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TMI Blog2019 (8) TMI 518X X X X Extracts X X X X X X X X Extracts X X X X ..... tween 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 claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax department was justified in taking away 30% of the interest on the compensation which was determined nearly 36 years after the accident. Looking to the issues involved, we have heard the learned Counsel for the parties for final disposal of the petition. The petition arises in the following background: FACTS: The petitioner is presently aged about 48 years. When he was about 8 years old, on 18.10.1978, he was trying to cross Nepensea Road in South Mumbai accompanied by a household servant when a car insured by Oriental Insurance Company Ltd. Respondent No.4, collided with the young boy causing serious injuries. His brain was severely damaged. He remained in the hospital in an unconscious state for several months. His parents brought him home setting up a nursing station at home and administered all necessary treatment. Though several months later, he regained consciousness, his brain injuries left him paraplegic. Further, treatments, therapies and cures failed to have the desired effect. His mental growth also stunted. Ever since the date of the accident, he is left completely bed ridden, needs constant attention even for routine activities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal sum of ₹ 39,92,000/as awarded by this Court, interest @ 9% for 36 years came to ₹ 1,18,04,606/-. The insurance company before depositing the amount, deducted tax at source a sum of ₹ 11,80,461/- @ 10% on the interest component. 7. The petitioner had received interest of ₹ 1,18,04,606/during the period relevant to the A.Y. 2016-2017. According to the petitioner, such interest was not taxable. However, by way of caution, the petitioner filed the return of income for the A.Y. 2016 2017 in which he had presented the computation of his taxable income if the interest received by him was made taxable. His tax liability came to ₹ 37,97,773/-, which also he had deposited with the Income Tax department. In the return of income, he had put the following note in order to dispute the taxability of the interest: NOTE: As per the stand taken by the Assessee the interest amount on such insurance income received should be treated as capital receipt and hence Income Tax should not be applicable on it. The Assessee has paid the Income Tax amount under protest. 8. This petition was initially filed with a prayer for a declaration that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sources , if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of theprovisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely:- (viii) income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A. 13. Sub-section (2) of section 56 thus provides that in particular and without prejudice to the generality of the provisions of subsection (1), the following incomes, contained in various clauses therein would be chargeable to income tax under the head income from other sources. Clause (viii) refers to income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A. Subsection (1) of section 56 provides that income of every kind which is not to be excluded from the total income would be chargeable to tax as income from other sources if it is not chargeable under any of the heads specified in items (A) to (E) of section 14. 14. Section 145A(b) as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsatory in nature. It is meant to offset the erosion of the principal compensation because of passage of time and the reduction of purchasing power of rupee due to inflation. According to the petitioner since the compensation itself is not taxable, the interest pendente lite which also forms part of the compensation, would not be taxable. When the receipt itself is not taxable, the question of deducting tax at source while making payment thereof would not arise. It was lastly contended that in any case, such interest should be spread over the entire period for which it is paid. The interest accrues from year to year. Merely because it is paid at a single point, would not mean the entire amount is taxable in the year of payment. THE STAND OF THE DEPARTMENT: 16. The Department contends that the interest is an income distinct from the compensation and is, therefore, taxable. By virtue of clause (b) of section 145A of the Act, such income is taxable on actual receipt. Heavy reliance is placed on the provisions contained in section 56(2)(viii), section 145A(b) and section 194A of the Act. It was pointed out that section 145A was amended by the Finance Act of 2009 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pread over theory is to be applied, deduction of tax at source will be needed only if the payment of interest in a year exceeds ₹ 50,000/-. CERTAIN IMPORTANT DECISIONS: 18. We will now notice the decisions of the High Courts and the Supreme Court having a bearing on these aspects. 19. In the case of Rama Bai (supra), a 3-Judge Bench of the Supreme Court considered a situation where the assessee s land was acquired under the Land Acquisition Act. Aggrieved by the compensation awarded by the Land Acquisition Officer, the assessee sought enhancement of compensation before the Reference Court. The Reference Court awarded enhanced compensation. With solatium, the amount came to ₹ 2,34,607/-. Interest of ₹ 37,529/- was awarded on the enhanced compensation. The Income Tax officer while making assessment for the A.Y. 1967-1968 and A.Y. 1968-1969, held that the right to receive interest on enhanced compensation arises on the date when the Reference Court passes the order. The assessee contended that the interest should be distributed over the period commencing from the date of dispossession of the assessee under the Land Acquisition Act till t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m under Section 23 (2) of the 1961 Act forms part of enhanced compensation under Section 45(5)(b) of the 1961 Act. 54. Section 45(5) read as a whole [including clause (c)] not only deals with re-working as urged on behalf of the assessee but also with the change in the full value of the consideration (computation) and since the enhanced compensation/consideration (including interest under Section 28 of the 1894 Act) becomes payable/paid under 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155 (16) of the 1961 Act, later on. Hence, the year in which enhanced compensation is received is the year of taxability. Consequently, even in cases where pending appeal, the Court/Tribunal/Authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under Section 45(5) of the 1961 Act. This is the scheme of Section 45(5) and Section 155(16) of the 1961 Act. We may clarify that even before the insertion of Section 45(5)(c) and Section 155 (16) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accrued in the concerned financial year together with other income of the respective claimants in that financial year exceeds the chargeable limit as specified in the provisions of the Income-tax Act, 1961 in force for the relevant years. It will, therefore, be open to the claimants to make appropriate applications/representations before the concerned income-tax authority for refund of such amount/s as may be due to them out of the amount of ₹ 1,70,269/- which has already been deducted by the Insurance Company as tax deducted at source under the provisions of Section 194A of the Act. 14. It is necessary to obviate such a situation in future for other claimants who may be awarded compensation with interest thereon, and the amount of interest being deposited exceeds ₹ 50,000/-, but who may not be liable to have any tax deducted at source as per the interpretation placed by us on the provisions of Section 194A of the Act. We, therefore, direct that - I. The Insurance Companies or the owners of the motor vehicles depositing the amounts in compliance with the awards of the Motor Accident Claim Tribunals shall (a) first spread the interest amount over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions/representations. 22. This view was adopted by the Bombay High Court in the case of Gauri Deepak Patel ors. (supra), in which the following observations were made: 6. Accordingly, we direct that the following procedure as laid down in the case of Hansaguri (supra) shall be followed in the present case and in all the similar cases arising in future before the Motor Accidents Claims Tribunal:- (i) The insurance companies or the owners of the motor vehicles depositing the amounts in compliance with the awards of the Motor Accidents Claims Tribunal shall: (a) first spread the interest amount over to the relevant financial years for the period from the date of filing the claim petition till the date of deposit, (b) thereafter, if the interest for any particular financial year exceeds ₹ 50,000/-, separately deposit before the Tribunal the amount liable to be deducted at source under the provisions of section 194-A (3) to (ix) of the Income-Tax Act, 1961. Such amount shall not, however, straightaway be paid over to Income Tax Department, (c) produce before the Claims Tribunal a statement of computation of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai vs. Income-Tax Officer (TDS) [2016] 388 ITR 343 (Guj.) and another considered the effect of this amendment on the question of charging tax on the interest payable to a claimant under section 28 of the Land Acquisition Act. We may recall, the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra), was rendered when section 145A was not so amended and the Court had held that interest under section 28 of the Land Acquisition Act payable to a claimant is part of compensation. The question before the Gujarat High Court, therefore, was does the amendment in section 145A and the corresponding amendments in section 56(2) of the Act change the position of law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra). The Division Bench of the Gujarat High Court noticed the distinction between interest payable under section 28 and one payable under section 34 of the Land Acquisition Act. It was observed that the interest under section 28 which is paid on enhanced compensation is treated as accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dily injury suffered in a vehicular accident, which is damage and not income. 28. The Division Bench of Allahabad High Court in the case of Commissioner of Income Tax vs. Oriental Insurance Co. Limited[2012] 211 TAXMAN 369 (All) took somewhat restricted view of charging interest as income to tax. Reference was made to the definition of interest under section 2(28A) of the Act and held as under: 36. The necessary ingredients of such interest are that it should be in respect of any money borrowed or debt incurred. The award under the Motor Vehicles Act is neither the money borrowed by the insurance company nor the debt incurred upon the insurance company. As far as the word claim is concerned, it should also be regarding a deposit or other similar right or obligation. The definition of Section 2(28A) of the Income Tax Act again repeats the words monies borrowed or debt incurred which clearly shows the intention of the legislature is that if the assessee has received any interest in respect of monies borrowed or debt incurred including a deposit, claim or other similar right or obligation, or any service fee or other charge in respect of monies borrowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Act of 1988 make third party insurance compulsory and limit the defences which the insurance company may raise to repudiate its liability. 32. The first law to be framed in India in this field was the Fatal Accidents Act, 1855. It provided that whenever the death of a person is caused by a wrongful act, neglect or default and the act, neglect or default is such as would (if death had not ensued) have entitled the party injured to maintain an action and recover damages in respect thereof, the party, who would have been alive if death had not ensued, shall be liable to an action or suit for damages notwithstanding the death of the person injured and although the death shall have been caused under such circumstances as amount in law to felony or other crime. 33. The Motor Vehicles Act, 1939 was thereafter enacted in order to consolidate the law relating to motor vehicles, which contained various provisions for use of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on awarded to a victim of a motor accident. 37. In the case of General manager, Kerala S.R.T.C. vs. Susamma Thomas (1994) 2 SCC 176, it was observed that the compensation in a motor accident claim must be just, fair and reasonable. It was observed thus: 8. The measure of damage is the pecuniary loss suffered and is likely to be suffered by each dependent. Thus except where there is express statutory direction to the contrary, the damages to be awarded to a dependent of a deceased person under the Fatal Accidents Acts must take into account any pecuniary benefit accruing to that dependent in consequence of the death of the deceased. It is the net loss on balance which constitutes the measure of damages. . 38. In the case of R.D. Hattangadi vs. M/s.Pest Control (India) Pvt. Ltd. (1995) 1 SCC 551, while referring to different heads for assessing compensation in injury case, it was observed as under: 9. Broadly speaking while fixing an amount of compensation payable to a victim of an accident, the damages have to be assessed separately as pecuniary damages and special damages. Pecuniary damages are those which the victim has actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er developments such as future pay revisions. The following observations were made: 45. The assumption of the appellants that the actual future pay revisions should be taken into account for the purpose of calculating the income is not sound. As against the contention of the appellants that if the deceased had been alive, he would have earned the benefit of revised pay scales, it is equally possible that if he had not died in the accident, he might have died on account of ill health or other accident, or lost the employment or met some other calamity or disadvantage. The imponderables in life are too many. Another significant aspect is the non-existence of such evidence at the time of accident. 46. In this case, the accident and death occurred in the year 1988. The award was made by the Tribunal in the year 1993. The High Court decided the appeal in 2007. The pendency of the claim proceedings and appeal for nearly two decades is a fortuitous circumstance and that will not entitle the appellants to rely upon the two pay revisions which took place in the course of the said two decades. If the claim petition filed in 1988 had been disposed of in the year 198889 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apitalised. Take for instance a case where annual loss of dependency is ₹ 10,000. If a sum of ₹ 1,00,000 is invested at 10% annual interest, the interest will take care of the dependency, perpetually. The multiplier in this case works out to 10. If the rate of interest is 5% per annum and not 10% then the multiplier needed to capitalise the loss of the annual dependency at ₹ 10,000 would be 20. Then the multiplier, i.e., the number of years' purchase of 20 will yield the annual dependency perpetually. Then allowance to scale down the multiplier would have to be made taking into account the uncertainties of the future, the allowances for immediate lump sum payment, the period over which the dependency is to last being shorter and the capital feed also to be spent away over the period of dependency is to last etc. Usually in English Courts the operative multiplier rarely exceeds 16 as maximum. This will come down accordingly as the age of the deceased person (or that of the dependents, whichever is higher) goes up. 42. In the case of Sarla Verma (supra), the Supreme Court standardised the choice of the multiplier for achieving degree of uniformity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including inflation, change of economy, policy being adopted by the Reserve Bank of India from time to time, how long the case is pending, permanent injuries suffered by the victim, enormity of suffering, loss of future income, loss of enjoyment of life, etc., into consideration. No rate of interest is fixed under section 171 of the Motor Vehicles Act, 1988. Varying rates of interest are being awarded by Tribunals, High Courts and the Apex court. Interest can be granted even if claimant does not specifically plead for the same as it is consequential in the eyes of law. Interest is compensation for forbearance or detention of money and that interest being awarded to a party only for being kept out of money which ought to have been paid to him. No principle could be deduced nor any rate of interest can be fixed to have a general application in motor accident claim cases having regard to nature of provision under section 171 giving discretion to the Tribunal in such matter. 46. In the case of Dharampal vs. U.P. State Road Transport Corporation (2008) 12 SCC 2018, it was observed as under: 8. As per section 171 of the Motor Vehicle Act, 1988 (hereinafter r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portation, etc. The multiplier method is found to be most appropriate for computing loss of dependency benefits in fatal and future loss of income in injury cases. 48. From the above judgments, it can further be seen that be it a fatal case or an injury case, compensation includes future loss. In case of fatal accidents, it is awarded under the head of loss of dependency benefits. In case of injury cases, such future loss may either be in the form of loss of future income or even for future medical treatment and other expenditure. However, the computation of such future loss is on the basis of the income of the deceased or the injured on the death or accident. This is adjusted by a reasonable future rise in income. The concept of taking into account full possible rise in income is not accepted. For example, in case of a salaried person, particularly in government service, by the time a Claim Petition or Appeal is decided, there is hard evidence of the implementation of pay revisions and consequential rise in salary of other employees of the same cadre as that of the deceased. However, the Courts have rejected the request for awarding compensation on the basis of such futur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause (b) of section 145A. 50. Before proceeding to analyse clause (b) of section 145A, we may note that section 56 of the Act per se does not make a particular receipt chargeable to tax if it otherwise does not happen to be income. This section merely provides for taxing an income not falling under the other heads as income from other sources. Sub-section (2) of section 56 when it lists various incomes, which would be treated as income from other sources, merely amplifies this purpose. Therefore, clause (viii) of sub-section (2) of section 56 by itself would not make the receipt of interest on compensation chargeable to tax as income from other sources, if such receipt is not income. 51. We have briefly noted the history behind enactment of section 145A of the Act. Section 145 pertains to method of accounting. Sub-section (1) of section 145 provides that income chargeable under the head profits and gains of business or profession or income from other sources would be, subject to the provisions of sub-section (2) computed in accordance with either cash or mercantile system of accounting regularly employed by assessee. This provision thus, leaves an option to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider the taxability of interest on compensation or enhanced compensation in case of land acquisition cases. In the case of Ghanshyam (HUF) (supra), the Supreme Court held that interest awarded on compensation as well as solatium are part of the compensation and, therefore, in terms of section 45(5) of the Act, would be chargeable to capital gain in the year in which enhanced compensation is received. We are conscious that this decision was rendered before the amendment in Section 145A under the Finance Act, 2009. We are drawing reference to this judgment only for the limited purpose of noting that the decision of the Supreme Court in case of Rama Bai (supra) is not an authority on the question of taxability of interest on compensation or enhanced compensation. The Division Bench of the Gujarat High Court, we may recall, in the case of Movaliya Bhikhubhai Balabhai (supra), held that the ratio of the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra), would continue to apply even after amendment in section 145A of the Act. Secondly, interest under section 28 of the Land Acquisition Act cannot be treated as income subject to tax irrespective of clause (b) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is awarded for delayed computation of compensation. Right to award interest flows from section 170 of the Motor Vehicles Act, 1988. As is well settled, the authority of the Court to award interest must be traced to a statutory provision or in agreement between the parties. In absence of section 170 of the Motor Vehicles Act, perhaps it would not be lawful for the Tribunal and for that matter, the High Court in Appeal, to award interest on compensation. The Supreme Court in the cases of Abati Bezbaruah (supra), Kaushnuma Begum (supra), Patricia G. Mahajan (supra) and Dharampal (supra), explained the nature of interest awarded in motor accident claims cases. Culmination of discussion in these judgments would be that such interest is compensatory in nature and will thus, form part of the compensation itself. Compensation is computed with reference to the date of accident. All calculations of multiplicand and multiplier are based on such reference point. But computation by the Tribunal takes time. If compensation is revised by the High Court it takes further time. Interest is awarded keeping in mind the rate of inflation. Effort thus is to award just compensation. Awarding interest for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 58. We are not oblivion to erstwhile clause (ix) of sub-section (3) of section 194A or the newly amended clauses (ix) and (ixa) thereof substituting original clause (ix) w.e.f. 1.6.2015 by Finance Act, 2015. Subsection (1) of section 194A provides for deduction of tax at source upon payment of any income by way of interest. Sub-section (3) of section 194A contains exclusion clauses from the purview of sub-section (1). Clause (ix) contained in subsection (3) prior to amendment pertained to income credited or paid by way of interest on the compensation amount awarded by the Motor Accident Claims Tribunal where such amount did not exceed ₹ 50,000/-. In substitution of this provision, clause (ix) now provides that the provision of sub-section (1) will not apply to such income credited by way of interest on the compensation awarded by the Motor Accident Claims Tribunal. Clause (ixa) virtually retains the original provision of uname ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal, we think it is our duty to explain why this petition was entertained. In the present case, only question was of charging interest on compensation/enhanced compensation of motor accident to tax. This was a pure question of law. No facts were to be ascertained. It was otherwise important that such a question is decided by the High Court. We had, therefore, entertained the petition. (iii) The Assessing Officer has passed the order of assessment. He has made a bonafide assessment. With his approach, there can be no criticism. But when it comes to issuing notice for penalty, it defies logic. The petitioner despite his stand that the interest is not taxable, filed the return, offered the interest to tax and also deposited such tax under protest. What was the purpose of issuing notice for penalty is difficult to understand. 63. In the result, we find that the Assessing Officer had committed an error in levying tax on the interest component of the compensation awarded to the petitioner till the date of the judgment of the High Court. On any interest paid to him post the judgment, tax had to be collected as income from other sources. We, therefore, set aside the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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