2016 (5) TMI 268 - HC - Income Tax

TDS liability on compensation in view of the death or injury - insurance company has been called upon to pay the amounts of TDS deducted on the interest income which was deposited by the insurance company with the Income tax Department - Held that - There is force in the contention raised on behalf of the petitioner that the claimants are liable to pay double the tax one on receipt of compensation which would be added in the income and the other where TDS would be deducted by the insurance company thus it amounts to putting an onerous liability on the taxpayers as they are liable to pay tax two times. The payment of compensation on account of death and injury is not a business transaction or a receipt of any charges on account of services rendered by any other party. Compensation received under the Motor Vehicles Act is either on account of loss of earning capacity on account of death or injury or on account of pain and suffering and such receipt is not by way of earning or profit. Award of compensation is on the principle of restitution to place the claimant in the same position in which he would have been had the loss of life or injury has not been suffered. Therefore the impugned orders calling upon the insurance company to pay the TDS/deduct TDS on the interest part are not sustainable and are hereby set aside. - Decided against revenue

Summary

Issues:
Challenge to impugned orders passed by executing court regarding TDS deduction on interest income deposited with Income-tax Department by insurance company.

Analysis:
The judgment concerns the challenge to orders passed by the executing court, directing an insurance company to pay TDS deducted on interest income deposited with the Income-tax Department. The court appointed Mr. Pankaj Jain as amicus curiae to assist in determining whether TDS should be deducted in cases where claimants receive compensation for death or injury. Mr. Jain, supported by Mr. Bhardwaj, cited a judgment to argue that insurance companies are not liable to impose TDS in such cases. The court reviewed the contentions and relevant judgments, including those from the Supreme Court, to make an informed decision.

The judgment referenced a case from the Himachal Pradesh High Court, highlighting the distinction between interest and compensation. It emphasized that interest under specific sections of the law is for delayed payment, not part of compensation. The court also discussed the implications of interest on solatium and market value, citing relevant legal provisions and past judgments to support its reasoning.

The court acknowledged the argument that requiring claimants to pay tax on compensation received, in addition to TDS deducted by the insurance company, imposes a burdensome tax liability. It differentiated compensation for death or injury from business transactions, emphasizing the restitutive nature of compensation to restore claimants to their pre-loss position. The judgment also referenced foreign court judgments supporting a similar view on taxation of compensation.

Furthermore, the Division Bench of the court, in a related case, held that compensation under the Motor Vehicles Act is not earned income but aims to restore claimants to their pre-injury financial state. Consequently, the court set aside the impugned orders directing the insurance company to pay or deduct TDS on interest income, deeming them unsustainable.

In conclusion, the court appreciated the assistance of Mr. Pankaj Jain and allowed the revision petitions, thereby resolving the issue regarding TDS deduction on interest income in compensation cases.