2016 (6) TMI 240 - HC - Income Tax

TDS on compensation and interest awarded by the Motor Accident Claims - whether the deduction of TDS on interest accrued on deposits in terms of Orders passed by the Courts in Motor Accident cases is legally sustainable or not? - Held that - Compensation cannot be categorized or even described as income as the intention of the legislature in awarding compensation to the victims of Motor Accident cases is to restitute them and rehabilitate them. If there is a conflict between a social welfare legislation and a taxation legislation, then, this Court is of the view that a social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicle Act is one such legislation which has been passed with a benevolent intention for compensating the accidient victims who have suffered bodily disablement or loss of life and the Income Tax Act which is primarily intended for Tax collection by the State cannot put spokes in the effective and efficacious enforcement of the Motor Vehicles Act. In fact, if one might deeply analyse, it could be seen that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases. This Court arrives at the conclusion that the compensation awarded or the interest accruing therein from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term income as defined under the Income Tax Act, 1961. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of the term 'Life' in Article 21 of the Constitution of India.
2. Grant of compensation in Motor Accident cases.
3. Legality of Tax Deduction at Source (TDS) on interest accrued on compensation awarded in Motor Accident cases.

Analysis:

Issue 1: Interpretation of the term 'Life' in Article 21 of the Constitution of India
The judgment discusses the evolution of the interpretation of the term 'Life' in Article 21 of the Constitution of India, emphasizing that it does not merely refer to animal existence. The court highlights the need to understand the term expansively, citing landmark cases like A.K.Gopalan's and Menaka Gandhi's cases to underscore the development in judicial interpretation over the years.

Issue 2: Grant of compensation in Motor Accident cases
The court acknowledges the rise in Motor Vehicle Accidents and the resulting loss of life and bodily injury. It emphasizes that compensation serves as the only solace for victims, as they cannot be fully restored to their original state post-accident. The court notes that in granting compensation, a liberal approach is adopted by courts to understand the victim's difficulties and help them in their journey back to normalcy.

Issue 3: Legality of Tax Deduction at Source (TDS) on interest accrued on compensation awarded in Motor Accident cases
The central issue revolves around whether victims awarded compensation should be required to pay TDS on the interest accrued on the compensation amount under the Income Tax Act, 1961. The court critically analyzes this question, citing judgments from various High Courts. It deliberates on the concept of compensation and its purpose, ultimately concluding that compensation cannot be classified as taxable income. The court highlights a circular issued by the Income Tax Department, which was quashed by the Himachal Pradesh High Court in a Public Interest Litigation, emphasizing that compensation aims to ameliorate the sufferings of victims and should not be subject to TDS. The court rejects the notion of TDS on compensation, aligning with the judgments of the Himachal Pradesh High Court and the Punjab and Haryana High Court, stating that compensation and the interest accrued thereon do not fall under the definition of 'income' in the Income Tax Act, 1961.

In conclusion, the court dismisses the Civil Revision Petition, directing that the Petitioner Corporation cannot deduct any amount towards TDS on the compensation awarded in the Motor Accident case. The court's decision is based on the principle that compensation is not taxable income and should not be subjected to TDS, ensuring that victims receive the full restitution intended by the law.