2016 (6) TMI 255 - AT - Income Tax

Addition on account of interest awarded as a part of enhanced accident compensation - Held that - Clearly, unless a receipt is not an income, there is no occasion for the provisions of Section 56(1) or 56(2) coming into play. Section 56 does not decide what is an income. What it holds is that if there is an income, which is not taxable under any of the heads under Section 14, i.e item A to E, it is taxable under the head income from other sources . The receipt being in the nature of income is a condition precedent for Section 56 coming into play, and not vice versa. To suggest that since an item is listed under section 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse. The very approach of the authorities below is devoid of legally sustainable merits. The authorities below were thus completely in error in bringing the interest awarded by Hon ble Supreme Court to tax. The question of deduction under section 57(iii), given the above conclusion, is wholly irrelevant. We vacate this action of the Assessing Officer, and disapprove the CIT(A) s action of confirming the same. Grievance of the assessee is thus upheld.

Issues Involved:
1. Taxability of interest awarded as part of enhanced accident compensation.
2. Applicability of Section 145A(b) and Section 56(2)(viii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Interest Awarded as Part of Enhanced Accident Compensation:

The primary issue is whether the interest component on the compensation awarded by the Supreme Court is taxable. The assessee, a victim of a motor accident, received compensation after a prolonged legal battle. The compensation itself is not disputed to be non-taxable as it is a capital receipt. However, the Assessing Officer (AO) contended that the interest on this compensation is taxable under Section 145A(b) read with Section 56(2)(viii) of the Income Tax Act.

The CIT(A) upheld the AO's view, stating that the interest received on compensation is taxable as "income from other sources." The CIT(A) dismissed the appellant's reliance on certain judgments, noting that those cases did not consider the specific provisions of Section 56(2)(viii) and Section 145A(b).

On appeal, the Tribunal examined the nature of the interest awarded. It was emphasized that the interest compensates for the time value of money due to the delay in payment of compensation. The Tribunal referred to the Supreme Court's judgment in Padmaraje R. Kadambande vs. CIT, which held that amounts received as compensation are capital receipts and not income. The Tribunal also cited the Allahabad High Court's decision in CIT Vs Oriental Insurance Co Ltd, which stated that compensation and the interest on such compensation for motor accident claims cannot be regarded as income.

The Tribunal concluded that since the compensation itself is not taxable, the interest awarded due to the delay in payment of compensation also cannot be taxed. The interest is seen as part of the compensation, maintaining its character as a capital receipt.

2. Applicability of Section 145A(b) and Section 56(2)(viii) of the Income Tax Act:

The Revenue's argument rested on the applicability of Section 145A(b) and Section 56(2)(viii). These provisions were introduced to mitigate the hardship caused by the Supreme Court's decision in Rama Bai vs. CIT, which taxed interest on delayed compensation on an accrual basis. The amendment aimed to tax such interest on a receipt basis to provide relief to taxpayers.

The Tribunal clarified that Section 145A(b) deals with the timing of taxability, not the taxability itself. It does not convert a non-taxable receipt into taxable income. Section 56(2)(viii) is an enabling provision to classify interest as "income from other sources" in the year of receipt. However, this classification applies only if the receipt is inherently income. Since the interest in question is part of the compensation, it retains its non-taxable nature.

The Tribunal emphasized that the authorities below misinterpreted these provisions, leading to an erroneous conclusion. The interest awarded by the Supreme Court, being compensatory in nature, is not taxable. The Tribunal vacated the AO's action and disapproved the CIT(A)'s confirmation of the same.

Conclusion:

The Tribunal allowed the appeal, holding that the interest component on the enhanced accident compensation awarded by the Supreme Court is not taxable. The Tribunal suggested that the Central Board of Direct Taxes issue appropriate administrative instructions to prevent such unjust tax demands in the future, ensuring that measures intended to provide relief are not misused for taxation purposes. The judgment was pronounced on 31st May 2016.

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