2023 (2) TMI 273 - HC - Income Tax

Taxability of interest income - Interest on deposit while the matter was in dispute - claim arouse against accident under motor vehicle Act - TDS u/s 194A r.w.s. 56 of the Income Tax Act - gross amount payable to each of the petitioners-claimants towards interest calculated from date of application for claim on account of delay in deposit of amount of compensation as modified/reduced in the National Lok Adalat - petitioners, the wife and the children of the deceased, filed Motor Accident Claims u/s 166 of the Motor Vehicles Act, 1988 ( MV Act ) before the 3rd Motor Accidents Claims Tribunal, Jagatsinghpur (MACT) consequent upon death of Sri Mahendra Kumar Sahoo in road accident on 07.01.2013 Whether the opposite party No.4-National Insurance Co. Ltd. is justified in deducting income tax at source in terms of Section 194A(3)(ixa), as amended or Section 194A(3)(ix), as existed prior to amendment read with Section 56(2) of the Income Tax Act, 1961 in respect of interest computed from the date of application for claim till deposit of cheques before the learned Motor Accidents Claims Tribunal on account of delay in disbursal of the amount of compensation awarded to the petitioners-claimants? HELD THAT - MV Act makes detailed provisions for awarding compensation for death or disablement of any person resulting from an accident arising out of the use of a motor vehicle. Essentially, such claim is in the nature of tortious liability. The concept of compulsory third party insurance has been statutorily introduced. The relationship between the insurer and the insured is basically a contractual relationship but interjected by a range of statutory provisions. Under such contract of insurance, the insurer undertakes to indemnify the insured to the extent agreed. The statutory provisions contained in the MV Act make third party insurance compulsory and limit the defences which the insurance company may raise to repudiate its liability. The purpose of granting compensation under the MV Act is to ameliorate the sufferings of the victims so that they may be saved from social evils and starvation, and that the victims get some sort of help as early as possible. It is just to save them from sufferings, agony and to rehabilitate them. The interest awarded in the motor accident claim cases from the date of the application for claim till the passing of the award or in case of Appeal, till the Judgment of the High Court in such Appeal, would not be exigible to tax, and such interest not being an income as such interest payable on account of delay in deposit of amount awarded shall not attract TDS under Section 194A. The nature of such interest paid/credited to the petitioners does not fall within the ambit of definition of interest contained in Section 2(28A). In the instant case, it is not denied that interest was paid for delay in depositing the awarded amount. The marginal heading of Section 194A suggests that said provision deals with TDS in respect of interest definition of which term is given in Section 2(28A), but not interest on securities which expression is defined in Section 2(28B). The amount of interest deposited by the opposite party No.4 with the MACT is on account of delay in deposit of compensation, which can neither be understood as borrowed or debt incurred nor does it fall within meaning of the term service fee or the expression other charge in respect of money borrowed or debt incurred or in respect of any credit facility which has not been utilized . The interest so deposited by the National Insurance Co. Ltd.-opposite party No.4 would not, therefore, be treated as income of the petitioners. Hence, the TDS deducted by the opposite party No.4 is liable to be refunded to the petitioners. This Court finds force in the argument of the learned counsel for the petitioners and it is found in the instant case that if the interest is spread over year to year, the amount would not exceed Rs.50,000/-. Under such premise, the deduction of tax at source in respect of interest for delay in deposit of compensation before the MACT would attract provisions of sub-section (3) of Section 194A of the IT Act. The amount so deducted towards tax at source, being on erroneous understanding of the opposite party No.4, said amount is liable to be refunded to the petitioners. This Court is, thus, inclined to hold that the tax is payable on the interest on the amount of compensation under the MV Act with a rider that the interest should not be more than Rs.50,000/- per claimant per financial year. In the present case, after the award being finalised, the opposite party No.4-National Insurance Co. Ltd. has calculated the interest payable on the entire amount of compensation. Had the interest in question been computed by spreading over for six years commencing from 2013-14 till the deposit is made, the interest would be less than Rs.50,000/-. In such eventuality in view of Section 194A(3)(ix) pre-amendment / Section 194A(3)(ixa) post amendment , TDS was not required to be deducted by the opposite party No.4. In the result, the writ petition is allowed and the TDS amount wrongly deducted will be refunded to the petitioners by the Income-tax Department not later than eight weeks from today, failing which simple interest at the rate of 6% per annum on the said sum will be paid to the petitioners for the period of delay.

Summary

Issues Involved:
1. Propriety and legality of deduction of income-tax at source under Section 194A read with Section 56 of the Income Tax Act, 1961.
2. Obligation to pay interest for delayed deposit of compensation.
3. Applicability of Section 194A(3)(ixa) and Section 194A(3)(ix) of the Income Tax Act, 1961.
4. Nature of interest awarded under the Motor Vehicles Act, 1988 in relation to income tax.

Detailed Analysis:

1. Propriety and Legality of TDS Deduction:
The petitioners challenged the deduction of income-tax at source (TDS) from the interest awarded on compensation by the Motor Accidents Claims Tribunal (MACT). The interest was calculated from the date of the application for claim due to the delay in the deposit of the compensation amount. The petitioners argued that the TDS deduction was illegal and sought a refund of the deducted amount.

2. Obligation to Pay Interest for Delayed Deposit of Compensation:
The petitioners argued that the opposite party, National Insurance Co. Ltd., was obligated to pay interest at 7% per annum until the cheques were deposited with the MACT. There was a delay of around six years and three months, and the petitioners claimed an additional amount of Rs.9,250/- for one month of less computation of interest.

3. Applicability of Section 194A(3)(ixa) and Section 194A(3)(ix) of the Income Tax Act, 1961:
The petitioners contended that the interest component for each case, spread over six years, would be less than Rs.50,000/-. Therefore, under Section 194A(3)(ixa) or Section 194A(3)(ix) (pre-amendment), TDS should not have been deducted. The opposite party argued that the interest received on compensation is chargeable to income tax under "INCOME FROM OTHER SOURCES" as per Section 56(2) of the Income Tax Act, and TDS was rightly deducted.

4. Nature of Interest Awarded Under the Motor Vehicles Act, 1988 in Relation to Income Tax:
The court analyzed the nature of the interest awarded under the Motor Vehicles Act. It was observed that compensation awarded by the MACT is to ameliorate the sufferings of the victims and is not to be treated as income. The court referred to various judgments, including those from the Himachal Pradesh, Madras, and Punjab and Haryana High Courts, which held that interest awarded on compensation is not liable for TDS as it is compensatory in nature and not income.

Court's Analysis and Judgment:
The court referred to the definitions and provisions of Sections 2(28A), 56, 145B, and 194A of the Income Tax Act. It was held that the interest awarded in motor accident claim cases from the date of application till the passing of the award is not exigible to tax and does not attract TDS under Section 194A. The interest paid for the delay in depositing the awarded amount does not fall within the definition of "interest" under Section 2(28A) of the Income Tax Act.

The court concluded that the interest awarded for the delay in deposit of compensation is not income and should not attract TDS. The opposite party's deduction of TDS was based on an erroneous understanding, and the amount deducted is liable to be refunded to the petitioners.

Conclusion and Directions:
The court allowed the writ petition and directed the Income-tax Department to refund the TDS amount wrongly deducted to the petitioners within eight weeks. If the refund is delayed, simple interest at the rate of 6% per annum on the said sum will be paid to the petitioners for the period of delay. There was no order as to costs.