2020 (12) TMI 483 - HC - Income Tax

TDS liabiity on Award and decree passed by Motor Accident Claim Tribuna l - Whether Insurance Company could not also have deducted the amount of income tax which has been deducted by the Tribunal on its own? - HELD THAT - When the Income Tax Act and the decisions referred hereinabove do not permit the Insurance Company to deduct TDS, could the Tribunal deduct what is known as tax on the compensation. With utmost respect, the answer is same cannot be. Tax has to be levied each yea Compensation is awarded in lump sum which has to be spread over as it was an aggregate amount. Income even if we consider apart from the interest, it has to be spread over relevant financial year from the period when the amount would accrue. The claimants normally are not given the entire amount and are subjected to deposit the amount. The amount awarded by the Tribunal cannot be subjected to tax on the flat rate as decided by the Tribunal. The legislation being a social welfare legislation and in fact there is no conflict between the social welfare legislation and tax legislation even if there is conflict the social welfare legislation would prevail as it would subserve larger public interest. Learned Judge has lost sight of the fact that the deceased left behind him five legal representatives when he passed away. The amount has to be distributed amongst all the five of them and it cannot be that the income tax would be payable on the total sum amount awarded. Even if we look at the order, amounts are bifurcated which goes to show that the amounts are again kept in fixed deposits. In that view of the matter, the amount of compensation will have to be divided between the persons who got money and this amount has to be spread over to the coming years. It is not one time income to them. It is compensation spread over as per the system prevailing. The amount cannot, therefore, be held to be income in one particular year, namely, 2019 when the award came to be passed even if we consider that the period during which the matter remained pending before the Tribunal, the amount has to be bifurcated amongst the legal heirs. Thereafter, the Income Tax Department will have to consider the slabs as they are applicable. Fresh decree will be drawn by the Tribunal on receipt of the order of this Court. The Insurance Company, if has not deposited the amount as of yet despite the order dated 23.11.2019, shall immediately deposit the entire amount. It goes without saying that no TDS shall be deducted in view of New India Assurance Co. Ltd. Vs. Hussain Babulal Shaikh and others 2017 (4) TMI 183 - BOMBAY HIGH COURT

Summary

Issues:
1. Assessment of compensation and liability by the Motor Accident Claim Tribunal.
2. Deduction of income tax from the compensation awarded to the heirs of the deceased.
3. Applicability of Section 194A(3)(IX) of the Income Tax Act.
4. Practice of deduction of TDS by Insurance Company.
5. Calculation of income tax on the compensation awarded.
6. Distribution of compensation among legal representatives.
7. Rate of interest on the compensation amount.

Assessment of Compensation and Liability:
The appeal was filed against the award and decree passed by the Motor Accident Claim Tribunal regarding a fatal accident involving two individuals. The Tribunal assessed the quantum of compensation and liability, which was not in dispute. The deceased was a salaried person, and the main issue revolved around the deduction of income tax from the compensation awarded to the deceased's heirs.

Deduction of Income Tax:
The primary issue was whether the Tribunal had the authority to deduct income tax from the compensation awarded to the deceased's heirs. The Tribunal had deducted a significant amount as income tax, which was challenged by the appellants. The judgment highlighted that income tax should be levied on income accrued each year, and the Tribunal's deduction was deemed incorrect.

Applicability of Income Tax Act:
The judgment referenced Section 194A(3)(IX) of the Income Tax Act, emphasizing that income tax should be calculated based on the income accrued in the relevant financial year. The Tribunal's decision to deduct a specific amount as income tax was found to be against the provisions of the Income Tax Act.

Practice of TDS Deduction:
The counsel for the appellants argued against the practice of deduction of TDS by Insurance Companies, citing previous judgments deprecating such deductions. The Tribunal's decision to deduct income tax, including education cess, was contested based on legal precedents.

Calculation of Income Tax:
The judgment highlighted that the Tribunal's calculation of income tax on the compensation awarded was flawed. It emphasized that income tax should be charged in the year the income is received, and the compensation amount should be spread over the relevant financial years.

Distribution of Compensation:
The judgment discussed the distribution of the compensation among the deceased's legal representatives, emphasizing that income tax should not be levied on the total sum awarded. The amount was to be divided among the legal heirs, and the income tax implications should be considered accordingly.

Rate of Interest on Compensation:
The judgment maintained the rate of interest on the compensation amount as per the latest decision of the Apex Court. It directed the Tribunal to draw a fresh decree without any TDS deduction, in line with previous judgments and legal provisions.

Conclusion:
The appeal was partly allowed, emphasizing the incorrect deduction of income tax by the Tribunal and directing the Insurance Company to deposit the compensation amount without any TDS deduction. The judgment aimed to prevent similar mistakes in future cases by circulating the order to concerned Tribunals.