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2019 (8) TMI 518
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....aking away 30% of the interest on the compensation which was determined nearly 36 years after the accident. Looking to the issues involved, we have heard the learned Counsel for the parties for final disposal of the petition. The petition arises in the following background: FACTS: The petitioner is presently aged about 48 years. When he was about 8 years old, on 18.10.1978, he was trying to cross Nepensea Road in South Mumbai accompanied by a household servant when a car insured by Oriental Insurance Company Ltd. Respondent No.4, collided with the young boy causing serious injuries. His brain was severely damaged. He remained in the hospital in an unconscious state for several months. His parents brought him home setting up a nursing station at home and administered all necessary treatment. Though several months later, he regained consciousness, his brain injuries left him paraplegic. Further, treatments, therapies and cures failed to have the desired effect. His mental growth also stunted. Ever since the date of the accident, he is left completely bed ridden, needs constant attention even for routine activities. 2. On his behalf, his father had filed Motor Accident Claim ....
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....company before depositing the amount, deducted tax at source a sum of Rs. 11,80,461/- @ 10% on the interest component. 7. The petitioner had received interest of Rs. 1,18,04,606/during the period relevant to the A.Y. 2016-2017. According to the petitioner, such interest was not taxable. However, by way of caution, the petitioner filed the return of income for the A.Y. 2016 - 2017 in which he had presented the computation of his taxable income if the interest received by him was made taxable. His tax liability came to Rs. 37,97,773/-, which also he had deposited with the Income Tax department. In the return of income, he had put the following note in order to dispute the taxability of the interest: "NOTE: As per the stand taken by the Assessee the interest amount on such insurance income received should be treated as capital receipt and hence Income Tax should not be applicable on it. The Assessee has paid the Income Tax amount under protest." 8. This petition was initially filed with a prayer for a declaration that no tax at source is required to be deducted on the interest component of the compensation in motor accident claims. The petitioner had also prayed for a d....
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....sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely:- (viii) income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A." 13. Sub-section (2) of section 56 thus provides that in particular and without prejudice to the generality of the provisions of subsection (1), the following incomes, contained in various clauses therein would be chargeable to income tax under the head income from other sources. Clause (viii) refers to income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A. Subsection (1) of section 56 provides that income of every kind which is not to be excluded from the total income would be chargeable to tax as income from other sources if it is not chargeable under any of the heads specified in items (A) to (E) of section 14. 14. Section 145A(b) as it stood at the relevant time reads thus: Notwithstanding anything to the contrary contained in section 145 - (b) interest received by an assessee on compensation or on enhanced compensation, as the ....
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....interest pendente lite which also forms part of the compensation, would not be taxable. When the receipt itself is not taxable, the question of deducting tax at source while making payment thereof would not arise. It was lastly contended that in any case, such interest should be spread over the entire period for which it is paid. The interest accrues from year to year. Merely because it is paid at a single point, would not mean the entire amount is taxable in the year of payment. THE STAND OF THE DEPARTMENT: 16. The Department contends that the interest is an income distinct from the compensation and is, therefore, taxable. By virtue of clause (b) of section 145A of the Act, such income is taxable on actual receipt. Heavy reliance is placed on the provisions contained in section 56(2)(viii), section 145A(b) and section 194A of the Act. It was pointed out that section 145A was amended by the Finance Act of 2009 in order to obviate the difficulties arising out the judgment of the Supreme Court in the case of Rama Bai and ors. vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad and Ors. 181 ITR 400. The learned ASG had argued that looking to these statutory provisions, any....
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....n the case of Rama Bai (supra), a 3-Judge Bench of the Supreme Court considered a situation where the assessee's land was acquired under the Land Acquisition Act. Aggrieved by the compensation awarded by the Land Acquisition Officer, the assessee sought enhancement of compensation before the Reference Court. The Reference Court awarded enhanced compensation. With solatium, the amount came to Rs. 2,34,607/-. Interest of Rs. 37,529/- was awarded on the enhanced compensation. The Income Tax officer while making assessment for the A.Y. 1967-1968 and A.Y. 1968-1969, held that the right to receive interest on enhanced compensation arises on the date when the Reference Court passes the order. The assessee contended that the interest should be distributed over the period commencing from the date of dispossession of the assessee under the Land Acquisition Act till the date of payment. The Supreme Court considered the question whether in the facts of the case, the interest was liable to be assessed in the A.Y. 1968-1969? The Supreme Court noticed that different High Courts had given divergent decisions. The Supreme Court held that the question of accrual of interest will have to be determine....
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....ompensation/consideration (including interest under Section 28 of the 1894 Act) becomes payable/paid under 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155 (16) of the 1961 Act, later on. Hence, the year in which enhanced compensation is received is the year of taxability. Consequently, even in cases where pending appeal, the Court/Tribunal/Authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under Section 45(5) of the 1961 Act. This is the scheme of Section 45(5) and Section 155(16) of the 1961 Act. We may clarify that even before the insertion of Section 45(5)(c) and Section 155 (16) w.e.f. 1-4-2004, the receipt of enhanced compensation under Section 45(5)(b) was taxable in the year of receipt which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt. 55. It is important to note that compensation, including enhanced compensation/consideration under the 18....
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....d of such amount/s as may be due to them out of the amount of Rs. 1,70,269/- which has already been deducted by the Insurance Company as tax deducted at source under the provisions of Section 194A of the Act. 14. It is necessary to obviate such a situation in future for other claimants who may be awarded compensation with interest thereon, and the amount of interest being deposited exceeds Rs. 50,000/-, but who may not be liable to have any tax deducted at source as per the interpretation placed by us on the provisions of Section 194A of the Act. We, therefore, direct that - I. The Insurance Companies or the owners of the motor vehicles depositing the amounts in compliance with the awards of the Motor Accident Claim Tribunals shall (a) first spread the interest amount over to the relevant financial years for the period from the date of filing the claim petition till the date of deposit. (b) thereafter, if the interest for any particular financial year exceeds Rs. 50,000/-, separately deposit before the Tribunal the amount liable to be deducted at source under the provisions of Section 194A(3)(ix) of the Income-tax Act, 1961. Such amount Page 2108 shall no....
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....insurance companies or the owners of the motor vehicles depositing the amounts in compliance with the awards of the Motor Accidents Claims Tribunal shall: (a) first spread the interest amount over to the relevant financial years for the period from the date of filing the claim petition till the date of deposit, (b) thereafter, if the interest for any particular financial year exceeds Rs. 50,000/-, separately deposit before the Tribunal the amount liable to be deducted at source under the provisions of section 194-A (3) to (ix) of the Income-Tax Act, 1961. Such amount shall not, however, straightaway be paid over to Income Tax Department, (c) produce before the Claims Tribunal a statement of computation of interest by spreading the amount over the relevant years from the date of claim application till the date of deposit if the interest for any particular financial year exceeds Rs. 50,000/- and also request the Tribunal to treat the amount as a separate deposit. (ii) The Tribunal shall ensure that the amount of interest accrued each year is apportioned amongst the claimants on year to year basis. (iii) If the interest payable to any claim....
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....nd Acquisition Act payable to a claimant is part of compensation. The question before the Gujarat High Court, therefore, was does the amendment in section 145A and the corresponding amendments in section 56(2) of the Act change the position of law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra). The Division Bench of the Gujarat High Court noticed the distinction between interest payable under section 28 and one payable under section 34 of the Land Acquisition Act. It was observed that the interest under section 28 which is paid on enhanced compensation is treated as accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to capital gain tax under section 45(5) of the Act. The Court noticed the Departmental Circular explaining the said amendment in section 145A of the Act and observed as under: "Thus, the substitution of section 145A by the Finance (No.2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF) (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR 4....
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..... The award under the Motor Vehicles Act is neither the money borrowed by the insurance company nor the debt incurred upon the insurance company. As far as the word "claim" is concerned, it should also be regarding a deposit or other similar right or obligation. The definition of Section 2(28A) of the Income Tax Act again repeats the words "monies borrowed or debt incurred" which clearly shows the intention of the legislature is that if the assessee has received any interest in respect of monies borrowed or debt incurred including a deposit, claim or other similar right or obligation, or any service fee or other charge in respect of monies borrowed or debt incurred has been received then certainly it shall come within the definition of interest." 29. Learned Single Judge of Madras High Court in the case of The Managing Director, Tamil Nadu State Transport Corporation (Salem) Ltd. vs. Chinnadurai CRP (PD) No.1343 of 2012 and M.P. No.1 of 2012 decided on 2.6.2016 held that neither the compensation in motor accident claims awarded by the Tribunal nor the interest thereon can be subjected to deduction of tax at source since such receipts are not income under the said Act. 30. A c....
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....r default is such as would (if death had not ensued) have entitled the party injured to maintain an action and recover damages in respect thereof, the party, who would have been alive if death had not ensued, shall be liable to an action or suit for damages notwithstanding the death of the person injured and although the death shall have been caused under such circumstances as amount in law to felony or other crime. 33. The Motor Vehicles Act, 1939 was thereafter enacted in order to consolidate the law relating to motor vehicles, which contained various provisions for use of the motor vehicles and for claiming compensation for death or bodily injury caused in a motor accident. Special Claims Tribunals were set up to decide such cases. The Motor Vehicles Act, 1939 was replaced by the Motor Vehicles Act, 1988. The Statement of Objects and Reasons for enactment of the said Act records that the need was felt for consolidation and amendments of laws relating to motor vehicles and such law should take into account changes in the road transport technology, pattern of passenger and freight movements, development of road network in the country and in particular, improved techniques in th....
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....he death of the deceased. It is the net loss on balance which constitutes the measure of damages. ...." 38. In the case of R.D. Hattangadi vs. M/s.Pest Control (India) Pvt. Ltd. (1995) 1 SCC 551, while referring to different heads for assessing compensation in injury case, it was observed as under: "9. Broadly speaking while fixing an amount of compensation payable to a victim of an accident, the damages have to be assessed separately as pecuniary damages and special damages. Pecuniary damages are those which the victim has actually incurred and which is capable of being calculated in terms of money-, whereas non-pecuniary damages are those which are incapable of being assessed by arithmetical calculations. In order to appreciate two concepts pecuniary damages may, include expenses incurred by the claimant : (i) medical attendance; (ii) loss of earning of profit upto the date of trial; (iii) other material loss. So far non-pecuniary damages are concerned, they may include (i) damages for mental and physical shock, pain suffering, already suffered or likely to be suffered in future; (ii) damages to compensate for the loss of a....
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.... 46. In this case, the accident and death occurred in the year 1988. The award was made by the Tribunal in the year 1993. The High Court decided the appeal in 2007. The pendency of the claim proceedings and appeal for nearly two decades is a fortuitous circumstance and that will not entitle the appellants to rely upon the two pay revisions which took place in the course of the said two decades. If the claim petition filed in 1988 had been disposed of in the year 198889 itself and if the appeal had been decided by the High Court in the year 1989-90, then obviously the compensation would have been decided only with reference to the scale of pay applicable at the time of death and not with reference to any future revision in pay scales." CONCEPT OF MULTIPLIER - The Supreme Court in Susamma Thomas (supra) referred to the methods adopted for determination of compensation in fatal accident cases and endorsed that the multiplier method is logically sound and legally well established. The following observations were made: "As to the multiplier, Halsbury states: "However, the multiplier is a figure considerably less than the number of years taken as the dura....
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....r and the capital feed also to be spent away over the period of dependency is to last etc. Usually in English Courts the operative multiplier rarely exceeds 16 as maximum. This will come down accordingly as the age of the deceased person (or that of the dependents, whichever is higher) goes up." 42. In the case of Sarla Verma (supra), the Supreme Court standardised the choice of the multiplier for achieving degree of uniformity in awarding compensation in motor accident claim cases. This was reiterated by the Supreme Court in the case of Reshma Kumari vs. Madan Mohan (2013) 9 SCC 65. NATURE OF INTEREST PAYABLE: 43. In the context of interest, the case of Kaushnuma Begum vs. New India Assurance Co. Ltd. (2001) 2 SCC 9, it was observed as under: "24. Now, we have to fix up the rate of interest. Section 171 of the MV Act empowers the Tribunal to direct that "in addition to the amount of compensation simple interest shall also be paid at such rate and from such date not earlier than the date of making the claim as may be specified in this behalf'. Earlier, 12% was found to be the reasonable rate of simple interest. With a change in economy and the policy of Reserve Ba....
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....xed to have a general application in motor accident claim cases having regard to nature of provision under section 171 giving discretion to the Tribunal in such matter. ......" 46. In the case of Dharampal vs. U.P. State Road Transport Corporation (2008) 12 SCC 2018, it was observed as under: "8. As per section 171 of the Motor Vehicle Act, 1988 (hereinafter referred as 'Act') where the claim for compensation made under the act is allowed by the Claims Tribunal, the tribunal may direct that in addition to the amount of compensation simple interest shall also be paid at such rate from such date not earlier than the date of making claim. 9. In National Insurance co. Ltd. v. Keshav Bahadur [(2004) 2 SCC 370] this court has held that the provisions require payment of interest in addition to compensation already determined. Even though the expression "may" is used, a duty is laid on the Tribunal to consider the question of interest separately with due regard to the facts and circumstances of the case. It was clearly held in the said decision that the provision of payment of interest is discretionary and is not and cannot be bound by rules. 10. Inter....
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....son, particularly in government service, by the time a Claim Petition or Appeal is decided, there is hard evidence of the implementation of pay revisions and consequential rise in salary of other employees of the same cadre as that of the deceased. However, the Courts have rejected the request for awarding compensation on the basis of such future predictions. To the multiplicand so determined multiplier is applied to ascertain future loss. The method of multiplier takes into account various factors and imponderables of life and, therefore, the multiplier is not equivalent to the full length of the remainder of the expected life of the deceased. The multiplier theory proceeds on the basis that with interest that may be earned on the compensation and a portion drawn from the capital, should be equivalent to what the deceased would have contributed to his family. At the end of the period, the capital should be completely utilised. It is, therefore, that while awarding compensation, though the Claims Tribunal awards future loss in praesenti, interest is awarded for the period between filing of the Claim Petition till passing of the award and, therefore, as held by the Supreme Court in ....
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....vides that income chargeable under the head profits and gains of business or profession or income from other sources would be, subject to the provisions of sub-section (2) computed in accordance with either cash or mercantile system of accounting regularly employed by assessee. This provision thus, leaves an option to assessee to offer the income of profit and gains of business or profession or from other sources to tax either on cash or mercantile system. In case of Rama Bai (supra), the Supreme Court held that interest on compensation cannot be stated to have accrued on the date of the order of the Court granting enhanced compensation but has to be taken as having accrued year after year from the date of delivery of possession of the lands till the date of such order. The Legislature felt that this decision would cause undue hardship to the assessees. Even otherwise, it can be seen that, this position would cause severe hardship to the assessees. Interest would be charged to tax on accrual basis before the compensation is enhanced. The assessee who seeks enhanced compensation would go on paying tax on notional interest for years together till the reference or appeal for enhanceme....
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.... the ratio of the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra), would continue to apply even after amendment in section 145A of the Act. Secondly, interest under section 28 of the Land Acquisition Act cannot be treated as income subject to tax irrespective of clause (b) of section 145A of the Act. Such interest would form part of the compensation and, therefore, subject to capital gain. We may note that the Punjab & Haryana High Court in case of Puneet Singh vs. Commissioner of Income Tax (2019) 415 ITR 215 (P&H) has held that interest on enhanced compensation under Land Acquisition Act is assessable in the year of receipt as income from other sources. This decision is directly contrary to the view expressed by the Gujarat High Court in the case of Movalia Bhikhubai Balabhai (supra). It is not necessary for us to resolve this controversy since our reference to and reliance on the judgment of Gujarat High Court is limited to the effect of amendment in section 145A by the Finance Act, 2009. 54. To summarise, the decision of the Supreme Court in the case of Rama Bai (supra) is not an authority on the question of taxability of interest on compensation or enha....
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....d and multiplier are based on such reference point. But computation by the Tribunal takes time. If compensation is revised by the High Court it takes further time. Interest is awarded keeping in mind the rate of inflation. Effort thus is to award just compensation. Awarding interest for delayed computation of compensation is therefore integral part of this exercise. 56. The issue can be looked from a slightly different angle. In the context of interest, there are three crucial dates. The date of the accident is a date in reference to which the entire compensation is calculated. The date of filing of the claim petition is the date from which the claimant can seek interest on the compensation awarded by the Claims Tribunal. Under section 170 of the Motor Vehicles Act, the interest cannot be awarded for a period prior to filing of the Claim Petition. The date of passing of the award by Claims Tribunal is the date on which the compensation is determined and the right to receive interest pendente lite ceases. The interest for the period between the filing of the claim petition and passing of the award thus, is for the period when the claimant for the first time approached the Claims ....
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....his provision, clause (ix) now provides that the provision of sub-section (1) will not apply to such income credited by way of interest on the compensation awarded by the Motor Accident Claims Tribunal. Clause (ixa) virtually retains the original provision of unamended clause (ix). The learned ASG would, therefore, contend that by virtue of these provisions, requirement of deducting tax at source on interest income would not arise only if the same does not exceed Rs. 50,000/- in a financial year or where such income is merely credited. In other words, at the time of payment of interest, the provision for deduction of tax at source would kick in. 59. So far as the plain meaning of section 194A(1) read with erstwhile clause (ix) and substituted clauses (ix) and (ixa) of subsection (3) is concerned, there can be no doubt or dispute. However, the fundamental question is does section 194A make the interest income chargeable to tax if it otherwise is not. The answer has to be in the negative. The provision for deduction of tax at source is not a charging provision. It only makes deduction of tax at source on payment of same, which, in the hands of payee, is income. If the payee has no....