2018 (6) TMI 1838 - HC - Income Tax

TDS u/s 194A - interest payable to the claimants on compensation awarded under Employees' Compensation Act - HELD THAT - Section 194A of Income Tax Act, 1961, clearly provides that any person, not being an individual or a Hindu undivided family, responsible for paying to a resident any income by way of interest, other than income by way of interest on securities, shall deduct income tax on such income at the time of payment thereof in cash or by issue of cheque or by any other mode. Compensation awarded under Motor Vehicles Act or Employees' Compensation Act in lieu of death of a person or bodily injury suffered in a vehicular accident, is a damage and not an income and cannot be treated as taxable income. As well settled that interest awarded by the Motor Accident Claims Tribunal on a compensation is also a part of compensation upon which income tax is not chargeable as also held by the Division Bench of this Court in Court on its own motion vs. The H.P. State Cooperative Bank Ltd. And others 2014 (10) TMI 972 - HIMACHAL PRADESH HIGH COURT . The same principle will be applicable in the present case also. Deduction of income tax by petitioner/Insurance Company on the interest accrued/awarded on the compensation deposited by the petitioner/Insurance Company is illegal and is contrary to the law of land. This petition is disposed of directing Income Tax Officer, Nahan to refund the TDS to the petitioner/Insurance Company within ten weeks from date of receiving information thereof, failing which petitioner company shall also be liable to pay interest @ 9% per annum on the said amount with effect from 1st February, 2018, till payment/deposit.

Summary

Issues involved:
1. Interpretation of Section 194A of the Income Tax Act, 1961 regarding deduction of income tax on interest component of compensation under the Employees' Compensation Act.
2. Legality of deducting income tax on interest accrued on compensation awarded under the Employees' Compensation Act.
3. Applicability of income tax on compensation awarded for death or bodily injury in a vehicular accident.
4. Refund of TDS deducted by the Insurance Company.
5. Liability of the Insurance Company to pay the balance amount of compensation along with interest.

Analysis:

Issue 1: Interpretation of Section 194A of the Income Tax Act, 1961
The judgment delves into the provisions of Section 194A of the Income Tax Act, 1961, which mandates the deduction of income tax on interest payments. It highlights that compensation awarded under the Employees' Compensation Act should not be treated as taxable income, as it is considered as damage and not income. This interpretation is crucial in determining the tax liability on compensation amounts.

Issue 2: Legality of deducting income tax on interest component
The judgment questions the legality of deducting income tax on the interest component of compensation awarded under the Employees' Compensation Act. It emphasizes that interest awarded on compensation should not be subject to income tax, aligning with previous decisions that deemed such interest as part of the compensation and not taxable income.

Issue 3: Applicability of income tax on compensation for vehicular accidents
The judgment draws parallels with previous cases to establish that interest awarded on compensation, including in cases of vehicular accidents, is not taxable income. It cites precedents to support the argument that income tax should not be deducted on interest accrued on compensation amounts under the Employees' Compensation Act.

Issue 4: Refund of TDS
The judgment directs the Income Tax Officer to refund the TDS deducted by the Insurance Company on the interest component of the compensation. This refund is ordered within a specified timeframe, emphasizing the illegality of the deduction and the need for compliance with the law.

Issue 5: Liability to pay balance compensation and interest
The judgment mandates the Insurance Company to pay the balance amount of compensation, along with interest, within a stipulated period after receiving the refund of TDS. Failure to comply with this directive would result in the imposition of interest on the outstanding amount, reinforcing the obligation of the Insurance Company to fulfill the compensation award.

In conclusion, the judgment provides a comprehensive analysis of the issues surrounding the deduction of income tax on compensation under the Employees' Compensation Act. It clarifies the legal position on the tax treatment of compensation amounts, emphasizes the non-taxable nature of interest awarded on compensation, and outlines the obligations of the parties involved in adhering to the law and fulfilling the compensation award.