2006 (10) TMI 383 - HC - Income Tax

TDS liability on Insurance companies - TDS u/s 194A - interest received on the compensation - Motor Accidents Claims - HELD THAT - 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 income-tax authority for refund of such amount/s as may be due to them out of the amount which has already been deducted by the Insurance Company as tax deducted at source under the provisions of Section 194A of the Act. 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. In the facts of the present case, since the Insurance Company had deducted tax on compensation u/s 194A(3)(ix) of the Act by treating the entire interest amount as one lumpsum amount, we direct that after giving the claimants the details of the amounts of interest spread over the relevant financial years and the break-up amongst several claimants, the Insurance Company shall, within one month from the date of receipt of a certified copy of this order, furnish to the claimants the certificate indicating the interest amounts computed for each year and with the break-up of the interest amounts payable to each claimant in each of those years as per the apportionment made in this order. Thereafter it will be open to the claimants to make applications/representations before the appropriate income-tax authority which shall decide the same within six months from the date of receipt thereof. We are not passing any orders on the prayers for disbursement of the amounts as the learned advocate for the claimants seeks leave to file a separate application with all necessary facts in support of the prayer. Leave as prayed for is granted - The application is accordingly allowed in the aforesaid terms.

Summary

Issues Involved:
1. Interpretation of Section 194A(3)(ix) of the Income-tax Act, 1961.
2. Apportionment and disbursement of compensation and interest among claimants.
3. Tax Deducted at Source (TDS) on interest accrued on compensation.
4. Refund of excess tax deducted at source.

Detailed Analysis:

1. Interpretation of Section 194A(3)(ix) of the Income-tax Act, 1961:

This application involves the interpretation of Section 194A(3)(ix) regarding the deduction of income tax at source on interest received by claimants on compensation awarded by the Motor Accident Claims Tribunal. The court examined whether the Insurance Company was justified in deducting TDS on the total interest amount of Rs. 15,47,902/- at the rate of 11%, resulting in a deduction of Rs. 1,70,269/-. The court noted that compensation under the Motor Vehicles Act is not taxable as income, and interest on such compensation should be spread over the years from the date of filing the claim petition to the date of deposit, as per the Supreme Court's decision in Rama Bai v. Commissioner of Income-tax, AP.

2. Apportionment and Disbursement of Compensation and Interest Among Claimants:

The original claim petition was filed by the heirs of the deceased for compensation of Rs. 20 lakhs due to a motor vehicle accident. The Tribunal awarded Rs. 11,78,000/- with interest at 9% per annum from the date of filing the petition till the date of payment. The court directed that the compensation and interest be apportioned among the widow and five children of the deceased, with 33% for the widow and the balance equally divided among the children. Detailed calculations of interest income payable to each claimant were submitted, showing the interest accrued year by year from 1991 to 2006.

3. Tax Deducted at Source (TDS) on Interest Accrued on Compensation:

The court addressed the contention that the Insurance Company should not have deducted Rs. 1,70,269/- as TDS. The court held that income tax is ultimately a tax on income, and the interest on compensation should be spread over the relevant financial years. The court directed that the Insurance Company provide detailed computations of interest for each year and apportion it among the claimants. The Tribunal was instructed to ensure the interest accrued each year is apportioned among the claimants and to permit the Insurance Company to pay over the amount liable to be deducted at source if the interest for any particular financial year exceeds Rs. 50,000/-.

4. Refund of Excess Tax Deducted at Source:

The court allowed the claimants to apply to the Income-tax Department for a refund of the excess tax deducted. The concerned authority was directed to decide such applications within six months. The court emphasized the need to prevent similar situations in the future and provided detailed guidelines for the Insurance Companies and Tribunals to follow in cases where the interest on compensation exceeds Rs. 50,000/- in any financial year.

Conclusion:

The court ruled in favor of the claimants, allowing them to seek a refund of the excess TDS and providing a framework to ensure proper apportionment and tax treatment of interest on compensation in future cases. The application was allowed, and the Registry was directed to circulate the order among all Motor Accident Claims Tribunals in the State.