2023 (2) TMI 926 - HC - Income Tax

Court rules no TDS on interest in compensation until High Court judgment

Balkrishna Versus The State of Maharashtra, The Income Tax Officer, TDS Circle, Ahmednagar, The Senior Divisional Manager, The National Insurance Company Ltd., Ahmedngar

The Court held that no TDS can be deducted on the interest component of the compensation until the High Court judgment, deeming the deduction by the ... Validity of deduction of TDS u/s 194A on interest - Motor Accident Claims - Enhanced Principal - TDS for the period prior to the date of Judgement of HC and after the date of Judgement - HELD THAT:- This issue has been considered by the Division Bench of this Court in the case of Rupesh Rashmikant Shah Vs. Union of India and others [2019 (8) TMI 518 - BOMBAY HIGH COURT] 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 - till the date of the Judgment of the High Court no TDS can be deducted on the interest component and, as such, the deduction done by the Insurance Company on the interest component of the claim amount is bad in law. Order: The Insurance Company is directed to pay the TDS amount deducted on the interest component of the claim amount, uptill the date of the High Court Judgment along with 9% interest. Any interest on the claim amount after the date of the High Court Judgment, tax has to be collected as income from other sources and, as such, the Insurance Company would be entitled to claim TDS on that component of interest, which accrues after the High Court Judgment. Issues:Challenge to deduction of TDS on interest component of compensation awarded under the Motor Vehicles Act.Analysis:The petitioner, a Police Constable, claimed compensation for a 100% disability due to an accident, which was enhanced by the High Court to Rs.22,51,375 with interest. The Insurance Company deducted TDS on the interest component, leading to a legal challenge. The petitioner argued the TDS deduction was unlawful, while the Insurance Company contended it was permitted under Section 194A of the Income Tax Act, 1961. The Court referred to a previous Division Bench judgment which clarified that interest awarded in motor accident claim cases until the passing of the award or High Court judgment in case of appeal is not exigible to tax. The Court held that no TDS can be deducted on the interest component until the High Court judgment, making the deduction by the Insurance Company illegal.The Court further considered the arguments of the Insurance Company, which cited Section 194A of the Income Tax Act, 1961. The Court pointed out that the provision for deduction of tax at source does not make interest income chargeable to tax if it otherwise is not. It clarified that the provision for deducting tax at source cannot determine the taxability of the amount being paid. The Court ordered the Insurance Company to pay the TDS amount deducted on the interest component until the date of the High Court Judgment along with 9% interest. Any interest accrued after the High Court Judgment would be subject to tax as income from other sources, allowing the Insurance Company to claim TDS on that post-judgment interest component.Therefore, the Court allowed the petition, directing the Insurance Company to rectify the TDS deduction on the interest component of the claim amount until the High Court Judgment and provided guidelines for future tax treatment of interest on the claim amount post-judgment.