2017 (4) TMI 1430 - HC - Income Tax

Accrual of income - Compensation awarded by the Motor Accident Claims - whether sum payable to the claimants on the death of victim falls within the ambit of interest within the meaning of Sec. 2 (28A) and can be subjected to tax? - HELD THAT - On plain reading of Section 2-(28A), it is very clear that originally compensation was received by the claimant was not income but once the amount received, it has become capital and interest on capital is liable to be taxable. In that view of the matter, the issue is required to be answered in favour of the department and against the assessee. The contention that revenue income of compensation interest is also compensation, in our considered opinion, is misconceived inasmuch as they are entitled benefits only for the compensation, the rest of the amount of interest is deferred amount of compensation, therefore, the interest income is to be calculated from the date of application which was preferred and they are entitled for the interest from the date of application as directed by all courts but subject to income liable to be taxed every year. In that view of the matter, the income of interest is to be counted on accrual basis year wise. The first issue is accordingly answered in favour of the department that interest income is taxable. In the second issue, it is held that taxability of interest would be attracted on year wise accrual basis. The assessee will calculate the interest year wise and will submit the same calculation to the assessing officer within a period of 30 days. The amount which has been received by him will bekept in a separate FDR year wise and statement of year wise will be submitted to the AO. It is made clear that FDR interest will be allowed to be accrued in favour of the assessee and only amount of interest kept in FDR will be refunded to the department within 30 days from the date of judgment of the First Appeal which is pending in the High Court, the assessee inform the disposal of the appeal and will deposit the amount. If the amount is not paid within 30 days of the judgment of the High Court, the department will be entitled for statutory interest prevailing on that day from the date of the judgment of the High Court, in first appeal. With the aforesaid observations, the appeals stand disposed of.

Issues involved:
1. Taxability of interest received on compensation awarded by the Motor Accident Claims Tribunal.
2. Interpretation of Section 2(28A) of the Income Tax Act, 1961 regarding interest income.
3. Determination of the tax liability on interest received on compensation.

Detailed Analysis:
1. The judgment dealt with the taxability of interest received on compensation awarded by the Motor Accident Claims Tribunal. The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the department. The primary question was whether the interest received on compensation payable to claimants falls within the ambit of interest under Section 2(28A) of the Income Tax Act, 1961 and can be subjected to tax.

2. The counsel for the department argued that interest received on compensation is taxable as per the provisions of the Income Tax Act. The argument was based on the accrual of interest on compensation awarded by the Motor Accident Claims Tribunal. The contention was that interest income is liable to be assessed in the year in which it reaches its finality.

3. On the other hand, the counsel for the assessee contended that the interest income received on compensation is not taxable as it does not fall within the definition of income under the Income Tax Act. The argument was supported by various judgments citing that interest on compensation is of a contingent nature and not amenable to tax.

4. The court analyzed the provisions of Section 2(28A) of the Income Tax Act, which defines interest income. It was concluded that once compensation is received by the claimant, it becomes capital, and interest on capital is liable to be taxed. The court held that interest income on compensation is taxable on an accrual basis year-wise.

5. The judgment resolved the issues in favor of the department, stating that interest income on compensation is taxable. It directed the assessee to calculate interest year-wise and submit the calculation to the assessing officer. The court also instructed the amount received to be kept in a separate fixed deposit account year-wise and refunded to the department if required.

6. In conclusion, the judgment clarified the tax liability on interest received on compensation awarded by the Motor Accident Claims Tribunal. It emphasized the accrual basis for taxing interest income and provided directions for the proper calculation and management of the interest amount.

← Previous Next →