2019 (8) TMI 518 - HC - Income Tax

TDS u/s 194A on Interest accrued on Compensation awarded under the Motor Vehicle Act - deduction of tax at source - Whether income tax department was justified in taking away 30% of the interest on the compensation which was determined nearly 36 years after the accident? - Taxability of interest income u/s 56 - Method of accounting u/s 145 r.w.s 145A HELD THAT - The interest for the period between the filing of the claim petition and passing of the award is for the period when the claimant for the first time approached the Claims Tribunal asking the Tribunal to assess and award compensation and the time consumed in disposing of the Claim Petition. We may also recall, the interest can be awarded even though part of the compensation would comprise of future loss of income. This is so because, the multiplier method factors this aspect also. At the same time, as noted, the Courts do not award interest on future expenditure since the amount is being paid to the claimant for an expenditure which may be incurred at a later point of time. This dichotomy, thus, between awarding interest on future income while not awarding interest for future expenditure brings out the true character of the interest being awarded. The interest awarded in the motor accident claim cases from the date of the Claim Petition 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, 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. Section 194A(1) read with erstwhile clause (ix) and substituted clauses (ix) and (ixa) of subsection (3) - HELD THAT - There can be no doubt or dispute. However, the fundamental question is does section 194A make the interest income chargeable to tax if it otherwise is not. The answer has to be in the negative. The provision for deduction of tax at source is not a charging provision. It only makes deduction of tax at source on payment of same, which, in the hands of payee, is income. If the payee has no liability to pay such income, the liability to deduct tax at source in the hands of payer cannot be fastened. In other words, the provision of deducting tax at source cannot govern the taxability of the amount which is being paid. These observations and conclusions would apply to interest on compensation or enhanced compensation awarded by the Motor Accident Claims Tribunal or High Court from the date of the Claim Petition till passing of the award or the judgment. Further interest which may be paid for 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. The impugned order of assessment is set aside and the assessment of the petitioner placed back to the Assessing Officer for passing fresh order in line with this judgment - petition allowed by way of remand.

Issues Involved:
1. Taxability of interest on compensation awarded in motor accident claims.
2. Applicability of Section 145A and Section 56(2)(viii) of the Income Tax Act.
3. Interpretation of Section 194A of the Income Tax Act regarding TDS on interest.
4. Nature of compensation and interest under the Motor Vehicles Act.
5. Validity of the Assessing Officer’s assessment and penalty notice.

Detailed Analysis:

1. Taxability of Interest on Compensation:
The petitioner argued that the interest on motor accident claim compensation is not taxable as it is a capital receipt and compensatory in nature. The interest is intended to offset the erosion of the principal compensation due to the passage of time and inflation. The Department contended that the interest is distinct from the compensation and is taxable as income from other sources under Section 56(2)(viii) and Section 145A(b) of the Income Tax Act.

2. Applicability of Section 145A and Section 56(2)(viii) of the Income Tax Act:
Section 56(2)(viii) specifies that interest received on compensation or enhanced compensation is chargeable to tax as income from other sources. Section 145A(b) states that such interest shall be deemed to be the income of the year in which it is received. The Court concluded that these provisions do not make the interest taxable if it is otherwise not income. They merely establish the timing of taxability if the interest is considered income.

3. Interpretation of Section 194A of the Income Tax Act Regarding TDS on Interest:
Section 194A mandates TDS on interest payments. However, the Court clarified that TDS provisions do not determine the taxability of the payment. The question of TDS arises only if the payment is income in the hands of the payee. The Court held that interest awarded by the Motor Accident Claims Tribunal from the date of the claim petition till the judgment is compensatory and forms part of the compensation, thus not taxable as income.

4. Nature of Compensation and Interest under the Motor Vehicles Act:
The Court examined the nature of compensation under the Motor Vehicles Act, which aims to provide just compensation for death or injury resulting from motor accidents. Compensation includes future loss of income, pain, suffering, and medical expenses. Interest awarded on compensation is meant to offset the delay in receiving the compensation and is thus considered part of the compensation itself.

5. Validity of the Assessing Officer’s Assessment and Penalty Notice:
The Court found that the Assessing Officer erred in taxing the interest component of the compensation awarded to the petitioner. The interest awarded till the judgment date is not taxable, but any interest paid post-judgment is taxable as income from other sources. The Court criticized the issuance of a penalty notice, noting that the petitioner had filed the return and paid the tax under protest.

Conclusion:
The Court set aside the impugned order of assessment and directed the Assessing Officer to reassess the petitioner’s income in line with the judgment. The interest awarded by the Motor Accident Claims Tribunal till the judgment date is not taxable, while interest paid post-judgment is taxable as income from other sources. The Court appreciated the assistance provided by the Amicus Curiae in the case.

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