2022 (2) TMI 1095 - HC - Income Tax

Motor Accident Claims - tds on the interest component deducted by insurance companies - petitioners are claimants of motor accident compensation - petitioners contend that the interest is not taxable and insurance company ought not to have deducted tax at source thereon - divergent views amongst different High Courts on the point - HELD THAT - In view of the position and also considering the importance of the issue as also the fact that the issue is a recurring one arising in large number of motor accident claim cases, it is desirable that there is an authoritative pronouncement on this question by Larger Bench. Under the circumstances reference may be made to the Larger Bench on following question - Whether the interest payable on motor accident claim compensation is exigible to tax and resultantly is the insurance company required to deduct tax at source while making such payment to the claimants?

Summary

Issues Involved:
1. Taxability of interest component on motor accident compensation
2. Requirement of insurance company to deduct tax at source on interest component

Analysis:
1. The petitioners, claimants of motor accident compensation, challenged the deduction of tax at source by the insurance company on the interest component of the compensation. The Motor Accident Claims Tribunal had awarded compensation with interest, leading to a dispute regarding the taxability of the interest amount. The petitioners argued that the interest should not be taxable. The court noted various decisions cited by the petitioners but highlighted a Division Bench judgment of the court in the case of Sharda Pareek and Ors. Vs. Astt. Commissioner of I.T. and Ors., which held that interest on compensation is liable to be taxed as it becomes capital once received by the claimant. The court emphasized that interest on capital is taxable, rejecting the contention that interest income is part of compensation.

2. The court acknowledged conflicting views among different High Courts on the taxability of interest on compensation for motor accident claims. It referenced a Bombay High Court decision and a Madras High Court case where differing opinions were expressed. The court observed that the earlier Division Bench judgment in the case of Sharda Pareek did not consider all statutory provisions and judgments related to the issue. Considering the significance of the matter and its recurrence in numerous motor accident claim cases, the court deemed it appropriate to refer the question to a Larger Bench for an authoritative pronouncement. The court proposed the question for reference to the Larger Bench: "Whether the interest payable on motor accident claim compensation is exigible to tax and whether the insurance company is required to deduct tax at source while making such payment to the claimants?" This decision was made to ensure a comprehensive and definitive resolution of the issue.

This detailed analysis of the judgment provides a thorough understanding of the issues involved, the arguments presented by the parties, and the court's decision to refer the matter to a Larger Bench for a conclusive determination on the taxability of interest on motor accident claim compensation.