2022 (5) TMI 282 - HC - Income Tax

TDS liability on Insurance companies - TDS u/s 194A - Taxability of interest awarded by the Motor Accident Claim Tribunal - interest granted on compensation or enhanced compensation - Taxability of certain income u/s 145B - liability for TDS shall be attracted in respect of any income credited by way of interest on the compensation amount awarded by the MACT - Whether interest allowed by the MACT in the accident case on the amount of award can be termed as the 'Income from interest' or the same is a part of compensation for the delay caused in the legal proceedings? - Whether interest allowed on the compensation amount can be equated with interest earned on the principal amount? - Whether the interest awarded by the MACT is not a part of compensation? HELD THAT - Compensation received under the Motor Vehicles Act is either on account of loss of earning capacity on account of death or injury or on account of pain and suffering and such receipt is not by way of earning or profit. The award of compensation is on the principle of restitution to place the claimant in the same position in which he would have been as the loss of life or injury would not have been suffered. Our final conclusion may be summarized as under a The interest awarded by the Motor Accident Claim Tribunal u/s 171 of the Motor Vehicles Act 1988 is not taxable under the Income Tax Act, 1961. b The interest awarded in the motor accident claim cases from the date of the Claim Petition till the passing of the award, or in the case of Appeal, till the judgment of the High Court in such appeal, would not be exigible to tax, not being an income. This position would not change on account of clause (b) of Section 145A of the Act as it stood at the relevant time amended by Finance Act, 2009, which provision now finds place in sub-section (1) of Section 145B of the Act. Neither clause (b) of Section 145A, as it stood at the relevant time, nor clause (viii) of sub-section (2) of Section 56 of the Act make the interest chargeable to tax, whether such interest is income of the recipient or not. Section 194A of the Act is only a provision for deduction of tax at source. Any provision for deduction of tax at source in the said section would not govern the taxability of the receipt. The question of deduction of tax at source would arise only if the payment is in the nature of income of the payee. c The Insurance Companies or the owners of the motor vehicles depositing the requisite amount in due compliance with the awards of the Motor Accident Claims Tribunals shall deposit the full amount with the Tribunal and shall not deduct tax u/s 194A of the Income Tax Act on the interest awarded by the Motor Accident Claims Tribunal. We may clarify that the aforesaid observations and conclusions would apply to interest granted on compensation or enhanced compensation awarded by the Motor Accident Claims Tribunal or the High Court from the date of the Claim Petition till the passing of the award or the judgment. Further, the interest that may be paid for the delay in depositing the awarded amount, would not form part of the compensation and, therefore, would fall in the bracket of interest income and would be exigible to tax under the normal provisions.

Summary

Issues Involved:
1. Applicability of TDS on interest awarded by the Motor Accident Claims Tribunal (MACT).
2. Taxability of interest awarded by MACT under the Income Tax Act, 1961.
3. Correct procedure for depositing TDS in compliance with MACT awards.

Issue-wise Detailed Analysis:

1. Applicability of TDS on Interest Awarded by MACT:
The primary issue was whether the interest awarded by MACT on compensation amounts is subject to Tax Deducted at Source (TDS) under Section 194A of the Income Tax Act, 1961. The court examined various legal provisions and precedents, including Section 194A(3)(ix) and (ixa), which exclude certain interest payments from TDS if they do not exceed Rs. 50,000 in a financial year.

2. Taxability of Interest Awarded by MACT:
The court considered whether the interest on compensation awarded by MACT constitutes taxable income. The court referred to several judgments, including Hansaguri Prafulchandra Ladhani vs. The Oriental Insurance Company Ltd., and noted that compensation and interest awarded under the Motor Vehicles Act are not income but compensatory payments. The court emphasized that the interest awarded is intended to compensate for the delay in receiving the compensation and not as income.

3. Correct Procedure for Depositing TDS in Compliance with MACT Awards:
The court analyzed the correct procedure for depositing TDS in compliance with MACT awards. It was noted that the Insurance Company had deposited the TDS amount with the Tribunal instead of the Income Tax Department, leading to a demand for interest on late payment of TDS. The court clarified that the interest on compensation awarded by MACT should not be subject to TDS, and therefore, the full amount should be deposited with the Tribunal without any deduction.

Final Analysis and Conclusion:
1. Interest Not Taxable: The court concluded that the interest awarded by MACT under Section 171 of the Motor Vehicles Act, 1988, is not taxable under the Income Tax Act, 1961. The interest awarded from the date of the claim petition till the passing of the award or judgment is not considered income and is not exigible to tax.

2. No TDS Deduction Required: The court held that Insurance Companies or vehicle owners must deposit the full compensation amount awarded by MACT without deducting TDS under Section 194A of the Income Tax Act. The interest awarded by MACT is not considered income, and therefore, no TDS should be deducted.

3. Clarification on Interest for Delay: The court clarified that any interest paid for the delay in depositing the awarded amount does not form part of the compensation and would be considered interest income, which is taxable under the normal provisions of the Income Tax Act.

The court's judgment provided a clear directive that the compensation and interest awarded by MACT should be treated as non-taxable, and no TDS should be deducted on such amounts. The judgment emphasized the compensatory nature of the awards and the intent to place the claimant in the same position as if the loss or injury had not occurred.