Compensatory interest on motor accident compensation is not ordinary income for TDS when the statutory threshold is not crossed.

Interest awarded on delayed payment of motor accident compensation is treated as compensatory, not as ordinary income arising from a borrowing, debt, service fee, or similar charge. Read with the Motor Vehicles Act and the Income-tax Act, the amount is not subject to tax deduction at source under Section 194A where, on a year-wise spread, the interest payable to each claimant does not cross the statutory threshold. In such a situation, any TDS already deducted is treated as having been made on an erroneous basis and is refundable.

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Issues: Whether tax was deductible at source from interest paid on compensation awarded under the Motor Vehicles Act for delay in deposit of the compensation amount, and whether such interest was liable to be treated as income so as to attract Section 194A of the Income-tax Act, 1961.

Analysis: Interest awarded in motor accident compensation matters is compensatory in character and is granted for the delay in determination or disbursal of compensation. Such interest does not arise from a borrowing, debt, service fee, or other charge within the meaning of the statutory definition of interest. The scheme of Section 171 of the Motor Vehicles Act, 1988, read with Sections 2(28A), 56(2), 145B(1), and 194A of the Income-tax Act, 1961, shows that the relevant interest is not to be treated as ordinary income for TDS purposes where, on spreading the amount over the relevant financial years, the interest payable to each claimant does not exceed the statutory threshold. In the present case, the deduction was made on an erroneous understanding, and the amount deducted was therefore refundable.

Conclusion: The deduction of tax at source was not justified, and the petitioners were entitled to refund of the TDS amount.

Ratio Decidendi: Interest awarded for delayed payment of motor accident compensation is compensatory and not taxable as ordinary income for TDS purposes when, on year-wise spread over, the amount payable to each claimant does not cross the statutory threshold under Section 194A of the Income-tax Act, 1961.

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