2014 (10) TMI 620 - HC - Income Tax

Tax deduction on interest accrued on term deposits on orders passed in Motor Accident Claims cases Validity of Circular dated 14.10.2011 Held that - The circular, dated 14.10.2011, issued by the Income-tax Authorities, is not in tune with the mandate of Sections 2(42) and 2(31), read with Section 6 of the Income Tax Act, 1961 the circular also is not in accordance with the mandate of Section 194A of the Act As decided in Ghaziabad Development Authority vs. Dr. N.K. Gupta 2002 (9) TMI 292 - National Consumer Disputes Redressal Commission - damages paid for the death of a person cannot be equated with the income and tax cannot be deducted also in Delhi Development Authority v. ITO 1995 (1) TMI 126 - ITAT DELHI - the amounts credited in the accounts of the allottees were not in the nature of interest within the meaning of section 2(28A) and directed that what is recovered by the DDA be refunded in the present facts and circumstances, the Circular, dated 14.10.2011, issued by the Income Tax Authorities, whereby deduction of income tax has been ordered on the award amount and interest accrued on the deposits made under the orders of the Court in Motor Accident Claims cases, is quashed and in case any deduction has been made, they are directed to refund the same, with interest at the rate of 12% from the date of deduction till payment Decided in favour of assessee.

Issues Involved:

1. Legality of tax deductions on interest accrued from term deposits made by the court in Motor Accident Claims cases.
2. Applicability of Income Tax Circular No. 8/2011 regarding tax deductions on interest from court-ordered deposits.
3. Definition and scope of "resident" and "person" under the Income Tax Act, 1961.
4. Nature of compensation awarded under the Motor Vehicles Act and its classification as taxable income.
5. Precedents and judicial interpretations regarding taxability of compensation and interest in similar cases.

Issue-wise Analysis:

1. Legality of tax deductions on interest accrued from term deposits made by the court in Motor Accident Claims cases:

The Registrar (Judicial) noted that bank authorities were deducting tax on interest accrued from term deposits made by the Registry in Motor Accident Claims cases. The Finance/Purchase Committee recommended judicial consideration due to the intricate nature of the dispute and public interest involved.

2. Applicability of Income Tax Circular No. 8/2011 regarding tax deductions on interest from court-ordered deposits:

Respondents No. 4 and 5 cited Circular No. 8/2011, issued by the Income Tax Authorities, which mandates the deduction of income tax on interest periodically accruing on deposits made under court orders to protect litigants' interests. Respondents argued they were bound to follow this circular.

3. Definition and scope of "resident" and "person" under the Income Tax Act, 1961:

The court examined Sections 2(42) and 2(31) of the Income Tax Act, 1961, which define "resident" and "person," respectively. Section 194A mandates that any person, not being an individual or a Hindu undivided family, responsible for paying interest to a resident must deduct income tax. However, the court found that these provisions do not apply to compensation awarded in Motor Accident Claims cases.

4. Nature of compensation awarded under the Motor Vehicles Act and its classification as taxable income:

The court emphasized that compensation awarded under the Motor Vehicles Act is not taxable income but damages awarded in lieu of death or bodily injury suffered in a vehicular accident. The purpose of such compensation is to ameliorate the victims' sufferings and provide immediate relief, not to generate taxable income.

5. Precedents and judicial interpretations regarding taxability of compensation and interest in similar cases:

The court referred to several precedents, including:

- N.K.V. Bros. (P.) Ltd. vs. M. Karumai Ammal and Sohan Lal Passi v. P. Sesh Reddy, where the Apex Court emphasized that compensation in Motor Accident Claims should not be hindered by legal technicalities.
- Savita vs. Bindar Singh & others, which reiterated that courts should focus on providing just compensation without succumbing to legal niceties.
- Ghaziabad Development Authority vs. Dr. N.K. Gupta, where it was held that damages paid for the death of a person cannot be equated with income, and tax cannot be deducted.
- Haryana Urban Development Authority vs. DevDutt Gandhi, which stated that compensation awarded for land acquisition or enhanced amounts paid cannot be termed as income and are not subject to tax deduction.
- Commissioner of Income-Tax vs. Ghanshyam (HUF), which clarified that interest awarded as part of compensation under the Land Acquisition Act is not taxable income.

Conclusion:

The court quashed the Circular dated 14.10.2011, issued by the Income Tax Authorities, which mandated the deduction of income tax on the award amount and interest accrued on deposits made under court orders in Motor Accident Claims cases. The court directed the respondents to refund any such deductions made, with interest at the rate of 12% from the date of deduction until payment, within six weeks.

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