2016 (9) TMI 451 - HC - Income Tax

TDS u/s 194A - whether the insurance company was justified in deducting tax at source while depositing the compensation in favour of the claimants? - Held that - The case of credit of interest on compensation awarded by the Claims Tribunal continues to find place in the exclusion clause contained in sub section (3) of Section 194A. In fact it would prima facie appear that the ceiling of 50, 000/- per annum for such exclusion is now done away with in case of crediting of interest on compensation awarded by the Claims Tribunal while retaining such limit in cases of payment of interest on such compensation. However we need not thresh out this last part of the issue since admittedly in the present case for none of the years under consideration the interest income exceeded 50, 000/-. In fact this Court in case of Smt. Hansagauri Prafulchandra Ladhani and ors vs. The Oriental Insurance Company Ltd (2006 (10) TMI 383 - GUJARAT HIGH COURT) provided for further splitting up of this ceiling of 50, 000/- per claimant basis. Looked from any angle the insurance company was not justified in deducting tax at source while depositing the compensation in favour of the claimants. It therefore cannot avoid liability of depositing such amount with the Claims Tribunal. The Claims Tribunal had committed no error in insisting on the insurance company in making good the shortfall.

Summary

Issues:
Challenge to order of Motor Accident Claims Tribunal regarding deduction of tax at source by insurance company.

Analysis:
1. The petition was filed by New India Assurance Company Ltd. challenging an order passed by the Motor Accident Claims Tribunal, Vadodara, regarding deduction of tax at source in a compensation case. The case involved a fatal accident where the petitioner-insurance company was liable to pay compensation to the legal heirs of the deceased passenger. The Tribunal awarded compensation, and the insurance company deposited the amount after deducting tax at source. The claimants disputed the deduction, leading to the impugned order and the subsequent petition challenging it.

2. The petitioner argued that a statutory amendment in the Income Tax Act required tax deduction at source on interest accrued on compensation awarded by the Claims Tribunal. However, the High Court referred to a previous judgment which outlined the procedure for tax deduction in such cases. The Court highlighted the provisions of Section 194A of the Income Tax Act and emphasized the need to apportion interest among claimants on a yearly basis, with tax deduction only if the interest exceeded a certain threshold for a claimant in a financial year.

3. The Court analyzed the relevant sections of the Income Tax Act, particularly Section 194A, both before and after the 2015 amendment. It clarified that the exclusion clause for tax deduction on interest credited on compensation by the Claims Tribunal continued to exist post-amendment. The Court noted that in the present case, the interest income did not exceed the threshold for any year, making the insurance company unjustified in deducting tax at source. The Tribunal's decision to insist on the company rectifying the shortfall was upheld.

4. The Court rejected the petitioner's argument based on a previous order allowing refund of tax deducted in a different case. It emphasized that the insurance company should have sought proper advice before deducting tax, especially considering the legal implications of the statutory amendments. The Court dismissed the petition, stating that the insurance company should approach the Income Tax department for any refund, as advised.

In conclusion, the High Court dismissed the petition, affirming the Tribunal's order regarding tax deduction at source by the insurance company in a motor accident compensation case. The judgment highlighted the statutory provisions, previous judgments, and the need for proper compliance with tax deduction rules in such scenarios.