2018 (4) TMI 526 - HC - Income Tax

Liability of Insurance Company to deduct income tax at source (TDS) on the interest paid on the compensation paid under Motor Vehicles Act, 1988 - Held that - When there is conflict between the Social Welfare Legislation and Taxation Legislation, then the Social Welfare Legislation should prevail, since, it sub-serves larger public interest. Admittedly, Motor Vehicles Act, 1988, is a Social Welfare Legislation. In case of victims, they have already been subjected to the rigors of law by taking rounds of the Courts for year or some time decades to get the compensation for the loss they have already suffered. Therefore, interest paid on account of delayed payment of compensation cannot be subjected to TDS. Considering the object of the Motor Vehicles Act, 1988, regarding grant of compensation to the victim, it will not only be unjust but cruel to ask the hapless victim to first pay the interest received along with compensation on account of delayed payment, for which he is not responsible, and then to file the income tax return and claim the refund. Thus the interest paid along with the compensation as a result of the order of the Tribunal or of the superior Court is not liable for TDS. - Decided in favour of assessee

Summary

Issues:
1. Whether Insurance Company can deduct income tax at source (TDS) on the interest paid on the compensation under the Motor Vehicles Act, 1988?

Analysis:
The High Court examined the issue of whether the Insurance Company can deduct income tax at source (TDS) on the interest paid on compensation under the Motor Vehicles Act, 1988. The Court considered the provisions of the Income Tax Act, 1961, specifically Section 194-A and Section 56(2)(viii), along with the definition of 'income' under Section 2(24) of the Act. The Court analyzed the exemption limit of ?50,000 on interest, beyond which TDS is applicable. The Court reviewed previous judgments, including the Single Bench judgment of the Court, and discussed the interpretation of the law regarding TDS on interest on compensation.

The Court also referred to a judgment of the Madras High Court, where the issue of TDS on interest awarded by the Motor Accident Claims Tribunal was considered. The Court emphasized the social welfare aspect of the Motor Vehicles Act, highlighting that compensation to victims is intended for restitution and rehabilitation, not as taxable income. The Court compared social welfare legislation with taxation legislation, concluding that social welfare laws should prevail in cases of conflict. The Court held that interest paid on compensation due to delayed payment should not be subjected to TDS, considering the hardships victims face in obtaining compensation.

Furthermore, the Court discussed scenarios where interest is part of compensation or paid separately, emphasizing that interest on compensation exceeding ?50,000 is subject to TDS as per the Act. The Court cited judgments from other High Courts to support its conclusion that interest paid with compensation should not be liable for TDS. Ultimately, the Court upheld the impugned orders passed by the Tribunal, ruling that interest paid along with compensation is not subject to TDS. Consequently, all revision petitions were dismissed, and pending applications were disposed of accordingly.