TaxTMI 
TaxTMI 
2019 (8) TMI 518
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....ion 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 Petition before the Motor Accident Claims Tribunal, G....
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....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 direction to refund the sum of Rs. 37,97,773/- which he had paid to the Inc....
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....er 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 case may be, shall be deemed to be the income of the year in which it is received." Sub-section (1) of section 194A of the Act e....
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....le 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 interest on compensation or enhanced compensation of motor accident claims would be chargeable to tax as income from other sources and the point of chargeability would be the....
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....e 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 determined in accordance with the decision of the Supreme Court in the case of Khorshed Shapoor Chenai vs. Assistant Controller of Estate Duty, A.P. (1980) 122 ITR 21 (SC) The effect of the decision, it was clarifie....
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.... 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 1894 Act, is based on the full value of property as on date of notification under Section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under Section 23(1A), or Section 23(2) or under Section 28 of....
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....ate 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 not, however, straightaway, be paid over to the Income-tax department. (c) produce before the Tribunal a statement of computation of interest by spreading the amount over the relevant years from the date of claim petition till the date of deposit if the in....
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....f 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 claimant during any particular financial year exceeds Rs. 50,000/-, the Tribunal shall permit the insurance companies/owners to pay over the amount liable to be deducted at source under section 194A(3)(ix) to the Income Tax Department in respect of that particular claimant for the particular year, without prejudice to the claimant's case ....
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....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 400 (SC) whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the words "interest received on compensation or enhanced compensation" in section 145A of the Income-tax Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF) (supra....
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.... 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 contrary view has been taken in the following decisions: Rajasthan High Court in the case of Kailash Narain Gupta vs. Commissioner of Income Tax 225 ITR 921 held that interest on compensation stands on a different footing as compared to the compensation awarded. It was held that such interest is in the nature of income. This was reiterated in a later decision of the High Court in the case of Smt....
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....rime. 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 the motor vehicles management. Chapter X of the Act of 1988 pertains to liability without fault in certain cases. Chapter XI pertains to insurance of motor vehicles against third party rights. Chapter XII pertains to Claims Tribunals. Section 166 of Act of 1988 pertains to applications for compensation under which a person who has sustained injury or the owner of the property or where death has resulted from the ac....
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....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 amenities of life which may include a variety of matters i.e. on account of injury the claimant may not be able to walk, run or sit; (iii) damages for the loss of expectation of life, i.e. on account of injury the normal longevity of the person concerned is shortened; (iv) inconvenience, hardship, discomfort, disappointment, frustration and mental stress in life." 39. In the case of Jagdish vs. Mohan and others (2018) 4 SCC 571, it was observed as under: "8.....
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....n 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 duration of the expectancy. Since the dependents can invest their damages, the lump sum award in respect of future loss must be discounted to reflect their receipt of interest on invested funds, the intention being that the dependents will each year draw interest and some capital (the interest element decreasing and the capital drawings increasing with the passage of years), so that they are compensated each year for their annual loss, and the fund will be exhausted at the age which the court assesses to be the correct age, having regard to all contingencies. ....
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....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 Bank of India the interest rate has been lowered. The nationalised banks are now granting interest at the rate of 9% per annum from the date of the claim made by the appellants. The amount of Rs. 50,000 paid by the Insurance Company under Section 140 shall be deducted from the principal amount as on the date of its payment, and interest would be recalculated on the balance amount of the principal sum from such date." 44. In the case of United India Insurance Company Ltd. and others vs. Patricia Jean Mahajan and Others (2002) 6 SCC 281,, it was observed as under: "In our view the re....
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....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. Interest is compensation for forbearance ordetention of money, which ought to have been paid to the claimant. No rate of interest is fixed under section 171 of the Act and the duty has been bestowed upon the court to determine such rate of interest. In order to determine such rate we may refer to the observations made by this court over the years. In the year 2001 in the case of Kaushnuma Begaum v. New India Assurance Co. Ltd. [(2001) 2 SCC 9] on the question of rate of interest to be awarded it was held that earlier, 12% was found to be the reasonable rate of simple interest but with a change in economy and the policy of Reser....
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....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 the case of Abati Bezbaruah (supra) and Dharampal (supra), such interest is considered to be part of compensation, and accretion to the compensation since the same is awarded for the compensation which is ascertained with reference to an earlier date i.e., the date of accident. At the same time, courts have not approved granting interest on future expenditure. INTERPRETATION OF THE PROVISIONS CONTAINED IN THE INCOME TAX ACT - 49. We may apply these conclusions to the relevant provisions contained in the Income Tax Act. Section 56 pertains to income from other sources. Sub-section (1) of section 56 provides that income of every....
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.... 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 enhancement is allowed. With a view to mitigate such hardship, section 145A was amended by the Finance Act of 2009 w.e.f. 1.4.2010. 52. Clause (b) of section 145A of the Act as amended, we may recall provides that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or enhanced compensation, as the case may be, shall be deemed to be income of the year in which it is received. This provision in our opinion, would have two significant effects. Firstly, it would overcome the decision of the Supreme Court in the case of Rama Bai (supra) and, therefore, the principle of accrual of inter....
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....eipt 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 enhanced compensation in motor accident claim cases. In Ghanshyam (HUF) (supra), the Supreme Court held that interest under section 28 of the Land Acquisition Act would invite capital gain tax. This judgment was rendered before amendment in section 145A of the Act. The Gujarat High Court in Movalia Bhikhubhai Balabai (supra), held that the ratio of the Supreme Court in the case of Ghanshyam (HUF) (supra), would continue to apply post amendment in section 145A by virtue of Finance Act, 2009 also. 55. In order to ascertain the taxability of interest on compensation or enhanced compensation in motor accident claim cases, we, therefore would have to a....
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....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 Tribunal asking the Tribunal to assess and award compensation and the time consumed in disposing of the Claim Petition. We may also recall, the interest can be awarded even though part of the compensation would comprise of future loss of income. This is so because, the multiplier method factors this aspect also. At the same time, as noted, the Courts do not award interest on future expenditure since the amount is being paid to the claimant for an expenditure which may be incurred at a later point of time. This dichotomy, thus, between awarding interest on future income while not awarding interest for future expenditure brings out the true character....
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....o 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 liability to pay such income, the liability to deduct tax at source in the hands of payer cannot be fastened. In other words, the provision of deducting tax at source cannot govern the taxability of the amount which is being paid. 60. In the decision of the Gujarat High Court in the case of Hansaguri Prafulchandra (supra), the Court had no occasion to decide the taxability of interest on compensation or enhanced compensation of motor accident cases. This was also the position in the case of decision of this Court in the Gauri Deepak Patel & ors. (supra). 61. We may clarify that these observations and conclusions would apply to interest on compensation....