Interest on motor accident compensation is not taxable income; TDS applies only where payment is income.

Interest on motor accident compensation, including interest on enhanced compensation, is treated as a restitutive receipt linked to a capital claim and is not automatically taxable as income. Section 145-B(1) of the Income-tax Act only governs the year of taxability and does not itself create a charge to tax where the receipt is not otherwise income. Section 194-A is only a TDS provision and applies only to payments that are in the nature of income. The stated exception is limited to interest treated as income and crossing the prescribed threshold; otherwise, tax deducted on such interest is refundable.

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Issues: Whether interest awarded on motor accident compensation and enhanced compensation under the Motor Vehicles Act, 1988 is taxable income so as to justify deduction of tax at source and denial of refund.

Analysis: Compensation awarded for death or injury under motor accident claims is a restitutive payment and is in the nature of capital receipt. Interest paid on such compensation, including interest on enhanced compensation, does not automatically become taxable income merely because it is received later. Section 145-B(1) of the Income-tax Act, 1961 governs the year of taxability and does not create a charge to tax where the receipt is not otherwise income. Section 194-A of the Income-tax Act, 1961 is only a TDS provision and can apply only where the payment is in the nature of income. The statutory scheme, read with the judicial authorities relied on, makes clear that interest on compensation under motor accident claims is not exigible to tax, save to the limited extent contemplated by the exception relating to interest that is treated as income and crosses the prescribed threshold.

Conclusion: The interest component on the motor accident compensation and enhanced compensation was not taxable income, and tax deducted thereon was liable to be refunded to the petitioner.

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