Income Tax Cannot Be Levied On Interest From Motor Accident Compensation : Bombay HC [Read Judgment]

In a significant judgment, the Bombay High Court has held that interest awarded on compensation in motor accident cases is not 'income' and therefore not liable to be taxed under the Income Tax Act 1961.

The ruling was given by a division bench of Justices Akil Kureshi and SJ Kathawalla on a writ petition filed by Rupesh Rashmikanth Shah, who was hit by a car 40 years ago at the tender age of eight and ended up being a paraplegic confined to his bed.

Shah filed the petition seeking Court's opinion whether income tax department was justified in taking away 30% of the interest on the compensation amount which was awarded 36 years after the accident.

Case Background

Rupesh is presently 48 years old. When he was about 8 years old, on October 18, 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. collided with him 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. Several months later, he regained consciousness, his brain injuries had left him paraplegic. His mental growth also stunted. Ever since the accident, Rupesh is completely bed ridden, needs constant assistance even for routine activities.

His father filed a claim petition before the Motor Accident Claims Tribunal on his behalf and sought a compensation of Rs.1 lakh from the driver, owner and insurer of the vehicle, which was subsequently revised to Rs.15 lakhs. Another application was filed before the tribunal raising the claim to Rs.50 lakhs.

However, the tribunal disposed of the petition 12 years later by award dated March 30, 1990. Tribunal held that the driver of the car was solely negligent in causing the accident and awarded a compensation of Rs.4,12,000 with interest @ 6% per annum from the date of the claim petition.

Thereafter, Rupesh filed first appeal before the High Court which was disposed of several years later by a judgement dated November 21, 2014. Total compensation of Rs.39.92 lakh was awarded.

Insurance company challenged the said judgement before Supreme Court which was dismissed.

Finally, an execution application was filed by the petitioner and the insurer deposited Rs.1.42 crore as interest of 36 years at the rate of 9 per cent had been added. But tax on the said interest was deducted at source.

Judgement

Senior Counsel Jehangir Mistri assisted the Court as Amicus Curiae. The bench examined various judgments of the Supreme Court, including Rama Bai vs CIT wherein it was held that arrears of interest computed on delayed or enhanced compensation in land acquisition cases shall be taxable on accrual basis.

Referring to the said judgement, Court noted-

"The Legislature felt that this decision would cause undue hardship to the assessees. Even otherwise, it can be seen that, this position would cause severe hardship to the assessees. Interest would be charged to tax on accrual basis before the compensation is enhanced. The assessee who seeks enhanced compensation would go on paying tax on notional interest for years together till the reference or appeal for enhancement is allowed. With a view to mitigate such hardship, section 145A was amended by the Finance Act of 2009 w.e.f. 1.4.2010."

The bench further observed-

"In order to ascertain the taxability of interest on compensation or enhanced compensation in motor accident claim cases, we, therefore would have to ascertain the true nature of interest. Even the Assessing Officer has proceeded on the basis that the compensation by itself is not taxable. As noted earlier, income of the deceased or the injured for earmarking compensation is ascertained after deducting income tax.

Interest is awarded keeping in mind the rate of inflation. Effort thus is to award just compensation. Awarding interest for delayed computation of compensation is therefore integral part of this exercise"

Finally, Court held-

"We, therefore, hold that 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 eligible to tax, not being an income."

Thus, the writ petition was allowed. 

In 2016, the Madras High Court had held that MACT compensation is not 'income' and not liable to be taxed ( Managing Director, Tamil Nadu State Transport Corporation v Chinnadurai).

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