2012 (9) TMI 588 - HC - Income Tax

TDS liability on the amount of interest paid on delayed payment of compensation - Proceedings regarding claim under Motor Vehicle Act - whether the interest paid does not come with in the ambit of section 2(28A)? - ITAT allowed the relief by canceling the liability - AY 1998-99 to 2002-03 - Held that - The word interest as defined under Section 2(28A) has to be construed strictly as necessary ingredients of such interest are that it should be in respect of any money borrowed or debt incurred. The award under the Motor Vehicle 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 IT 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. Insertion of clause (ix) to Section 194A(3) by the Finance Act 2003 with effect from 1.6.2003 also goes to show that prior to 1.6.2003, the legislature had no intention to charge any tax on the interest received as compensation under the Motor Vehicle Act. Even under the amended Act, interest received in excess of Rs.50,000/- has been subjected to tax liability. Certainly such interest exceeding Rs.50,000/- has further to be split amongst all the claimants and has to be spread over for each of the assessment years. Accordingly there appears to be no justification to cast liability to deduct the tax at source on the amount of interest paid on compensation under Motor Vehicle Act prior to 1.6.2003. The award of compensation under motor accidents claims cannot be regarded as income. The award is in the form of compensation to the legal heirs for the loss of life of their bread earner. Hence the interest on such award also cannot be termed as income to the legal heirs of the deceased or the victim himself - The award under the Motor Vehicle Act is like a decree of the court. It do not come within the definition of income as mentioned in Section 194A(1) read with Section 2(28A) of the Income Tax Act, thus the interest paid on compensation under motor accident claims awards prior to 1.6.2003 cannot be treated as income from the interest - in favour of assessee.

Issues Involved:
1. Whether the Tribunal was legally correct in cancelling the TDS liability imposed by the ITO (TDS) on the interest paid on delayed payment of compensation for the assessment years 1998-99 to 2002-03.
2. Whether the interest paid on delayed payment of compensation under MACT falls within the ambit of section 2(28A) of the Income-tax Act, 1961, and whether the tax deductor was legally obligated to deduct TDS on such interest.

Detailed Analysis:

Issue 1: Cancellation of TDS Liability Imposed by the ITO (TDS)
The Tribunal had allowed relief to the tax deductor by cancelling the TDS liability imposed by the ITO (TDS) on the interest paid on delayed payment of compensation. The Assessing Authority had initially established that the respondent had failed to deduct income tax on the interest amount and was liable to deposit the amount of short deduction of tax (TDS) under Section 201(1) along with interest under Section 201(1A) of the Act. This decision was confirmed by the Commissioner of Income Tax (Appeals)-1, Agra. However, the I.T.A.T., Agra, decided in favor of the respondent, reversing the decision of the Assessing Authority and the CIT (Appeals).

Issue 2: Applicability of Section 2(28A) of the Income-tax Act, 1961
The central question was whether the interest paid on delayed payment of compensation under the Motor Vehicle Act (MACT) falls within the definition of "interest" under Section 2(28A) of the Income-tax Act, 1961, which defines "interest" as interest payable in any manner in respect of any moneys borrowed or debt incurred. The Assessing Authority and CIT (Appeals) held that the interest on such compensation is taxable and falls under Section 194A of the Income Tax Act, 1961. However, the Tribunal and the High Court found that the interest paid on delayed compensation under MACT does not fall within this definition.

Legal Reasoning and Judgments:

Assessing Authority's Findings:
1. The Assessing Authority argued that interest paid under the Motor Vehicle Act is a revenue receipt similar to interest on delayed payment under the Land Acquisition Act, and thus subject to TDS under Section 194A of the Income Tax Act.
2. The provisions of Section 194A were deemed applicable to interest on compensation under the Motor Vehicle Act, as the interest element is distinct from the compensation.
3. The actual payer of interest, the insurance company, was responsible for deducting tax at source, as per Section 204(iii).

Tribunal's Decision:
1. The Tribunal, following previous decisions in similar cases, held that the interest on delayed payment of compensation under MACT does not fall within the ambit of Section 2(28A) and hence, TDS was not applicable.

High Court's Analysis:
1. The High Court examined the definition of "interest" under Section 2(28A) and concluded that the interest on compensation under MACT does not constitute interest on money borrowed or debt incurred.
2. The Court differentiated between compensation under the Land Acquisition Act and the Motor Vehicle Act, noting that compensation under the latter is for the loss of life or injury and does not attract capital gains tax.
3. The Court also considered the legislative intent, noting that the insertion of clause (ix) to Section 194A(3) by the Finance Act 2003 indicated that prior to this amendment, there was no intention to tax such interest.

Relevant Case Laws:
1. The Court referred to several precedents, including Commissioner of Income Tax Vs. Chiranji Lal Multani Mal Rai Bahadur (P.) Ltd., Ghaziabad Development Authority Vs. Dr. N.K. Gupta, and Commissioner of Income-tax Vs. H.P. Housing Board, which supported the view that interest awarded as compensation or damages does not attract TDS under Section 194A.
2. The Court distinguished these cases from those involving interest on compensation under the Land Acquisition Act, which were deemed taxable.

Conclusion:
The High Court concluded that the interest paid on compensation under motor accident claims awards prior to 1.6.2003 cannot be treated as income from interest and does not attract TDS under Section 194A of the Income Tax Act. Both substantial questions of law were answered against the revenue and in favor of the assessee, leading to the dismissal of all appeals.

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