Income Tax Set-Off Rules Can't Be Applied To Reduce Motor Accident Compensation: Bombay High Court

The Bombay High Court has held that loss computed under the head "Income from House Property" under the Income-tax Act, 1961, cannot be set off against income under the head "Business or Profession" while determining compensation under the Motor Vehicles Act, 1988. The Court observed that the Income-tax Act and the Motor Vehicles Act operate in distinct fields, and the mechanism of set-off under the Income-tax Act cannot be mechanically applied to reduce compensation payable under the Motor Vehicles Act.

Justice Jitendra Jain was hearing an appeal filed by the widow and children of a medical practitioner seeking enhancement of compensation awarded by the Motor Accident Claims Tribunal, on account of his death in a motor accident. The Tribunal had assessed the deceased's income by taking the average of the income disclosed in his income-tax returns after setting off the loss under the head "Income from House Property", representing interest paid on a housing loan, against his professional income. The claimants contended that such a deduction was impermissible while computing compensation under the Motor Vehicles Act. They also challenged the Tribunal's direction awarding interest only from the date on which the correct insurer was impleaded instead of the date of filing of the claim petition.

The insurance company argued that only the disposable income remaining with the deceased after payment of interest on the housing loan ought to be considered for determining compensation, as that alone would have been available for the benefit of his dependants.

The Court held that the object of the Motor Vehicles Act is to award "just compensation" to place the dependants, as nearly as possible, in the financial position they would have occupied had the deceased not died. It observed that the taxable income computed under the Income-tax Act cannot be mechanically adopted for the purpose of compensation. The provisions permitting set-off of losses under the Income-tax Act are intended to compute tax liability and cannot be imported into the Motor Vehicles Act to reduce compensation payable to the dependants.

“The object of Section 71 is to make a person liable to pay tax on the net income and, therefore, the provisions of set-off are provided. This cannot be borrowed mechanically for the purpose of arriving at “just compensation” under the MV Act… The set-off provision is for the purpose of determining lower tax, but same cannot be read to lower the compensation under the MV Act,” the Court observed.

The Court also observed that income from assets such as house property, capital gains and other sources ordinarily continues even after the death of the earning member and therefore, for determining compensation, it is only the income earned through the deceased's personal skill or profession that is relevant.

The Court also held that the Tribunal had erred in directing payment of interest only from the date on which the correct insurance company was impleaded. Referring to Section 171 of the Motor Vehicles Act, it held that interest is ordinarily payable from the date of filing of the claim petition and not from the date of impleadment of the insurer.

Accordingly, the Court set aside the Tribunal's method of computing income, reassessed the compensation by considering only the deceased's professional income without setting off the loss under the head "Income from House Property", enhanced the compensation by Rs.17,58,465/- with interest, and directed that interest be paid from the date of filing of the claim petition.

Case Title: Dr. Anagha Bhupendra Kothadiya v. Motiram Govind Budhwani [First Appeal No. 552 of 2014]

Citation: 2026 LiveLaw (Bom) 327

Click Here To Read/Download Order