the
interest payable to a claimant under section 28 of the Land
Acquisition Act. We may recall, the decision of the Supreme Court
in the case of Ghanshyam (HUF) (supra), was rendered when
section 145A was not so amended and the Court had held that
interest under section 28 of the Land Acquisition Act payable to a
claimant is part of compensation. The question before the Gujarat
High Court, therefore, was does the amendment in section 145A
and the corresponding amendments in section 56(2) of the Act
6 [2016] 388 ITR 343 (Guj.)
change the position of law laid down by the Supreme Court in the
case of Ghanshyam (HUF) (supra). The Division Bench of the
Gujarat High Court noticed the distinction between interest payable
under section 28 and one payable under section 34 of the Land
Acquisition Act. It was observed that the interest under section 28
which is paid on enhanced compensation is treated as accretion to
the value and, therefore, part of the enhanced compensation or
consideration making it exigible to capital gain tax under section
45(5) of the Act. The Court noticed the Departmental Circular
explaining the said amendment in section 145A of the Act and
observed as under:
“Thus, the substitution of section 145A by the Finance
(No.2) Act, 2009 was not in connection with the decision
of the Supreme Court in Ghanshyam (HUF) (supra) but
was brought in to mitigate the hardship caused to the
assessee on account of the decision of the Supreme
Court in Rama Bai v. CIT [1990] 181 ITR 400 (SC)
whereby it was held that arrears of interest computed on
delayed or enhanced compensation shall be taxable on
accrual basis. Therefore, when one reads the words
“interest received on compensation or enhanced
compensation” in section 145A of the Income-tax Act,
the same have to be construed in the manner interpreted
by the Supreme Court in Ghanshyam (HUF) (supra).”
25. The Court eventually held as under:
“The upshot of the above discussion is that since
interest under section 28 of the Act of 1894, partakes the
character of compensation, it does not fall within the
ambit of the expression “interest” as contemplated in
section 145A of the Income-tax Act. The first respondent
– Income-tax Officer was, therefore, not justified in
refusing to grant a certificate under section 197 of the
Income-tax Act to the petitioner for non-deduction of tax
at source, in as much as, the petitioner is not liable to
pay any tax under the head “Income from other sources”
on the interest paid to it under section 28 of the Act of
1894.”
26. We may now take note of the decisions of various High
Courts touching on the question of taxability of motor accident
claim compensation and interest payable thereon.
27. The Division Bench of the Himachal Pradesh High Court in
the case of Court on its own Motion v. The H.P. State
Cooperative Bank Ltd. & Ors.7 held that the compensation
awarded under the Motor Vehicles Act is not a taxable income. It
was observed as under:
“13. While going through the said provisions of law, one
comes to the inescapable conclusion that the mandate of the
said provisions does not apply to the accident claim cases
and the compensation awarded under the Motor Vehicles Act
cannot be said to be taxable income. The compensation is
awarded in lieu of death of a person or bodily injury suffered
in a vehicular accident, which is damage and not income.”
7 CWPIL No.9 of 2014 decided on 15.10.2014
28. The Division Bench of Allahabad High Court in the case of
Commissioner of Income Tax vs. Oriental Insurance Co.
Limited8 took somewhat restricted view of charging interest as
income to tax. Reference was made to the definition of ‘interest’
under section 2(28A) of the Act and held as under:
“36. The necessary ingredients of such interest are that it
should be in respect of any money borrowed or debt
incurred. The award under the Motor Vehicles Act is neither
the money borrowed by the insurance company nor the debt
incurred upon the insurance company. As far as the word
"claim" is concerned, it should also be regarding a deposit or
other similar right or obligation. The definition of Section
2(28A) of the Income Tax Act again repeats the words
"monies borrowed or debt incurred" which clearly shows the
intention of the legislature is that if the assessee has
received any interest in respect of monies borrowed or debt
incurred including a deposit, claim or other similar right or
obligation, or any service fee or other charge in respect of
monies borrowed or debt incurred has been received then
certainly it shall come within the definition of interest.”
29. Learned Single Judge of Madras High Court in the case of
The Managing Director, Tamil Nadu State Transport
Corporation (Salem) Ltd. vs. Chinnadurai9 held that neither the
compensation in motor accident claims awarded by the Tribunal
nor the interest thereon can be subjected to deduction of tax at
source since such receipts are not income under the said Act.
8 [2012] 211 TAXMAN 369 (All)
9 CRP (PD) No.1343 of 2012 and M.P. No.1 of 2012 decided on 2.6.2016
30. A contrary view has been taken in the following decisions:
Rajasthan High Court in the case of Kailash Narain Gupta
vs. Commissioner of Income Tax10 held that interest on
compensation stands on a different footing as compared to the
compensation awarded. It was held that such interest is in the
nature of income. This was reiterated in a later decision of the
High Court in the case of Smt.Sharda Pareek v. Assistant
Commissioner of Income Tax11. We are informed that leave to
appeal against this decision is granted and appeal is pending
before the Supreme Court.
DISCUSSION ON RIVAL CONTENTIONS:
(I) NATURE OF COMPENSATION UNDER THE MOTOR
VEHICLES ACT.-
31. In order to arrive at a correct answer, we would have to
appreciate the interplay between the decisions of the Supreme
Court in the case of Rama Bai (supra), Ghanshyam (HUF)
(supra) and that of Gujarat High Court in the case of Movalia
Bhikhubhai Balabhai (supra) in the context of the amendments
made in section 145A of the Act. Before doing that, it would be
10 225 ITR 921
11 [2019] 104 Taxmann.com 76 (Raj.)
necessary to examine the nature of compensation and interest
awarded under the Motor Vehicles Act, 1988 (for short, ‘Act of
1988’). The Act of 1988 makes detailed provisions for awarding
compensation for death or disablement of any person resulting
from an accident arising out of the use of a motor vehicle.
Essentially, such claim is in the nature of tortious liability. Over a
period of time, the same has been substantially codified. With
exponential increase in the number of vehicles and the road
network, legislations have tried to keep pace with the challenges
arising out of road accidents. The concept of compulsory third
party insurance has been statutorily introduced. The relationship
between the insurer and the insured is basically a contractual
relationship but interjected by a range of statutory provisions.
Under such contract of insurance, the insurer undertakes to
indemnify the insured to the extent agreed. The statutory
provisions contained in the Act of 1988 make third party insurance
compulsory and limit the defences which the insurance company
may raise to repudiate its liability.
32. The first law to be framed in India in this field was the Fatal
Accidents Act, 1855. It provided that whenever the death of a
person is caused by a wrongful act, neglect or default and the act,
neglect or default is such as would (if death had not ensued) have
entitled the party injured to maintain an action and recover
damages in respect thereof, the party, who would have been alive
if death had not ensued, shall be liable to an action or suit for
damages notwithstanding the death of the person injured and
although the death shall have been caused under such
circumstances as amount in law to felony or other crime.
33. The Motor Vehicles Act, 1939 was thereafter enacted in
order to consolidate the law relating to motor vehicles, which
contained various provisions for use of the motor vehicles and for
claiming compensation for death or bodily injury caused in a motor
accident. Special Claims Tribunals were set up to decide such
cases. The Motor Vehicles Act, 1939 was replaced by the Motor
Vehicles Act, 1988. The Statement of Objects and Reasons for
enactment of the said Act records that the need was felt for
consolidation and amendments of laws relating to motor vehicles
and such law should take into account changes in the road
transport technology, pattern of passenger and freight movements,
development of road network in the country and in particular,
improved techniques in the motor vehicles management. Chapter
X of the Act of 1988 pertains to liability without fault in certain
cases. Chapter XI pertains to insurance of motor vehicles against
third party rights. Chapter XII pertains to Claims Tribunals. Section
166 of Act of 1988 pertains to applications for compensation under
which a person who has sustained injury or the owner of the
property or where death has resulted from the accident, the legal
representatives of the deceased could make an application for
compensation to the Motor Accident Claims Tribunal. On such an
application, the Claims Tribunal would pass an award as provided
in section 168 of the Act of 1988. Sub-section (1) of section 168
provides that on receipt of application for compensation, the
Tribunal shall after giving notice to the insurer and giving an
opportunity of being heard to the parties, hold an enquiry into the
claim and may make an award determining the amount of
compensation which appears to it to be just and specify the person
or persons to whom the compensation shall be paid. Awarding just
compensation is thus, of paramount importance.
34. Section 171 of the Act of 1988 provides that where a Tribunal
allows the claim for compensation, such Tribunal may direct that in
addition to the amount of compensation, simple interest shall also
be paid at such rate and from such date, not earlier than the date
of making the claim as it may specify in this behalf.
35. Instances of petitions before the Claims Tribunal broadly fall
within the categories of fatal or injury cases. A case of injury may
lead to permanent disability or temporary disability and such
disability may be partial or total.
36. We may take note of a few leading judgments in the context
of the nature of compensation awarded to a victim of a motor
accident.
37. In the case of General manager, Kerala S.R.T.C. vs.
Susamma Thomas12, it was observed that the compensation in a
motor accident claim must be just, fair and reasonable. It was
observed thus:
“8. The measure of damage is the pecuniary loss suffered
and is likely to be suffered by each dependent. Thus "except
where there is express statutory direction to the contrary, the
damages to be awarded to a dependent of a deceased
person under the Fatal Accidents Acts must take into account
any pecuniary benefit accruing to that dependent in
consequence of the death of the deceased. It is the net loss
on balance which constitutes the measure of damages. …."
12 (1994) 2 SCC 176
38. In the case of R.D. Hattangadi vs. M/s.Pest Control (India)
Pvt. Ltd.13, while referring to different heads for assessing
compensation in injury case, it was observed as under:
“9. Broadly speaking while fixing an amount of
compensation payable to a victim of an accident, the
damages have to be assessed separately as pecuniary
damages and special damages. Pecuniary damages are
those which the victim has actually incurred and which is
capable of being calculated in terms of money-, whereas
non-pecuniary damages are those which are incapable of
being assessed by arithmetical calculations. In order to
appreciate two concepts pecuniary damages may, include
expenses incurred by the claimant : (i) medical attendance;
(ii) loss of earning of profit upto the date of trial; (iii) other
material loss. So far non-pecuniary damages are concerned,
they may include (i) damages for mental and physical shock,
pain suffering, already suffered or likely to be suffered in
future; (ii) damages to compensate for the loss of amenities
of life which may include a variety of matters i.e. on account
of injury the claimant may not be able to walk, run or sit;
(iii) damages for the loss of expectation of life, i.e. on
account of injury the normal longevity of the person
concerned is shortened; (iv) inconvenience, hardship,
discomfort, disappointment, frustration and mental stress in
life.”
39. In the case of Jagdish vs. Mohan and others14, it was
observed as under:
“8. In assessing the compensation payable the settled
principles need to be borne in mind. A victim who suffers a
permanent or temporary disability occasioned by an accident
is entitled to the award of compensation. The award of
13 (1995) 1 SCC 551
14 (2018) 4 SCC 571
compensation must cover among others, the following
aspects:
(i) Pain, suffering and trauma resulting from the accident;
(ii) Loss of income including future income;
(iii) The inability of the victim to lead a normal life together
with its amenities;
(iv) Medical expenses including those that the victim may
be required to undertake in future; and
(v) Loss of expectation of life.”
40. In Reshma Kumari (supra), it was held that while taking into
account the income of the deceased at the time of the accident,
deduction for income tax payable should be made. Similar view
was expressed in the case of Vimal Kanwar vs. Kishore15.
41. In Sarla Varma vs. DTC16, in the context of computation of
compensation, the Court had stressed the requirement of taking
into account the income of the deceased at the time of the
accident (of course after adjusting for future increase) ignoring the
later developments such as future pay revisions. The following
observations were made:
“45. The assumption of the appellants that the actual future
pay revisions should be taken into account for the purpose of
calculating the income is not sound. As against the
contention of the appellants that if the deceased had been
alive, he would have earned the benefit of revised pay
scales, it is equally possible that if he had not died in the
15 (2013) 7 SCC 476
16 (2009) 6 SCC 121
accident, he might have died on account of ill health or other
accident, or lost the employment or met some other calamity
or disadvantage. The imponderables in life are too many.
Another significant aspect is the non-existence of such
evidence at the time of accident.
46. In this case, the accident and death occurred in the
year 1988. The award was made by the Tribunal in the year
1993. The High Court decided the appeal in 2007. The
pendency of the claim proceedings and appeal for nearly two
decades is a fortuitous circumstance and that will not entitle
the appellants to rely upon the two pay revisions which took
place in the course of the said two decades. If the claim
petition filed in 1988 had been disposed of in the year 1988-
89 itself and if the appeal had been decided by the High
Court in the year 1989-90, then obviously the compensation
would have been decided only with reference to the scale of
pay applicable at the time of death and not with reference to
any future revision in pay scales.”
CONCEPT OF MULTIPLIER -
The Supreme Court in Susamma Thomas (supra) referred
to the methods adopted for determination of compensation in fatal
accident cases and endorsed that the multiplier method is logically
sound and legally well established. The following observations
were made:
“As to the multiplier, Halsbury states:
"However, the multiplier is a figure
considerably less than the number of years
taken as the duration of the expectancy. Since
the dependents can invest their damages, the
lump sum award in respect of future loss
must be discounted to reflect their receipt of
interest on invested funds, the intention
being that the dependents will each year draw
interest and some capital (the interest
element decreasing and the capital drawings
increasing with the passage of years), so that
they are compensated each year for their
annual loss, and the fund will be exhausted at
the age which the court assesses to be the
correct age, having regard to all
contingencies. The contingencies of life such as
illness, disability and unemployment have to be
taken into account. …...
16. It is necessary to reiterate that the multiplier method
is logically sound and legally well-established. There are
some cases which have proceeded to determine the
compensation on the basis of aggregating the entire
future earnings for over the period the life expectancy
was lost, deducted a percentage therefrom towards
uncertainties of future life and award the resulting sum
as compensation. This is clearly unscientific. For
instance, if the deceased was, say 25 years of age at the
time of death and the life expectancy is 70 years, this
method would multiply the loss of dependency for 45
years virtually adopting a multiplier of 45 and even if
one-third or one-fourth is deducted therefrom towards
the uncertainties of future life and for immediate lump
sum payment, the effective multiplier would be between
30 and 34. This is wholly impermissible. …...
17. The multiplier represents the number of years'
purchase on which the loss of dependency is
capitalised. Take for instance a case where annual loss
of dependency is Rs. 10,000. If a sum of Rs 1,00,000 is
invested at 10% annual interest, the interest will take
care of the dependency, perpetually. The multiplier in
this case works out to 10. If the rate of interest is 5% per
annum and not 10% then the multiplier needed to
capitalise the loss of the annual dependency at Rs
10,000 would be 20. Then the multiplier, i.e., the number
of years' purchase of 20 will yield the annual
dependency perpetually. Then allowance to scale down
the multiplier would have to be made taking into account
the uncertainties of the future, the allowances for
immediate lump sum payment, the period over which the
dependency is to last being shorter and the capital feed
also to be spent away over the period of dependency is
to last etc. Usually in English Courts the operative
multiplier rarely exceeds 16 as maximum. This will come
down accordingly as the age of the deceased person (or
that of the dependents, whichever is higher) goes up.”
42. In the case of Sarla Verma (supra), the Supreme Court
standardised the choice of the multiplier for achieving degree of
uniformity in awarding compensation in motor accident claim
cases. This was reiterated by the Supreme Court in the case of
Reshma Kumari vs. Madan Mohan17.
NATURE OF INTEREST PAYABLE:
43. In the context of interest, the case of Kaushnuma Begum
vs. New India Assurance Co. Ltd.18, it was observed as under:
“24. Now, we have to fix up the rate of interest. Section 171
of the MV Act empowers the Tribunal to direct that “in
addition to the amount of compensation simple interest shall
also be paid at such rate and from such date not earlier than
the date of making the claim as may be specified in this
behalf’. Earlier, 12% was found to be the reasonable rate of
simple interest. With a change in economy and the policy of
17 (2013) 9 SCC 65
18 (2001) 2 SCC 9
Reserve Bank of India the interest rate has been lowered.
The nationalised banks are now granting interest at the rate
of 9% per annum from the date of the claim made by the
appellants. The amount of Rs.50,000 paid by the Insurance
Company under Section 140 shall be deducted from the
principal amount as on the date of its payment, and interest
would be recalculated on the balance amount of the principal
sum from such date.”
44. In the case of United India Insurance Company Ltd. and
others vs. Patricia Jean Mahajan and Others19, it was observed
as under:
“In our view the reason indicated in the case of Kaushnuma
Begum (supra) is a valid reason and it may be noticed that
the rate of interest is already on the decline. We therefore,
reduce the rate of interest to 9% in place of 12% as awarded
by the High Court.”
45. In the context of interest on the compensation to be awarded
by the Claims Tribunal in the case of Abati Bezbaruah vs.
Dy.Director General Geological Survey of India20, it was
observed by A.R. Lakshmanan, J. in a concurring judgment, as
under:
“18. Three decision were cited before us by Mr.A.P.
Mohanty, learned counsel appearing on behalf of the
appellant, in support of his contentions. No ratio has been
laid down in any of the decisions in regard to the rate of
interest and the rate of interest was awarded on the amount
of compensation as a matter of judicial discretion. The rate
19 (2002) 6 SCC 281,
20 2003 ACJ 680
of interest must be just and reasonable depending upon
the facts and circumstances of each case and taking all
relevant factors including inflation, change of economy,
policy being adopted by the Reserve Bank of India from
time to time, how long the case is pending, permanent
injuries suffered by the victim, enormity of suffering,
loss of future income, loss of enjoyment of life, etc., into
consideration. No rate of interest is fixed under section
171 of the Motor Vehicles Act, 1988. Varying rates of
interest are being awarded by Tribunals, High Courts
and the Apex court. Interest can be granted even if
claimant does not specifically plead for the same as it is
consequential in the eyes of law. Interest is
compensation for forbearance or detention of money
and that interest being awarded to a party only for being
kept out of money which ought to have been paid to him.
No principle could be deduced nor any rate of interest
can be fixed to have a general application in motor
accident claim cases having regard to nature of
provision under section 171 giving discretion to the
Tribunal in such matter. ……”
46. In the case of Dharampal vs. U.P. State Road Transport
Corporation21, it was observed as under:
“8. As per section 171 of the Motor Vehicle Act, 1988
(hereinafter referred as 'Act') where the claim for
compensation made under the act is allowed by the Claims
Tribunal, the tribunal may direct that in addition to the
amount of compensation simple interest shall also be paid at
such rate from such date not earlier than the date of making
claim.
9. In National Insurance co. Ltd. v. Keshav Bahadur [(2004) 2
SCC 370] this court has held that the provisions require
payment of interest in addition to compensation already
determined. Even though the expression "may" is used, a
duty is laid on the Tribunal to consider the question of
21 (2008) 12 SCC 2018
interest separately with due regard to the facts and
circumstances of the case. It was clearly held in the said
decision that the provision of payment of interest is
discretionary and is not and cannot be bound by rules.
10. Interest is compensation for forbearance or
detention of money, which ought to have been paid to
the claimant. No rate of interest is fixed under section
171 of the Act and the duty has been bestowed upon the
court to determine such rate of interest. In order to
determine such rate we may refer to the observations made
by this court over the years. In the year 2001 in the case of
Kaushnuma Begaum v. New India Assurance Co. Ltd.
[(2001) 2 SCC 9] on the question of rate of interest to be
awarded it was held that earlier, 12% was found to be the
reasonable rate of simple interest but with a change in
economy and the policy of Reserve Bank of India the interest
rate has been lowered and the nationalized banks are now
granting interest @ 9% on fixed deposits for one year.
Accordingly, interest @ 9% was awarded in the said case.
We may at this stage also refer to the following observations
of their Lordships in the aforesaid decision which are
relevant to the present case: (SCC p. 16, para 24)”
47. It can, thus, be seen that in the case of fatal accident cases,
the Courts award compensation for loss of dependency benefit,
loss of estate, loss of consortium in case of a spouse, loss of love
and affection for the family members and funeral charges. In injury
cases, generally, the compensation is computed under the heads
of actual loss of income, future loss of income, pain, shock and
suffering, loss of enjoyment of amenities of life, medical treatment
– past and future, miscellaneous heads such as attendant
charges, special diet, transportation, etc. The multiplier method is
found to be most appropriate for computing loss of dependency
benefits in fatal and future loss of income in injury cases.
48. From the above judgments, it can further be seen that be it a
fatal case or an injury case, compensation includes future loss. In
case of fatal accidents, it 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. However, the
computation of such future loss is on the basis of the income of the
deceased or the injured on the death or accident. This is adjusted
by a reasonable future rise in income. The concept of taking into
account full possible rise in income is not accepted. For example,
in case of a salaried person, particularly in government service, by
the time a Claim Petition or Appeal is decided, there is hard
evidence of the implementation of pay revisions and consequential
rise in salary of other employees of the same cadre as that of the
deceased. However, the Courts have rejected the request for
awarding compensation on the basis of such future predictions. To
the multiplicand so determined multiplier is applied to ascertain
future loss. The method of multiplier takes into account various
factors and imponderables of life and, therefore, the multiplier is
not equivalent to the full length of the remainder of the expected
life of the deceased. The multiplier theory proceeds on the basis
that with interest that may be earned on the compensation and a
portion drawn from the capital, should be equivalent to what the
deceased would have contributed to his family. At the end of the
period, the capital should be completely utilised. It is, therefore,
that while awarding compensation, though the Claims Tribunal
awards future loss in praesenti, interest is awarded for the period
between filing of the Claim Petition till passing of the award and,
therefore, as held by the Supreme Court in the case of Abati
Bezbaruah (supra) and Dharampal (supra), such interest is
considered to be part of compensation, and accretion to the
compensation since the same is awarded for the compensation
which is ascertained with reference to an earlier date i.e., the date
of accident. At the same time, courts have not approved granting
interest on future expenditure.
INTERPRETATION OF THE PROVISIONS CONTAINED IN THE
INCOME TAX ACT -
49. We may apply these conclusions to the relevant provisions
contained in the Income Tax Act. Section 56 pertains to income
from other sources. Sub-section (1) of section 56 provides that
income of every kind which is not to be excluded from the total
income under the Act shall be chargeable to income tax under the
head of income from other sources, if it is not chargeable to
income tax under any of the heads specified in section 14, items
(A) to (E). Section 56(1) of the Act thus, makes a residuary
provision for charging income of every kind, not falling under items
(A) to (E) of section 14, to be charged as income from other
sources. Sub-section (2) of section 56 provides that in particular
and without prejudice to the generality of the provisions of subsection
(1), the incomes contained in the following clauses shall be
chargeable to income tax under the head income from other
sources. Clause (viii) inserted by the Finance Act, 2009 w.e.f.
1.4.2010 sub-section (2) of section 56 pertains to income by way
of interest received on compensation or enhanced compensation
referred to in clause (b) of section 145A.
50. Before proceeding to analyse clause (b) of section 145A, we
may note that section 56 of the Act per se does not make a
particular receipt chargeable to tax if it otherwise does not happen
to be income. This section merely provides for taxing an income
not falling under the other heads as income from other sources.
Sub-section (2) of section 56 when it lists various incomes, which
would be treated as income from other sources, merely amplifies
this purpose. Therefore, clause (viii) of sub-section (2) of section
56 by itself would not make the receipt of interest on compensation
chargeable to tax as income from other sources, if such receipt is
not income.
51. We have briefly noted the history behind enactment of
section 145A of the Act. Section 145 pertains to method of
accounting. Sub-section (1) of section 145 provides that income
chargeable under the head profits and gains of business or
profession or income from other sources would be, subject to the
provisions of sub-section (2) computed in accordance with either
cash or mercantile system of accounting regularly employed by
assessee. This provision thus, leaves an option to assessee to
offer the income of profit and gains of business or profession or
from other sources to tax either on cash or mercantile system. In
case of Rama Bai (supra), the Supreme Court held that interest
on compensation cannot be stated to have accrued on the date of
the order of the Court granting enhanced compensation but has to
be taken as having accrued year after year from the date of
delivery of possession of the lands till the date of such order. The
Legislature felt that this decision would cause undue hardship to
the assessees. 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. With a view
to mitigate such hardship, section 145A was amended by the
Finance Act of 2009 w.e.f. 1.4.2010.
52. Clause (b) of section 145A of the Act as amended, we may
recall provides that notwithstanding anything to the contrary
contained in section 145, interest received by an assessee on
compensation or enhanced compensation, as the case may be,
shall be deemed to be income of the year in which it is received.
This provision in our opinion, would have two significant effects.
Firstly, it would overcome the decision of the Supreme Court in the
case of Rama Bai (supra) and, therefore, the principle of accrual
of interest on land acquisition compensation from the date of
taking possession of the land till passing of the award would not
apply. Second effect of this provision would be that whether an
assessee follows the mercantile system of accounting or cash
basis in terms of the option in section 145(1) of the Act, insofar as
the interest on compensation or enhanced compensation is
concerned, the same would be deemed to be the income of the
year in which it is received. Once again, as observed in the
context of section 56(2)(viii), clause (b) of section 145A of the Act
does not make interest on compensation or enhanced
compensation taxable if it is otherwise not exigible to tax. It merely
provides for the point of time when it would be subjected to tax if
otherwise taxable.
53. The Supreme Court in the case of Rama Bai (supra) also,
had no occasion to consider the taxability of interest on
compensation or enhanced compensation in case of land
acquisition cases. In the case of Ghanshyam (HUF) (supra), the
Supreme Court held that interest awarded on compensation as
well as solatium are part of the compensation and, therefore, in
terms of section 45(5) of the Act, would be chargeable to capital
gain in the year in which enhanced compensation is received. We
are conscious that this decision was rendered before the
amendment in Section 145A under the Finance Act, 2009. We are
drawing reference to this judgment only for the limited purpose of
noting that the decision of the Supreme Court in case of Rama Bai
(supra) is not an authority on the question of taxability of interest
on compensation or enhanced compensation. The Division Bench
of the Gujarat High Court, we may recall, in the case of Movaliya
Bhikhubhai Balabhai (supra), held that the ratio of the decision of
the Supreme Court in the case of Ghanshyam (HUF) (supra),
would continue to apply even after amendment in section 145A of
the Act. Secondly, interest under section 28 of the Land
Acquisition Act cannot be treated as income subject to tax
irrespective of clause (b) of section 145A of the Act. Such interest
would form part of the compensation and, therefore, subject to
capital gain. We may note that the Punjab & Haryana High Court
in case of Puneet Singh vs. Commissioner of Income Tax22 has
22 (2019) 415 ITR 215 (P&H)
held that interest on enhanced compensation under Land
Acquisition Act is assessable in the year of receipt as income from
other sources. This decision is directly contrary to the view
expressed by the Gujarat High Court in the case of Movalia
Bhikhubai Balabhai (supra). It is not necessary for us to resolve
this controversy since our reference to and reliance on the
judgment of Gujarat High Court is limited to the effect of
amendment in section 145A by the Finance Act, 2009.
54. To summarise, the decision of the Supreme Court in the
case of Rama Bai (supra) is not an authority on the question of
taxability of interest on compensation or enhanced compensation
in motor accident claim cases. In Ghanshyam (HUF) (supra), the
Supreme Court held that interest under section 28 of the Land
Acquisition Act would invite capital gain tax. This judgment was
rendered before amendment in section 145A of the Act. The
Gujarat High Court in Movalia Bhikhubhai Balabai (supra), held
that the ratio of the Supreme Court in the case of Ghanshyam
(HUF) (supra), would continue to apply post amendment in
section 145A by virtue of Finance Act, 2009 also.
55. In order 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,
income of the deceased or the injured for earmarking
compensation is ascertained after deducting income tax. We have
noticed certain decisions of the Courts holding that such
compensation is by way of reimbursement of the loss and cannot
be treated as income. We, therefore, proceed on such basis. In
the context of the nature of the interest awarded by the Claims
Tribunal or the High Court on motor accident claim compensation
or enhanced compensation, we have referred to the decisions of
the Supreme Court including in cases of Abati Bezbaruah (supra),
Kaushnuma Begum (supra), Patricia G. Mahajan (supra) and
Dharampal (supra). These decisions suggest that the interest is
awarded for delayed computation of compensation. Right to
award interest flows from section 170 of the Motor Vehicles Act,
1988. As is well settled, the authority of the Court to award interest
must be traced to a statutory provision or in agreement between
the parties. In absence of section 170 of the Motor Vehicles Act,
perhaps it would not be lawful for the Tribunal and for that matter,
the High Court in Appeal, to award interest on compensation. The
Supreme Court in the cases of Abati Bezbaruah (supra),
Kaushnuma Begum (supra), Patricia G. Mahajan (supra) and
Dharampal (supra), explained the nature of interest awarded in
motor accident claims cases. Culmination of discussion in these
judgments would be that such interest is compensatory in nature
and will thus, form part of the compensation itself. Compensation
is computed with reference to the date of accident. All calculations
of multiplicand and multiplier are based on such reference point.
But computation by the Tribunal takes time. If compensation is
revised by the High Court it takes further time. Interest is awarded
keeping in mind the rate of inflation. Effort thus is to award just
compensation. Awarding interest for delayed computation of
compensation is therefore integral part of this exercise.
56. The issue can be looked from a slightly different angle. In
the context of interest, there are three crucial dates. The date of
the accident is a date in reference to which the entire
compensation is calculated. The date of filing of the claim petition
is the date from which the claimant can seek interest on the
compensation awarded by the Claims Tribunal. Under section
170 of the Motor Vehicles Act, the interest cannot be awarded for a
period prior to filing of the Claim Petition. The date of passing of
the award by Claims Tribunal is the date on which the
compensation is determined and the right to receive interest
pendente lite ceases. The interest for the period between the filing
of the claim petition and passing of the award thus, is for the
period when the claimant for the first time approached the Claims
Tribunal asking the Tribunal to assess and award compensation
and the time consumed in disposing of the Claim Petition. We may
also recall, the interest can be awarded even though part of the
compensation would comprise of future loss of income. This is so
because, the multiplier method factors this aspect also. At the
same time, as noted, the 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. This
dichotomy, thus, between awarding interest on future income while
not awarding interest for future expenditure brings out the true
character of the interest being awarded.
57. 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 exigible to tax, not being
an income. This position would not change on account of clause
(b) of section 145A of the Act as it stood at the relevant time
amended by Finance Act, 2009 which provision now finds place in
sub-section (1) of section 145B of the Act. Neither clause (b) of
section 145A, as it stood at the relevant time, nor clause (viii) of
sub-section (2) of section 56 of the Act make the interest
chargeable to tax whether such interest is income of the recipient
or not. Section 194A of the 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.
58. We are not oblivion to erstwhile clause (ix) of sub-section (3)
of section 194A or the newly amended clauses (ix) and (ixa)
thereof substituting original clause (ix) w.e.f. 1.6.2015 by Finance
Act, 2015. Subsection (1) of section 194A provides for deduction
of tax at source upon payment of any income by way of interest.
Sub-section (3) of section 194A contains exclusion clauses from
the purview of sub-section (1). Clause (ix) contained in subsection
(3) prior to amendment pertained to income credited or
paid by way of interest on the compensation amount awarded by
the Motor Accident Claims Tribunal where such amount did not
exceed Rs.50,000/-. In substitution of this provision, clause (ix)
now provides that the provision of sub-section (1) will not apply to
such income credited by way of interest on the compensation
awarded by the Motor Accident Claims Tribunal. Clause (ixa)
virtually retains the original provision of unamended clause (ix).
The learned ASG would, therefore, contend that by virtue of these
provisions, requirement of deducting tax at source on interest
income would not arise only if the same does not exceed
Rs.50,000/- in a financial year or where such income is merely
credited. In other words, at the time of payment of interest, the
provision for deduction of tax at source would kick in.
59. So far as the plain meaning of section 194A(1) read with
erstwhile clause (ix) and substituted clauses (ix) and (ixa) of subsection
(3) is concerned, there can be no doubt or dispute.
However, the fundamental question is does section 194A make the
interest income chargeable to tax if it otherwise is not. The answer
has to be in the negative. 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.
60. In the decision of the Gujarat High Court in the case of
Hansaguri Prafulchandra (supra), the Court had no occasion to
decide the taxability of interest on compensation or enhanced
compensation of motor accident cases. This was also the position
in the case of decision of this Court in the Gauri Deepak Patel &
ors. (supra).
61. 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.
62. Before closing we would tie a few loose ends:
(i) Learned Counsel for the petitioners had not made any
submissions on the vires of the provisions of the Act, virtually
giving up the challenge. We have therefore not examined
the same.
(ii) Though no serious opposition was raised to the petition
on the ground of availability of statutory appeal, we think it is
our duty to explain why this petition was entertained. In the
present case, only question was of charging interest on
compensation/enhanced compensation of motor accident to
tax. This was a pure question of law. No facts were to be
ascertained. It was otherwise important that such a question
is decided by the High Court. We had, therefore, entertained
the petition.
(iii) The Assessing Officer has passed the order of
assessment. He has made a bonafide assessment. With his
approach, there can be no criticism. But when it comes to
issuing notice for penalty, it defies logic. The petitioner
despite his stand that the interest is not taxable, filed the
return, offered the interest to tax and also deposited such tax
under protest. What was the purpose of issuing notice for
penalty is difficult to understand.
63. In the result, 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
judgment of the High Court. On any interest paid to him post the
judgment, tax had to be collected as income from other sources.
We, therefore, set aside the impugned order of assessment and
place the assessment of the petitioner back to the Assessing
Officer for passing fresh order in line with this judgment. Before
closing, we record our appreciation for the industry and punctuality
with which the learned Senior Counsel Mr.Jamshed Mistri, the
Amicus Curiae, had assisted the Court in the present petition.
64. Writ Petition is disposed of accordingly.
(S.J. KATHAWALLA, J.) (AKIL KURESHI, J.)
Print Page
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. This position would not change on account of clause
(b) of section 145A of the Act as it stood at the relevant time
amended by Finance Act, 2009 which provision now finds place in
sub-section (1) of section 145B of the Act. Neither clause (b) of
section 145A, as it stood at the relevant time, nor clause (viii) of
sub-section (2) of section 56 of the Act make the interest
chargeable to tax whether such interest is income of the recipient
or not. Section 194A of the 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.
59. So far as the plain meaning of section 194A(1) read with
erstwhile clause (ix) and substituted clauses (ix) and (ixa) of subsection
(3) is concerned, there can be no doubt or dispute.
However, the fundamental question is does section 194A make the
interest income chargeable to tax if it otherwise is not. The answer
has to be in the negative. 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.
61. 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.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.
WRIT PETITION NO.2902 OF 2016
Shri Rupesh Rashmikant Shah Vs Union of India
CORAM: AKIL KURESHI &
S.J. KATHAWALLA, JJ.
Dated: AUGUST 8, 2019
JUDGMENT (Per Akil Kureshi, J.):
1. A young boy, barely aged 8 years, cheerful and full of life,
was trying to cross the road accompanied by his household help.
His life was full of joy, happiness, his future full of possibilities.
Before he crossed the road all that changed. Knocked down by a
speeding vehicle, he lost his consciousness, remained in coma for
six months. For the remainder of his life, he wished he had not
regained consciousness. He has filed this petition seeking our
opinion whether income tax department was justified in taking
away 30% of the interest on the compensation which was
determined nearly 36 years after the accident. Looking to the
issues involved, we have heard the learned Counsel for the parties
for final disposal of the petition. The petition arises in the following
background:
FACTS:
The petitioner is presently aged about 48 years. When he
was about 8 years old, on 18.10.1978, he was trying to cross
Nepensea Road in South Mumbai accompanied by a household
servant when a car insured by Oriental Insurance Company Ltd. -
Respondent No.4, collided with the young boy causing serious
injuries. His brain was severely damaged. He remained in the
hospital in an unconscious state for several months. His parents
brought him home setting up a nursing station at home and
administered all necessary treatment. Though several months
later, he regained consciousness, his brain injuries left him
paraplegic. Further, treatments, therapies and cures failed to have
the desired effect. His mental growth also stunted. Ever since the
date of the accident, he is left completely bed ridden, needs
constant attention even for routine activities.
2. On his behalf, his father had filed Motor Accident Claim
Petition before the Motor Accident Claims Tribunal, Greater
Mumbai. He had initially sought a compensation of Rs.1 lakh from
the driver, owner and insurer of the vehicle involved in the
accident, which was subsequently revised to Rs.15 lakhs. Yet
another application was filed before the Motor Accident Claims
Tribunal raising the claim to Rs.50 lakhs. The Tribunal, however,
did not find any evidence of such application having been allowed.
3. More than 10 years after the accident, the Tribunal disposed
of the Claim Petition by award dated 30.3.1990. The Tribunal held
that the driver of the car was solely negligent in causing the
accident. The Tribunal awarded compensation under various
heads such as future loss of income; pain; shock and suffering;
loss of amenities of life; cost of medical treatment, etc. and
awarded a total compensation of Rs.4,12,000/- 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 till
realisation. The Tribunal also directed that if this amount is not
paid within three months, the rate of interest payable would be
12% p.a. on the unpaid amount.
4. By the time the Tribunal disposed of the Claim Petition, the
petitioner had become major. 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. Several years
later his appeal was disposed of by a judgment dated 21.11.2014.
The learned Single Judge awarded total compensation of
Rs.39,92,000/- to be paid with interest at the rate of 9% per
annum.
5. The insurance company challenged the said judgment of the
High Court before the Supreme Court by filing Special Leave
Petition. The said SLP came to be dismissed on 5.5.2015.
6. 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.
According to the petitioner, no TDS should have been deducted.
Under protest, however, he withdrew the compensation amount of
Rs.1,42,04,415/-. The break-up of the amount payable to the
petitioner would show that on the principal sum of Rs.39,92,000/-
as awarded by this Court, interest @ 9% for 36 years came to
Rs.1,18,04,606/-. The insurance company before depositing the
amount, deducted tax at source a sum of Rs.11,80,461/- @ 10%
on the interest component.
7. The petitioner had received interest of Rs.1,18,04,606/-
during the period relevant to the A.Y. 2016-2017. According to the
petitioner, such interest was not taxable. However, by way of
caution, the petitioner filed the return of income for the A.Y. 2016 –
2017 in which he had presented the computation of his taxable
income if the interest received by him was made taxable. His tax
liability came to Rs.37,97,773/-, which also he had deposited with
the Income Tax department. In the return of income, he had put
the following note in order to dispute the taxability of the interest:
“NOTE: As per the stand taken by the Assessee the
interest amount on such insurance income received
should be treated as capital receipt and hence Income
Tax should not be applicable on it. The Assessee has
paid the Income Tax amount under protest.”
8. This petition was initially filed with a prayer for a declaration
that no tax at source is required to be deducted on the interest
component of the compensation in motor accident claims. The
petitioner had also prayed for a direction to refund the sum of
Rs.37,97,773/- which he had paid to the Income Tax department
while filing the return of income. The petitioner had also
challenged the vires of section 194A (3)(ix) and (ixa) as also
section 145A(b) and 56(2)(viii) of the Income Tax Act, 1961 (‘Act’
for short).
9. When this petition was pending, the Assessing Officer
passed an order of assessment under section 143(3) of the Act on
30.11.2018 and assessed the petitioner’s total income at
Rs.1,14,99,380/- which comprised of the interest received on the
compensation minus available deductions. He rejected the
petitioner’s contention that such interest was not taxable. He was
of the opinion that the interest on compensation was distinct and
independent of the principal and the interest therefore, would be
income from other sources. Most unkindly, he also ordered
issuance of notice of penalty under section 271(1)(c) of the Act
completely ignoring the fact that the petitioner himself had filed the
return of income, disclosed the interest income and subject to his
objection to its taxability, also paid the full tax thereon. The
petitioner was allowed to amend the petition and challenge this
order of assessment.
10. As noted, at the time of filing of the petition, the dispute was
with respect to deduction of tax at source on the interest
component of the enhanced compensation. Before this issue
could be resolved, the final assessment was made by the
Assessing Officer holding the entire interest receipt taxable as
income from other sources. The issue of validity of deducting tax
at source has thus, merged into the larger question of very
taxability of the receipt.
INCOME TAX PROVISIONS:
11. Before recording rival stands, we may briefly refer to
applicable provisions contained in the said Act.
12. Section 2(24) of the Act defines the term ‘income’. Section
2(28A) defines ‘interest’. Section 56 pertains to income from other
sources, relevant portion of which reads as under:
“Income from other sources.
56.(1) Income of every kind which is not to be excluded
from the total income under this Act shall be chargeable to
income-tax under the head "Income from other sources", if it
is not chargeable to income-tax under any of the heads
specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the
provisions of sub-section (1), the following incomes, shall be
chargeable to income-tax under the head "Income from other
sources", namely:-
(viii) income by way of interest received on compensation or
on enhanced compensation referred to in clause (b) of
section 145A.”
13. Sub-section (2) of section 56 thus provides that in particular
and without prejudice to the generality of the provisions of subsection
(1), the following incomes, contained in various clauses
therein would be chargeable to income tax under the head income
from other sources. Clause (viii) refers to income by way of
interest received on compensation or on enhanced compensation
referred to in clause (b) of section 145A. Subsection (1) of section
56 provides that income of every kind which is not to be excluded
from the total income would be chargeable to tax as income from
other sources if it is not chargeable under any of the heads
specified in items (A) to (E) of section 14.
14. Section 145A(b) as it stood at the relevant time reads thus:
Notwithstanding anything to the contrary contained in section
145 -
(b) interest received by an assessee on compensation or
on enhanced compensation, as the case may be, shall be
deemed to be the income of the year in which it is received.”
Sub-section (1) of section 194A of the Act enjoins any person
other than an individual or Hindu Undivided Family responsible for
paying to a resident any income by way of interest to deduct tax at
source at the prescribed rates. The relevant portion of section
194A reads thus:
194A (1) Any person, not being an individual or a Hindu
undivided family, who is responsible for paying to a resident
any income by way of interest other than income by way of
interest on securities, shall, at the time of credit of such
income to the account of the payee or at the time of payment
thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier, deduct income-tax thereon
at the rates in force:
Provided that an individual or a Hindu undivided family,
whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the
monetary limits specified under clause (a) or clause (b) of
section 44AB during the financial year immediately preceding
the financial year in which such interest is credited or paid,
shall be liable to deduct income-tax under this section.
(3) The provisions of sub-section (1) shall not apply -
(ix) to such income credited by way of interest on the
compensation amount awarded by the Motor Accident
Claims Tribunal.
(ixa) to such income paid by way of interest on the
compensation amount awarded by the Motor Accident
Claims Tribunal where the amount of such income or, as the
case may be, the aggregate of the amounts of such income
paid during the financial year does not exceed fifty thousand
rupees”
The controversy at hand revolves around these provisions
which would come up for detailed examination later.
RIVAL STANDS -
CASE OF THE PETITIONER -
15. The stand of the petitioner is that the interest component on
the motor accident claim compensation paid to the petitioner is not
taxable. The first contention of the petitioner is that the interest is
a capital receipt. The other contention is that the interest is
compensatory in nature. It is meant to offset the erosion of the
principal compensation because of passage of time and the
reduction of purchasing power of rupee due to inflation. According
to the petitioner since the compensation itself is not taxable, the
interest pendente lite which also forms part of the compensation,
would not be taxable. When the receipt itself is not taxable, the
question of deducting tax at source while making payment thereof
would not arise. It was lastly contended that in any case, such
interest should be spread over the entire period for which it is paid.
The interest accrues from year to year. Merely because it is paid
at a single point, would not mean the entire amount is taxable in
the year of payment.
THE STAND OF THE DEPARTMENT:
16. The Department contends that the interest is an income
distinct from the compensation and is, therefore, taxable. By virtue
of clause (b) of section 145A of the Act, such income is taxable on
actual receipt. Heavy reliance is placed on the provisions
contained in section 56(2)(viii), section 145A(b) and section 194A
of the Act. It was pointed out that section 145A was amended by
the Finance Act of 2009 in order to obviate the difficulties arising
out the judgment of the Supreme Court in the case of Rama Bai
and ors. vs. Commissioner of Income Tax, Andhra Pradesh,
Hyderabad and Ors.1. The learned ASG had argued that looking
to these statutory provisions, any interest on compensation or
enhanced compensation of motor accident claims would be
chargeable to tax as income from other sources and the point of
chargeability would be the actual receipt. A conjoint reading of
1 181 ITR 400
clause (viii) of sub-section (2) of section 56, clause (b) of section
145A and section 194A (3) of the Act would lead to an inescapable
conclusion that interest on the compensation or enhanced
compensation would be chargeable as income from other sources
at the point of time when the same is actually received by the
claimants.
ARGUMENTS OF AMICUS CURIAE:-
17. Considering the fact that the petition involved complex
issues, answers to which would have wider ramifications, the Court
had requested the learned Senior Counsel Mr.Jehangir Mistri to
assist the Court as Amicus Curiae. He had graciously accepted
the request and ably assisted the Court with painstaking
preparations and usual flare. He had presented various
propositions on the interpretation of the relevant sections. He had
also presented the decisions of various Courts adopting different
view points. His analysis is as follows.
i) Whether the interest received on compensation or
enhanced compensation is income would be the
fundamental issue. One way of interpreting section 194A(3)
(ix), section 145A(b) and section 56(2)(viii) would be that
none of these provisions make such interest chargeable to
tax if it is otherwise not taxable. The taxability of the interest
would depend on the nature and the purpose for grant of
interest. If it is held that 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.
ii) The question would also arise whether post-insertion of
section 145A(b), the spread-over theory of interest on
compensation, which was first time adopted by the Gujarat
High Court in the case of Gauri Deepak Patel & ors. vs.
New India Assurance Co. Ltd.2, would stand overruled.
iii) If the spread over theory is to be applied, deduction of
tax at source will be needed only if the payment of interest in
a year exceeds Rs.50,000/-.
CERTAIN IMPORTANT DECISIONS:
18. We will now notice the decisions of the High Courts and the
Supreme Court having a bearing on these aspects.
2 CAF/4923/2009 decided on 17.12.2009
19. In the case of Rama Bai (supra), a 3-Judge Bench of the
Supreme Court considered a situation where the assessee’s land
was acquired under the Land Acquisition Act. Aggrieved by the
compensation awarded by the Land Acquisition Officer, the
assessee sought enhancement of compensation before the
Reference Court. The Reference Court awarded enhanced
compensation. With solatium, the amount came to Rs.2,34,607/-.
Interest of Rs.37,529/- was awarded on the enhanced
compensation. The Income Tax officer while making assessment
for the A.Y. 1967-1968 and A.Y. 1968-1969, held that the right to
receive interest on enhanced compensation arises on the date
when the Reference Court passes the order. The assessee
contended that the interest should be distributed over the period
commencing from the date of dispossession of the assessee under
the Land Acquisition Act till the date of payment. The Supreme
Court considered the question whether in the facts of the case, the
interest was liable to be assessed in the A.Y. 1968-1969? The
Supreme Court noticed that different High Courts had given
divergent decisions. The Supreme Court held that the question of
accrual of interest will have to be determined in accordance with
the decision of the Supreme Court in the case of Khorshed
Shapoor Chenai vs. Assistant Controller of Estate Duty, A.P.3
The effect of the decision, it was clarified that the interest cannot
be taken to have accrued on the date of the order of the Court
granting enhanced compensation but has to be taken as having
accrued year after year from the date of delivery of possession of
the lands till the date of such order.
20. In the case of the Commissioner of Income Tax,
Faridabad vs. Ghanshyam (HUF)4, the Supreme Court
considered a question whether the enhanced compensation,
solatium and interest under the Land Acquisition Act would be
chargeable as capital gains tax in the year of receipt. In the
context of interest payable under section 28 of the Land
Acquisition Act, it was observed that the same is applicable only in
respect of excess amount which is determined by the Court under
a reference under section 18 of the Land Acquisition Act. Section
28 does not apply to cases of undue delay in making award of
compensation. It was observed that interest is not compensation
and section 45(5) of the Act refers to compensation but held that
3 (1980) 122 ITR 21 (SC)
4 (2009) 8 SCC 412
interest under section 28 of the Land Acquisition Act is an
accretion of the value of the land acquired. The Court drawing a
distinction between interest payable under section 28 and section
34 of the Land Acquisition Act held thus:
“50. It is true that "interest" is not compensation. It
is equally true that Section 45(5) of the 1961 Act refers
to compensation. But as discussed hereinabove, we
have to go by the provisions of the 1894 Act which
awards "interest" both as an accretion in the value of
the lands acquired and interest for undue delay.
Interest under Section 28 unlike interest under
Section 34 is an accretion to the value, hence it is a
part of enhanced compensation or consideration
which is not the case with interest under Section 34
of the 1894 Act. So also additional amount under
Section 23(1A) and solatium under Section 23 (2) of
the 1961 Act forms part of enhanced compensation
under Section 45(5)(b) of the 1961 Act.
54. Section 45(5) read as a whole [including clause
(c)] not only deals with re-working as urged on behalf of
the assessee but also with the change in the full value of
the consideration (computation) and since the enhanced
compensation/consideration (including interest under
Section 28 of the 1894 Act) becomes payable/paid under
1894 Act at different stages, the receipt of such enhanced
compensation/consideration is to be taxed in the year of
receipt subject to adjustment, if any, under Section 155
(16) of the 1961 Act, later on. Hence, the year in which
enhanced compensation is received is the year of
taxability. Consequently, even in cases where pending
appeal, the Court/Tribunal/Authority before which appeal
is pending, permits the claimant to withdraw against
security or otherwise the enhanced compensation (which
is in dispute), the same is liable to be taxed under Section
45(5) of the 1961 Act. This is the scheme of Section 45(5)
and Section 155(16) of the 1961 Act. We may clarify that
even before the insertion of Section 45(5)(c) and Section
155 (16) w.e.f. 1-4-2004, the receipt of enhanced
compensation under Section 45(5)(b) was taxable in the
year of receipt which is only reinforced by insertion of
clause (c) because the right to receive payment under the
1894 Act is not in doubt.
55. It is important to note that compensation,
including enhanced compensation/consideration
under the 1894 Act, is based on the full value of
property as on date of notification under Section 4 of
that Act. When the Court/Tribunal directs payment of
enhanced compensation under Section 23(1A), or
Section 23(2) or under Section 28 of the 1894 Act it is
on the basis that award of Collector or the Court,
under reference, has not compensated the owner for
the full value of the property as on date of
notification.”
21. In the case of Hansaguri Prafulchandra vs. The Oriental
Insurance Company5, a Division Bench of the Gujarat High Court
taking cue from the decision of the Supreme Court in the case of
Rama Bai (supra), applied the theory of spreading over of interest
on enhanced compensation for the purpose of levying tax. The
facts were that Hansaguri alongwith her four daughters had filed a
Claim Petition seeking compensation of Rs.20 lakhs on account of
the death of her husband, Prafulchandra, who died in a vehicular
accident. The Tribunal awarded compensation of Rs.11,78,000/-
to be recovered with interest @ 9% p.a. from the date of the Claim
5 2007 ACJ 1897
Petition till the date of payment. Pursuant to such directions, the
insurance company deposited a sum of Rs.25,27,812/- which
included the enhanced compensation, interest minus the tax
deduction of Rs.1,70,279/-. The claimants, who had filed appeal
before the High Court against the judgment of the Tribunal, moved
an application praying that the amount awarded by the Tribunal as
compensation and interest should be apportioned equally amongst
all claimants and tax deduction should be by spread over on year
to year basis, commencing from the date of filing of the Claim
Petition till payment. The Division Bench of the High Court
referring to and relying upon the decision of the Supreme Court in
the case of Rama Bai (supra), held and observed as under:
“(13).Accordingly, the income-tax liability of the concerned
claimants to pay tax on the interest accrued on the
compensation awarded to them shall arise if such interest
income accrued in the concerned financial year together with
other income of the respective claimants in that financial year
exceeds the chargeable limit as specified in the provisions of
the Income-tax Act, 1961 in force for the relevant years. It
will, therefore, be open to the claimants to make appropriate
applications/representations before the concerned incometax
authority for refund of such amount/s as may be due to
them out of the amount of Rs. 1,70,269/- which has already
been deducted by the Insurance Company as tax deducted
at source under the provisions of Section 194A of the Act.
14. It is necessary to obviate such a situation in future for
other claimants who may be awarded compensation with
interest thereon, and the amount of interest being deposited
exceeds Rs. 50,000/-, but who may not be liable to have any
tax deducted at source as per the interpretation placed by us
on the provisions of Section 194A of the Act. We, therefore,
direct that - I. The Insurance Companies or the owners of the
motor vehicles depositing the amounts in compliance with
the awards of the Motor Accident Claim Tribunals shall -
(a) first spread the interest amount over to the relevant
financial years for the period from the date of filing the claim
petition till the date of deposit. (b) thereafter, if the interest for
any particular financial year exceeds Rs. 50,000/-, separately
deposit before the Tribunal the amount liable to be deducted
at source under the provisions of Section 194A(3)(ix) of the
Income-tax Act, 1961. Such amount Page 2108 shall not,
however, straightaway, be paid over to the Income-tax
department. (c) produce before the Tribunal a statement of
computation of interest by spreading the amount over the
relevant years from the date of claim petition till the date of
deposit if the interest for any particular financial year
exceeds Rs. 50,000/- and also request the Tribunal to treat
the amount as a separate deposit. II. (i) The Tribunal shall
take into account the principles laid down in this judgment
and ensure that the amount of interest accrued each year is
apportioned amongst the claimants on year to year basis. (ii)
If the interest payable to any claimant for any particular
financial year exceeds Rs. 50,000/-, the Tribunal shall permit
the Insurance Companies/owners to pay over the amount
liable to be deducted at source under Section 193(3)(ix) of
the Income-tax Department in respect of that particular
claimant for that particular year, without prejudice to the
claimant's case that he is not liable to pay any income-tax for
that year. (iii) for the financial year/s for which the interest
payable to the concerned claimant does not exceed Rs.
50,000/-, the Tribunal may permit such claimant to withdraw
the amount deposited as per direction I(b) without producing
the certificate from the concerned income-tax authority that
there is no income-tax liability on the interest which has
accrued on the compensation awarded by the Tribunal. (iv)
It is clarified that the amount other than the amount liable to
be deducted at source under Section 194A(3)(ix) shall be
invested/disbursed by the Tribunal. III. When the claimants
make applications/representations before the authority under
the Income-tax Act, 1961 for refund of the amount deducted
under the provisions of Section 194A(3)(ix) of the Act, the
concerned authority shall decide such applications/
representations within six months from the date of receipt of
the applications/representations.”
22. This view was adopted by the Bombay High Court in the
case of Gauri Deepak Patel & ors. (supra), in which the following
observations were made:
6. Accordingly, we direct that the following procedure as
laid down in the case of Hansaguri (supra) shall be followed in
the present case and in all the similar cases arising in future
before the Motor Accidents Claims Tribunal:-
“(i) The insurance companies or the owners of the motor
vehicles depositing the amounts in compliance with the
awards of the Motor Accidents Claims Tribunal shall:
(a) first spread the interest amount over to the relevant
financial years for the period from the date of filing the claim
petition till the date of deposit,
(b) thereafter, if the interest for any particular financial year
exceeds Rs.50,000/-, separately deposit before the Tribunal
the amount liable to be deducted at source under the
provisions of section 194-A (3) to (ix) of the Income-Tax Act,
1961. Such amount shall not, however, straightaway be paid
over to Income Tax Department,
(c) produce before the Claims Tribunal a statement of
computation of interest by spreading the amount over the
relevant years from the date of claim application till the date of
deposit if the interest for any particular financial year exceeds
Rs.50,000/- and also request the Tribunal to treat the amount
as a separate deposit.
(ii) The Tribunal shall ensure that the amount of interest
accrued each year is apportioned amongst the claimants on
year to year basis.
(iii) If the interest payable to any claimant during any
particular financial year exceeds Rs.50,000/-, the Tribunal
shall permit the insurance companies/owners to pay over the
amount liable to be deducted at source under section 194-
A(3)(ix) to the Income Tax Department in respect of that
particular claimant for the particular year, without prejudice
to the claimant's case that he is not liable to pay any
income tax for that year.
(iv) For the financial year(s) for which the interest payable
to the concerned claimant does not exceed Rs.50,000/-, the
Tribunal may permit such claimant to withdraw the amount
deposited as per direction (i)(b) without producing the
certificate from the concerned income-tax authority that there
is no income-tax liability on the interest which has accrued on
the compensation awarded by the Tribunal.
(v)It is clarified that the amount other than the amount liable to
be deducted at source under section 194-A(3)(ix) shall be
invested/disbursed by the Tribunal.
(vi) When the claimants make applications before the
authority under the Income-tax Act, 1961 for the refund of the
amount deducted under the provisions of section 194-A(3) (ix)
of the Act, the concerned authority shall decide such
applications with utmost expedition.”
23. The Legislature took cognisance of the judgment of the
Supreme Court in the case of Rama Bai (supra) and certain
undue hardship caused to the taxpayers on account of taxing the
interest on compensation or enhanced compensation on accrual
basis. Section 145A of the Act was, therefore, amended by
Finance Act, 2009 to obviate such hardship. In the amended form,
as noted, clause (b) of section 145A of the Act provides that
notwithstanding anything to the contrary contained in section 145,
interest received by an assessee on compensation or on
enhanced compensation shall be deemed to be income of the year
in which it is received.
24. The Gujarat High Court in the case of Movaliya Bhikhubhai
Balabhai vs. Income-Tax Officer (TDS) and another6 considered
the effect of this amendment on the question of charging tax on the
interest payable to a claimant under section 28 of the Land
Acquisition Act. We may recall, the decision of the Supreme Court
in the case of Ghanshyam (HUF) (supra), was rendered when
section 145A was not so amended and the Court had held that
interest under section 28 of the Land Acquisition Act payable to a
claimant is part of compensation. The question before the Gujarat
High Court, therefore, was does the amendment in section 145A
and the corresponding amendments in section 56(2) of the Act
6 [2016] 388 ITR 343 (Guj.)
change the position of law laid down by the Supreme Court in the
case of Ghanshyam (HUF) (supra). The Division Bench of the
Gujarat High Court noticed the distinction between interest payable
under section 28 and one payable under section 34 of the Land
Acquisition Act. It was observed that the interest under section 28
which is paid on enhanced compensation is treated as accretion to
the value and, therefore, part of the enhanced compensation or
consideration making it exigible to capital gain tax under section
45(5) of the Act. The Court noticed the Departmental Circular
explaining the said amendment in section 145A of the Act and
observed as under:
“Thus, the substitution of section 145A by the Finance
(No.2) Act, 2009 was not in connection with the decision
of the Supreme Court in Ghanshyam (HUF) (supra) but
was brought in to mitigate the hardship caused to the
assessee on account of the decision of the Supreme
Court in Rama Bai v. CIT [1990] 181 ITR 400 (SC)
whereby it was held that arrears of interest computed on
delayed or enhanced compensation shall be taxable on
accrual basis. Therefore, when one reads the words
“interest received on compensation or enhanced
compensation” in section 145A of the Income-tax Act,
the same have to be construed in the manner interpreted
by the Supreme Court in Ghanshyam (HUF) (supra).”
25. The Court eventually held as under:
“The upshot of the above discussion is that since
interest under section 28 of the Act of 1894, partakes the
character of compensation, it does not fall within the
ambit of the expression “interest” as contemplated in
section 145A of the Income-tax Act. The first respondent
– Income-tax Officer was, therefore, not justified in
refusing to grant a certificate under section 197 of the
Income-tax Act to the petitioner for non-deduction of tax
at source, in as much as, the petitioner is not liable to
pay any tax under the head “Income from other sources”
on the interest paid to it under section 28 of the Act of
1894.”
26. We may now take note of the decisions of various High
Courts touching on the question of taxability of motor accident
claim compensation and interest payable thereon.
27. The Division Bench of the Himachal Pradesh High Court in
the case of Court on its own Motion v. The H.P. State
Cooperative Bank Ltd. & Ors.7 held that the compensation
awarded under the Motor Vehicles Act is not a taxable income. It
was observed as under:
“13. While going through the said provisions of law, one
comes to the inescapable conclusion that the mandate of the
said provisions does not apply to the accident claim cases
and the compensation awarded under the Motor Vehicles Act
cannot be said to be taxable income. The compensation is
awarded in lieu of death of a person or bodily injury suffered
in a vehicular accident, which is damage and not income.”
7 CWPIL No.9 of 2014 decided on 15.10.2014
28. The Division Bench of Allahabad High Court in the case of
Commissioner of Income Tax vs. Oriental Insurance Co.
Limited8 took somewhat restricted view of charging interest as
income to tax. Reference was made to the definition of ‘interest’
under section 2(28A) of the Act and held as under:
“36. The necessary ingredients of such interest are that it
should be in respect of any money borrowed or debt
incurred. The award under the Motor Vehicles Act is neither
the money borrowed by the insurance company nor the debt
incurred upon the insurance company. As far as the word
"claim" is concerned, it should also be regarding a deposit or
other similar right or obligation. The definition of Section
2(28A) of the Income Tax Act again repeats the words
"monies borrowed or debt incurred" which clearly shows the
intention of the legislature is that if the assessee has
received any interest in respect of monies borrowed or debt
incurred including a deposit, claim or other similar right or
obligation, or any service fee or other charge in respect of
monies borrowed or debt incurred has been received then
certainly it shall come within the definition of interest.”
29. Learned Single Judge of Madras High Court in the case of
The Managing Director, Tamil Nadu State Transport
Corporation (Salem) Ltd. vs. Chinnadurai9 held that neither the
compensation in motor accident claims awarded by the Tribunal
nor the interest thereon can be subjected to deduction of tax at
source since such receipts are not income under the said Act.
8 [2012] 211 TAXMAN 369 (All)
9 CRP (PD) No.1343 of 2012 and M.P. No.1 of 2012 decided on 2.6.2016
30. A contrary view has been taken in the following decisions:
Rajasthan High Court in the case of Kailash Narain Gupta
vs. Commissioner of Income Tax10 held that interest on
compensation stands on a different footing as compared to the
compensation awarded. It was held that such interest is in the
nature of income. This was reiterated in a later decision of the
High Court in the case of Smt.Sharda Pareek v. Assistant
Commissioner of Income Tax11. We are informed that leave to
appeal against this decision is granted and appeal is pending
before the Supreme Court.
DISCUSSION ON RIVAL CONTENTIONS:
(I) NATURE OF COMPENSATION UNDER THE MOTOR
VEHICLES ACT.-
31. In order to arrive at a correct answer, we would have to
appreciate the interplay between the decisions of the Supreme
Court in the case of Rama Bai (supra), Ghanshyam (HUF)
(supra) and that of Gujarat High Court in the case of Movalia
Bhikhubhai Balabhai (supra) in the context of the amendments
made in section 145A of the Act. Before doing that, it would be
10 225 ITR 921
11 [2019] 104 Taxmann.com 76 (Raj.)
necessary to examine the nature of compensation and interest
awarded under the Motor Vehicles Act, 1988 (for short, ‘Act of
1988’). The Act of 1988 makes detailed provisions for awarding
compensation for death or disablement of any person resulting
from an accident arising out of the use of a motor vehicle.
Essentially, such claim is in the nature of tortious liability. Over a
period of time, the same has been substantially codified. With
exponential increase in the number of vehicles and the road
network, legislations have tried to keep pace with the challenges
arising out of road accidents. The concept of compulsory third
party insurance has been statutorily introduced. The relationship
between the insurer and the insured is basically a contractual
relationship but interjected by a range of statutory provisions.
Under such contract of insurance, the insurer undertakes to
indemnify the insured to the extent agreed. The statutory
provisions contained in the Act of 1988 make third party insurance
compulsory and limit the defences which the insurance company
may raise to repudiate its liability.
32. The first law to be framed in India in this field was the Fatal
Accidents Act, 1855. It provided that whenever the death of a
person is caused by a wrongful act, neglect or default and the act,
neglect or default is such as would (if death had not ensued) have
entitled the party injured to maintain an action and recover
damages in respect thereof, the party, who would have been alive
if death had not ensued, shall be liable to an action or suit for
damages notwithstanding the death of the person injured and
although the death shall have been caused under such
circumstances as amount in law to felony or other crime.
33. The Motor Vehicles Act, 1939 was thereafter enacted in
order to consolidate the law relating to motor vehicles, which
contained various provisions for use of the motor vehicles and for
claiming compensation for death or bodily injury caused in a motor
accident. Special Claims Tribunals were set up to decide such
cases. The Motor Vehicles Act, 1939 was replaced by the Motor
Vehicles Act, 1988. The Statement of Objects and Reasons for
enactment of the said Act records that the need was felt for
consolidation and amendments of laws relating to motor vehicles
and such law should take into account changes in the road
transport technology, pattern of passenger and freight movements,
development of road network in the country and in particular,
improved techniques in the motor vehicles management. Chapter
X of the Act of 1988 pertains to liability without fault in certain
cases. Chapter XI pertains to insurance of motor vehicles against
third party rights. Chapter XII pertains to Claims Tribunals. Section
166 of Act of 1988 pertains to applications for compensation under
which a person who has sustained injury or the owner of the
property or where death has resulted from the accident, the legal
representatives of the deceased could make an application for
compensation to the Motor Accident Claims Tribunal. On such an
application, the Claims Tribunal would pass an award as provided
in section 168 of the Act of 1988. Sub-section (1) of section 168
provides that on receipt of application for compensation, the
Tribunal shall after giving notice to the insurer and giving an
opportunity of being heard to the parties, hold an enquiry into the
claim and may make an award determining the amount of
compensation which appears to it to be just and specify the person
or persons to whom the compensation shall be paid. Awarding just
compensation is thus, of paramount importance.
34. Section 171 of the Act of 1988 provides that where a Tribunal
allows the claim for compensation, such Tribunal may direct that in
addition to the amount of compensation, simple interest shall also
be paid at such rate and from such date, not earlier than the date
of making the claim as it may specify in this behalf.
35. Instances of petitions before the Claims Tribunal broadly fall
within the categories of fatal or injury cases. A case of injury may
lead to permanent disability or temporary disability and such
disability may be partial or total.
36. We may take note of a few leading judgments in the context
of the nature of compensation awarded to a victim of a motor
accident.
37. In the case of General manager, Kerala S.R.T.C. vs.
Susamma Thomas12, it was observed that the compensation in a
motor accident claim must be just, fair and reasonable. It was
observed thus:
“8. The measure of damage is the pecuniary loss suffered
and is likely to be suffered by each dependent. Thus "except
where there is express statutory direction to the contrary, the
damages to be awarded to a dependent of a deceased
person under the Fatal Accidents Acts must take into account
any pecuniary benefit accruing to that dependent in
consequence of the death of the deceased. It is the net loss
on balance which constitutes the measure of damages. …."
12 (1994) 2 SCC 176
38. In the case of R.D. Hattangadi vs. M/s.Pest Control (India)
Pvt. Ltd.13, while referring to different heads for assessing
compensation in injury case, it was observed as under:
“9. Broadly speaking while fixing an amount of
compensation payable to a victim of an accident, the
damages have to be assessed separately as pecuniary
damages and special damages. Pecuniary damages are
those which the victim has actually incurred and which is
capable of being calculated in terms of money-, whereas
non-pecuniary damages are those which are incapable of
being assessed by arithmetical calculations. In order to
appreciate two concepts pecuniary damages may, include
expenses incurred by the claimant : (i) medical attendance;
(ii) loss of earning of profit upto the date of trial; (iii) other
material loss. So far non-pecuniary damages are concerned,
they may include (i) damages for mental and physical shock,
pain suffering, already suffered or likely to be suffered in
future; (ii) damages to compensate for the loss of amenities
of life which may include a variety of matters i.e. on account
of injury the claimant may not be able to walk, run or sit;
(iii) damages for the loss of expectation of life, i.e. on
account of injury the normal longevity of the person
concerned is shortened; (iv) inconvenience, hardship,
discomfort, disappointment, frustration and mental stress in
life.”
39. In the case of Jagdish vs. Mohan and others14, it was
observed as under:
“8. In assessing the compensation payable the settled
principles need to be borne in mind. A victim who suffers a
permanent or temporary disability occasioned by an accident
is entitled to the award of compensation. The award of
13 (1995) 1 SCC 551
14 (2018) 4 SCC 571
compensation must cover among others, the following
aspects:
(i) Pain, suffering and trauma resulting from the accident;
(ii) Loss of income including future income;
(iii) The inability of the victim to lead a normal life together
with its amenities;
(iv) Medical expenses including those that the victim may
be required to undertake in future; and
(v) Loss of expectation of life.”
40. In Reshma Kumari (supra), it was held that while taking into
account the income of the deceased at the time of the accident,
deduction for income tax payable should be made. Similar view
was expressed in the case of Vimal Kanwar vs. Kishore15.
41. In Sarla Varma vs. DTC16, in the context of computation of
compensation, the Court had stressed the requirement of taking
into account the income of the deceased at the time of the
accident (of course after adjusting for future increase) ignoring the
later developments such as future pay revisions. The following
observations were made:
“45. The assumption of the appellants that the actual future
pay revisions should be taken into account for the purpose of
calculating the income is not sound. As against the
contention of the appellants that if the deceased had been
alive, he would have earned the benefit of revised pay
scales, it is equally possible that if he had not died in the
15 (2013) 7 SCC 476
16 (2009) 6 SCC 121
accident, he might have died on account of ill health or other
accident, or lost the employment or met some other calamity
or disadvantage. The imponderables in life are too many.
Another significant aspect is the non-existence of such
evidence at the time of accident.
46. In this case, the accident and death occurred in the
year 1988. The award was made by the Tribunal in the year
1993. The High Court decided the appeal in 2007. The
pendency of the claim proceedings and appeal for nearly two
decades is a fortuitous circumstance and that will not entitle
the appellants to rely upon the two pay revisions which took
place in the course of the said two decades. If the claim
petition filed in 1988 had been disposed of in the year 1988-
89 itself and if the appeal had been decided by the High
Court in the year 1989-90, then obviously the compensation
would have been decided only with reference to the scale of
pay applicable at the time of death and not with reference to
any future revision in pay scales.”
CONCEPT OF MULTIPLIER -
The Supreme Court in Susamma Thomas (supra) referred
to the methods adopted for determination of compensation in fatal
accident cases and endorsed that the multiplier method is logically
sound and legally well established. The following observations
were made:
“As to the multiplier, Halsbury states:
"However, the multiplier is a figure
considerably less than the number of years
taken as the duration of the expectancy. Since
the dependents can invest their damages, the
lump sum award in respect of future loss
must be discounted to reflect their receipt of
interest on invested funds, the intention
being that the dependents will each year draw
interest and some capital (the interest
element decreasing and the capital drawings
increasing with the passage of years), so that
they are compensated each year for their
annual loss, and the fund will be exhausted at
the age which the court assesses to be the
correct age, having regard to all
contingencies. The contingencies of life such as
illness, disability and unemployment have to be
taken into account. …...
16. It is necessary to reiterate that the multiplier method
is logically sound and legally well-established. There are
some cases which have proceeded to determine the
compensation on the basis of aggregating the entire
future earnings for over the period the life expectancy
was lost, deducted a percentage therefrom towards
uncertainties of future life and award the resulting sum
as compensation. This is clearly unscientific. For
instance, if the deceased was, say 25 years of age at the
time of death and the life expectancy is 70 years, this
method would multiply the loss of dependency for 45
years virtually adopting a multiplier of 45 and even if
one-third or one-fourth is deducted therefrom towards
the uncertainties of future life and for immediate lump
sum payment, the effective multiplier would be between
30 and 34. This is wholly impermissible. …...
17. The multiplier represents the number of years'
purchase on which the loss of dependency is
capitalised. Take for instance a case where annual loss
of dependency is Rs. 10,000. If a sum of Rs 1,00,000 is
invested at 10% annual interest, the interest will take
care of the dependency, perpetually. The multiplier in
this case works out to 10. If the rate of interest is 5% per
annum and not 10% then the multiplier needed to
capitalise the loss of the annual dependency at Rs
10,000 would be 20. Then the multiplier, i.e., the number
of years' purchase of 20 will yield the annual
dependency perpetually. Then allowance to scale down
the multiplier would have to be made taking into account
the uncertainties of the future, the allowances for
immediate lump sum payment, the period over which the
dependency is to last being shorter and the capital feed
also to be spent away over the period of dependency is
to last etc. Usually in English Courts the operative
multiplier rarely exceeds 16 as maximum. This will come
down accordingly as the age of the deceased person (or
that of the dependents, whichever is higher) goes up.”
42. In the case of Sarla Verma (supra), the Supreme Court
standardised the choice of the multiplier for achieving degree of
uniformity in awarding compensation in motor accident claim
cases. This was reiterated by the Supreme Court in the case of
Reshma Kumari vs. Madan Mohan17.
NATURE OF INTEREST PAYABLE:
43. In the context of interest, the case of Kaushnuma Begum
vs. New India Assurance Co. Ltd.18, it was observed as under:
“24. Now, we have to fix up the rate of interest. Section 171
of the MV Act empowers the Tribunal to direct that “in
addition to the amount of compensation simple interest shall
also be paid at such rate and from such date not earlier than
the date of making the claim as may be specified in this
behalf’. Earlier, 12% was found to be the reasonable rate of
simple interest. With a change in economy and the policy of
17 (2013) 9 SCC 65
18 (2001) 2 SCC 9
Reserve Bank of India the interest rate has been lowered.
The nationalised banks are now granting interest at the rate
of 9% per annum from the date of the claim made by the
appellants. The amount of Rs.50,000 paid by the Insurance
Company under Section 140 shall be deducted from the
principal amount as on the date of its payment, and interest
would be recalculated on the balance amount of the principal
sum from such date.”
44. In the case of United India Insurance Company Ltd. and
others vs. Patricia Jean Mahajan and Others19, it was observed
as under:
“In our view the reason indicated in the case of Kaushnuma
Begum (supra) is a valid reason and it may be noticed that
the rate of interest is already on the decline. We therefore,
reduce the rate of interest to 9% in place of 12% as awarded
by the High Court.”
45. In the context of interest on the compensation to be awarded
by the Claims Tribunal in the case of Abati Bezbaruah vs.
Dy.Director General Geological Survey of India20, it was
observed by A.R. Lakshmanan, J. in a concurring judgment, as
under:
“18. Three decision were cited before us by Mr.A.P.
Mohanty, learned counsel appearing on behalf of the
appellant, in support of his contentions. No ratio has been
laid down in any of the decisions in regard to the rate of
interest and the rate of interest was awarded on the amount
of compensation as a matter of judicial discretion. The rate
19 (2002) 6 SCC 281,
20 2003 ACJ 680
of interest must be just and reasonable depending upon
the facts and circumstances of each case and taking all
relevant factors including inflation, change of economy,
policy being adopted by the Reserve Bank of India from
time to time, how long the case is pending, permanent
injuries suffered by the victim, enormity of suffering,
loss of future income, loss of enjoyment of life, etc., into
consideration. No rate of interest is fixed under section
171 of the Motor Vehicles Act, 1988. Varying rates of
interest are being awarded by Tribunals, High Courts
and the Apex court. Interest can be granted even if
claimant does not specifically plead for the same as it is
consequential in the eyes of law. Interest is
compensation for forbearance or detention of money
and that interest being awarded to a party only for being
kept out of money which ought to have been paid to him.
No principle could be deduced nor any rate of interest
can be fixed to have a general application in motor
accident claim cases having regard to nature of
provision under section 171 giving discretion to the
Tribunal in such matter. ……”
46. In the case of Dharampal vs. U.P. State Road Transport
Corporation21, it was observed as under:
“8. As per section 171 of the Motor Vehicle Act, 1988
(hereinafter referred as 'Act') where the claim for
compensation made under the act is allowed by the Claims
Tribunal, the tribunal may direct that in addition to the
amount of compensation simple interest shall also be paid at
such rate from such date not earlier than the date of making
claim.
9. In National Insurance co. Ltd. v. Keshav Bahadur [(2004) 2
SCC 370] this court has held that the provisions require
payment of interest in addition to compensation already
determined. Even though the expression "may" is used, a
duty is laid on the Tribunal to consider the question of
21 (2008) 12 SCC 2018
interest separately with due regard to the facts and
circumstances of the case. It was clearly held in the said
decision that the provision of payment of interest is
discretionary and is not and cannot be bound by rules.
10. Interest is compensation for forbearance or
detention of money, which ought to have been paid to
the claimant. No rate of interest is fixed under section
171 of the Act and the duty has been bestowed upon the
court to determine such rate of interest. In order to
determine such rate we may refer to the observations made
by this court over the years. In the year 2001 in the case of
Kaushnuma Begaum v. New India Assurance Co. Ltd.
[(2001) 2 SCC 9] on the question of rate of interest to be
awarded it was held that earlier, 12% was found to be the
reasonable rate of simple interest but with a change in
economy and the policy of Reserve Bank of India the interest
rate has been lowered and the nationalized banks are now
granting interest @ 9% on fixed deposits for one year.
Accordingly, interest @ 9% was awarded in the said case.
We may at this stage also refer to the following observations
of their Lordships in the aforesaid decision which are
relevant to the present case: (SCC p. 16, para 24)”
47. It can, thus, be seen that in the case of fatal accident cases,
the Courts award compensation for loss of dependency benefit,
loss of estate, loss of consortium in case of a spouse, loss of love
and affection for the family members and funeral charges. In injury
cases, generally, the compensation is computed under the heads
of actual loss of income, future loss of income, pain, shock and
suffering, loss of enjoyment of amenities of life, medical treatment
– past and future, miscellaneous heads such as attendant
charges, special diet, transportation, etc. The multiplier method is
found to be most appropriate for computing loss of dependency
benefits in fatal and future loss of income in injury cases.
48. From the above judgments, it can further be seen that be it a
fatal case or an injury case, compensation includes future loss. In
case of fatal accidents, it 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. However, the
computation of such future loss is on the basis of the income of the
deceased or the injured on the death or accident. This is adjusted
by a reasonable future rise in income. The concept of taking into
account full possible rise in income is not accepted. For example,
in case of a salaried person, particularly in government service, by
the time a Claim Petition or Appeal is decided, there is hard
evidence of the implementation of pay revisions and consequential
rise in salary of other employees of the same cadre as that of the
deceased. However, the Courts have rejected the request for
awarding compensation on the basis of such future predictions. To
the multiplicand so determined multiplier is applied to ascertain
future loss. The method of multiplier takes into account various
factors and imponderables of life and, therefore, the multiplier is
not equivalent to the full length of the remainder of the expected
life of the deceased. The multiplier theory proceeds on the basis
that with interest that may be earned on the compensation and a
portion drawn from the capital, should be equivalent to what the
deceased would have contributed to his family. At the end of the
period, the capital should be completely utilised. It is, therefore,
that while awarding compensation, though the Claims Tribunal
awards future loss in praesenti, interest is awarded for the period
between filing of the Claim Petition till passing of the award and,
therefore, as held by the Supreme Court in the case of Abati
Bezbaruah (supra) and Dharampal (supra), such interest is
considered to be part of compensation, and accretion to the
compensation since the same is awarded for the compensation
which is ascertained with reference to an earlier date i.e., the date
of accident. At the same time, courts have not approved granting
interest on future expenditure.
INTERPRETATION OF THE PROVISIONS CONTAINED IN THE
INCOME TAX ACT -
49. We may apply these conclusions to the relevant provisions
contained in the Income Tax Act. Section 56 pertains to income
from other sources. Sub-section (1) of section 56 provides that
income of every kind which is not to be excluded from the total
income under the Act shall be chargeable to income tax under the
head of income from other sources, if it is not chargeable to
income tax under any of the heads specified in section 14, items
(A) to (E). Section 56(1) of the Act thus, makes a residuary
provision for charging income of every kind, not falling under items
(A) to (E) of section 14, to be charged as income from other
sources. Sub-section (2) of section 56 provides that in particular
and without prejudice to the generality of the provisions of subsection
(1), the incomes contained in the following clauses shall be
chargeable to income tax under the head income from other
sources. Clause (viii) inserted by the Finance Act, 2009 w.e.f.
1.4.2010 sub-section (2) of section 56 pertains to income by way
of interest received on compensation or enhanced compensation
referred to in clause (b) of section 145A.
50. Before proceeding to analyse clause (b) of section 145A, we
may note that section 56 of the Act per se does not make a
particular receipt chargeable to tax if it otherwise does not happen
to be income. This section merely provides for taxing an income
not falling under the other heads as income from other sources.
Sub-section (2) of section 56 when it lists various incomes, which
would be treated as income from other sources, merely amplifies
this purpose. Therefore, clause (viii) of sub-section (2) of section
56 by itself would not make the receipt of interest on compensation
chargeable to tax as income from other sources, if such receipt is
not income.
51. We have briefly noted the history behind enactment of
section 145A of the Act. Section 145 pertains to method of
accounting. Sub-section (1) of section 145 provides that income
chargeable under the head profits and gains of business or
profession or income from other sources would be, subject to the
provisions of sub-section (2) computed in accordance with either
cash or mercantile system of accounting regularly employed by
assessee. This provision thus, leaves an option to assessee to
offer the income of profit and gains of business or profession or
from other sources to tax either on cash or mercantile system. In
case of Rama Bai (supra), the Supreme Court held that interest
on compensation cannot be stated to have accrued on the date of
the order of the Court granting enhanced compensation but has to
be taken as having accrued year after year from the date of
delivery of possession of the lands till the date of such order. The
Legislature felt that this decision would cause undue hardship to
the assessees. 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. With a view
to mitigate such hardship, section 145A was amended by the
Finance Act of 2009 w.e.f. 1.4.2010.
52. Clause (b) of section 145A of the Act as amended, we may
recall provides that notwithstanding anything to the contrary
contained in section 145, interest received by an assessee on
compensation or enhanced compensation, as the case may be,
shall be deemed to be income of the year in which it is received.
This provision in our opinion, would have two significant effects.
Firstly, it would overcome the decision of the Supreme Court in the
case of Rama Bai (supra) and, therefore, the principle of accrual
of interest on land acquisition compensation from the date of
taking possession of the land till passing of the award would not
apply. Second effect of this provision would be that whether an
assessee follows the mercantile system of accounting or cash
basis in terms of the option in section 145(1) of the Act, insofar as
the interest on compensation or enhanced compensation is
concerned, the same would be deemed to be the income of the
year in which it is received. Once again, as observed in the
context of section 56(2)(viii), clause (b) of section 145A of the Act
does not make interest on compensation or enhanced
compensation taxable if it is otherwise not exigible to tax. It merely
provides for the point of time when it would be subjected to tax if
otherwise taxable.
53. The Supreme Court in the case of Rama Bai (supra) also,
had no occasion to consider the taxability of interest on
compensation or enhanced compensation in case of land
acquisition cases. In the case of Ghanshyam (HUF) (supra), the
Supreme Court held that interest awarded on compensation as
well as solatium are part of the compensation and, therefore, in
terms of section 45(5) of the Act, would be chargeable to capital
gain in the year in which enhanced compensation is received. We
are conscious that this decision was rendered before the
amendment in Section 145A under the Finance Act, 2009. We are
drawing reference to this judgment only for the limited purpose of
noting that the decision of the Supreme Court in case of Rama Bai
(supra) is not an authority on the question of taxability of interest
on compensation or enhanced compensation. The Division Bench
of the Gujarat High Court, we may recall, in the case of Movaliya
Bhikhubhai Balabhai (supra), held that the ratio of the decision of
the Supreme Court in the case of Ghanshyam (HUF) (supra),
would continue to apply even after amendment in section 145A of
the Act. Secondly, interest under section 28 of the Land
Acquisition Act cannot be treated as income subject to tax
irrespective of clause (b) of section 145A of the Act. Such interest
would form part of the compensation and, therefore, subject to
capital gain. We may note that the Punjab & Haryana High Court
in case of Puneet Singh vs. Commissioner of Income Tax22 has
22 (2019) 415 ITR 215 (P&H)
held that interest on enhanced compensation under Land
Acquisition Act is assessable in the year of receipt as income from
other sources. This decision is directly contrary to the view
expressed by the Gujarat High Court in the case of Movalia
Bhikhubai Balabhai (supra). It is not necessary for us to resolve
this controversy since our reference to and reliance on the
judgment of Gujarat High Court is limited to the effect of
amendment in section 145A by the Finance Act, 2009.
54. To summarise, the decision of the Supreme Court in the
case of Rama Bai (supra) is not an authority on the question of
taxability of interest on compensation or enhanced compensation
in motor accident claim cases. In Ghanshyam (HUF) (supra), the
Supreme Court held that interest under section 28 of the Land
Acquisition Act would invite capital gain tax. This judgment was
rendered before amendment in section 145A of the Act. The
Gujarat High Court in Movalia Bhikhubhai Balabai (supra), held
that the ratio of the Supreme Court in the case of Ghanshyam
(HUF) (supra), would continue to apply post amendment in
section 145A by virtue of Finance Act, 2009 also.
55. In order 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,
income of the deceased or the injured for earmarking
compensation is ascertained after deducting income tax. We have
noticed certain decisions of the Courts holding that such
compensation is by way of reimbursement of the loss and cannot
be treated as income. We, therefore, proceed on such basis. In
the context of the nature of the interest awarded by the Claims
Tribunal or the High Court on motor accident claim compensation
or enhanced compensation, we have referred to the decisions of
the Supreme Court including in cases of Abati Bezbaruah (supra),
Kaushnuma Begum (supra), Patricia G. Mahajan (supra) and
Dharampal (supra). These decisions suggest that the interest is
awarded for delayed computation of compensation. Right to
award interest flows from section 170 of the Motor Vehicles Act,
1988. As is well settled, the authority of the Court to award interest
must be traced to a statutory provision or in agreement between
the parties. In absence of section 170 of the Motor Vehicles Act,
perhaps it would not be lawful for the Tribunal and for that matter,
the High Court in Appeal, to award interest on compensation. The
Supreme Court in the cases of Abati Bezbaruah (supra),
Kaushnuma Begum (supra), Patricia G. Mahajan (supra) and
Dharampal (supra), explained the nature of interest awarded in
motor accident claims cases. Culmination of discussion in these
judgments would be that such interest is compensatory in nature
and will thus, form part of the compensation itself. Compensation
is computed with reference to the date of accident. All calculations
of multiplicand and multiplier are based on such reference point.
But computation by the Tribunal takes time. If compensation is
revised by the High Court it takes further time. Interest is awarded
keeping in mind the rate of inflation. Effort thus is to award just
compensation. Awarding interest for delayed computation of
compensation is therefore integral part of this exercise.
56. The issue can be looked from a slightly different angle. In
the context of interest, there are three crucial dates. The date of
the accident is a date in reference to which the entire
compensation is calculated. The date of filing of the claim petition
is the date from which the claimant can seek interest on the
compensation awarded by the Claims Tribunal. Under section
170 of the Motor Vehicles Act, the interest cannot be awarded for a
period prior to filing of the Claim Petition. The date of passing of
the award by Claims Tribunal is the date on which the
compensation is determined and the right to receive interest
pendente lite ceases. The interest for the period between the filing
of the claim petition and passing of the award thus, is for the
period when the claimant for the first time approached the Claims
Tribunal asking the Tribunal to assess and award compensation
and the time consumed in disposing of the Claim Petition. We may
also recall, the interest can be awarded even though part of the
compensation would comprise of future loss of income. This is so
because, the multiplier method factors this aspect also. At the
same time, as noted, the 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. This
dichotomy, thus, between awarding interest on future income while
not awarding interest for future expenditure brings out the true
character of the interest being awarded.
57. 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 exigible to tax, not being
an income. This position would not change on account of clause
(b) of section 145A of the Act as it stood at the relevant time
amended by Finance Act, 2009 which provision now finds place in
sub-section (1) of section 145B of the Act. Neither clause (b) of
section 145A, as it stood at the relevant time, nor clause (viii) of
sub-section (2) of section 56 of the Act make the interest
chargeable to tax whether such interest is income of the recipient
or not. Section 194A of the 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.
58. We are not oblivion to erstwhile clause (ix) of sub-section (3)
of section 194A or the newly amended clauses (ix) and (ixa)
thereof substituting original clause (ix) w.e.f. 1.6.2015 by Finance
Act, 2015. Subsection (1) of section 194A provides for deduction
of tax at source upon payment of any income by way of interest.
Sub-section (3) of section 194A contains exclusion clauses from
the purview of sub-section (1). Clause (ix) contained in subsection
(3) prior to amendment pertained to income credited or
paid by way of interest on the compensation amount awarded by
the Motor Accident Claims Tribunal where such amount did not
exceed Rs.50,000/-. In substitution of this provision, clause (ix)
now provides that the provision of sub-section (1) will not apply to
such income credited by way of interest on the compensation
awarded by the Motor Accident Claims Tribunal. Clause (ixa)
virtually retains the original provision of unamended clause (ix).
The learned ASG would, therefore, contend that by virtue of these
provisions, requirement of deducting tax at source on interest
income would not arise only if the same does not exceed
Rs.50,000/- in a financial year or where such income is merely
credited. In other words, at the time of payment of interest, the
provision for deduction of tax at source would kick in.
59. So far as the plain meaning of section 194A(1) read with
erstwhile clause (ix) and substituted clauses (ix) and (ixa) of subsection
(3) is concerned, there can be no doubt or dispute.
However, the fundamental question is does section 194A make the
interest income chargeable to tax if it otherwise is not. The answer
has to be in the negative. 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.
60. In the decision of the Gujarat High Court in the case of
Hansaguri Prafulchandra (supra), the Court had no occasion to
decide the taxability of interest on compensation or enhanced
compensation of motor accident cases. This was also the position
in the case of decision of this Court in the Gauri Deepak Patel &
ors. (supra).
61. 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.
62. Before closing we would tie a few loose ends:
(i) Learned Counsel for the petitioners had not made any
submissions on the vires of the provisions of the Act, virtually
giving up the challenge. We have therefore not examined
the same.
(ii) Though no serious opposition was raised to the petition
on the ground of availability of statutory appeal, we think it is
our duty to explain why this petition was entertained. In the
present case, only question was of charging interest on
compensation/enhanced compensation of motor accident to
tax. This was a pure question of law. No facts were to be
ascertained. It was otherwise important that such a question
is decided by the High Court. We had, therefore, entertained
the petition.
(iii) The Assessing Officer has passed the order of
assessment. He has made a bonafide assessment. With his
approach, there can be no criticism. But when it comes to
issuing notice for penalty, it defies logic. The petitioner
despite his stand that the interest is not taxable, filed the
return, offered the interest to tax and also deposited such tax
under protest. What was the purpose of issuing notice for
penalty is difficult to understand.
63. In the result, 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
judgment of the High Court. On any interest paid to him post the
judgment, tax had to be collected as income from other sources.
We, therefore, set aside the impugned order of assessment and
place the assessment of the petitioner back to the Assessing
Officer for passing fresh order in line with this judgment. Before
closing, we record our appreciation for the industry and punctuality
with which the learned Senior Counsel Mr.Jamshed Mistri, the
Amicus Curiae, had assisted the Court in the present petition.
64. Writ Petition is disposed of accordingly.
(S.J. KATHAWALLA, J.) (AKIL KURESHI, J.)
No comments:
Post a Comment