Motor accident compensation interest: pre-judgment compensatory interest is not taxable, but post-award delay interest is taxable.

Interest awarded on motor accident compensation from the claim petition until the appellate judgment is compensatory in character, forming part of just recompense for death or bodily injury and not an independent income. On that basis, it is not taxable as income from other sources and no tax deduction at source can be made on that component; sections 56(2)(viii), 145A(b) and 194A do not create a charge where the receipt is not income. Interest paid for delay after the award or judgment stands apart, is ordinary interest income, and is taxable. The assessment was set aside for fresh determination consistent with this distinction.

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Issues: (i) Whether interest awarded on motor accident compensation from the date of the claim petition till the High Court's judgment is taxable as income from other sources and liable to tax deduction at source. (ii) Whether interest paid for delay after the award or judgment is taxable.

Issue (i): Whether interest awarded on motor accident compensation from the date of the claim petition till the High Court's judgment is taxable as income from other sources and liable to tax deduction at source.

Analysis: Compensation under the Motor Vehicles Act is awarded as just recompense for death or bodily injury and the interest granted on delayed determination of that compensation is compensatory in character. The statutory provisions in section 56(2)(viii), section 145A(b) and section 194A of the Income-tax Act, 1961 do not themselves create a charge if the receipt is not income in the first place. Section 145A(b) governs the year of receipt where the receipt is otherwise taxable, and section 194A is only a machinery provision for deduction at source. Interest awarded from the date of the claim petition till the award or appellate judgment forms part of the compensation and is not an independent income.

Conclusion: The interest for the period from the claim petition till the High Court's judgment is not taxable and no tax deduction at source could be made on that component.

Issue (ii): Whether interest paid for delay after the award or judgment is taxable.

Analysis: Interest paid for delay in depositing the awarded amount stands on a different footing from interest awarded as part of the compensation process. Such post-award or post-judgment interest is not part of the compensation fixed for the accident loss and answers the description of interest income in the ordinary sense. It therefore falls within the taxable net under the normal provisions.

Conclusion: The interest paid after the award or judgment is taxable as income from other sources.

Final Conclusion: The assessment could not include tax on the compensatory interest component up to the appellate judgment, but the revenue was entitled to tax the later interest component. The assessment was accordingly set aside for fresh determination in line with these findings.

Ratio Decidendi: Interest awarded for the period required to quantify and adjudicate motor accident compensation is part of the compensation itself and not income, whereas interest paid for delayed deposit after final quantification is taxable interest income.

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