Motor accident compensation interest locked in court-ordered fixed deposit under lien during award challenge; tax addition deleted.

Interest on motor accident compensation kept in a court-ordered fixed deposit under lien, pending challenge to the award, was held not taxable in the relevant year because it was not "received" by the assessee and remained in court custody. Applying ss. 56(2)(viii) and 145B(1), the ITAT held that interest on compensation is deemed income only in the previous year of receipt, and hypothetical or merely accrued interest cannot be assessed, whether substantively or protectively. Consequently, the addition of interest income was deleted, and the AO was directed to allow corresponding TDS credit.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether interest awarded on motor accident compensation (and kept under court directions in fixed deposits under lien) constitutes taxable income in the relevant year, or forms part of the compensation and therefore is not chargeable to tax.

(ii) Whether, on the facts found, any taxability could arise on an accrual/protective basis when the assessee had not received the interest amount and the funds were under court-ordered custody.

(iii) Whether the assessee is entitled to corresponding credit of tax deducted at source where the Tribunal holds the interest amount is not taxable in the assessee's hands.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) & (ii): Taxability and timing of tax on MACT interest kept under lien / court custody

Legal framework (as discussed by the Tribunal): The Tribunal considered the application of Section 56(2)(viii) read with Section 145B(1), and examined whether "interest" on compensation could be taxed, and if so, the year of taxability under the statutory scheme referring to "interest received".

Interpretation and reasoning: The Tribunal found as a fact that although compensation and interest were computed, the assessee did not obtain access to the money because the award was under challenge and the court had stayed release to the claimants while directing deposit into fixed deposits under strict lien. The Tribunal held the issue was squarely covered by a High Court decision applied by it, which treated interest awarded on compensation under the Motor Vehicles Act as "part and parcel of the compensation" and therefore not income. The Tribunal further reasoned that, even otherwise, the statutory scheme relied on by the revenue (Section 56(2)(viii) read with Section 145B(1)) hinges on receipt of interest; on the Tribunal's findings, the assessee had not received the interest during the relevant year. Therefore, taxing an amount merely credited into court-controlled fixed deposits, without receipt by the assessee, would amount to taxing hypothetical income. On these combined grounds, the Tribunal rejected the addition whether made substantively or "protectively".

Conclusions: The interest component on motor accident compensation, in the circumstances found (amount lying in court-ordered fixed deposits under lien and not received by the assessee), could not be brought to tax for the relevant year; the addition could not be sustained either on substantive or protective basis.

Issue (iii): Grant of credit for tax deducted at source

Interpretation and reasoning: Having held that the impugned interest amount was not taxable in the assessee's hands, the Tribunal directed that the credit of tax deducted at source, as available to the assessee on the record, must be granted.

Conclusions: The assessing authority was directed to allow the available tax deducted at source credit and re-compute the assessee's income accordingly.

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