HC asks Centre, CBDT to decide plea against tax on road accident compensation interest

The Delhi High Court Tuesday asked the Centre and the Central Board of Direct Taxes (CBDT) to decide the issue of deduction of tax on the interest received on compensation by a road accident victim.

A bench of Justices S Muralidhar and I S Mehta said that the petition, which came up for hearing on Tuesday, seeking quashing of a provision under the Income Tax law which mandates deduction of tax on the interest on compensation be treated as a supplementary representation by the authorities.

The court asked the Ministry of Finance and the CBDT to decide by June 30 the supplementary representation and a representation given by the petitioner in December 2018, and pass a detailed order.

It also asked the authorities to give a personal hearing to petitioner advocate and activist Amit Sahni, if required, and inform him about the decision taken.

The court's order came after the counsel for the CBDT said that the petitioner's earlier representation was pending before the authorities.

The plea stated that the receipts of compensation are non-taxable under the Income Tax Act and therefore, the interest under the motor accident claims should not be made taxable.

"But the insurance companies deduct TDS on the interest accrued upon the compensation awarded by the Motor Accident Claims Tribunal (MACT) in view of section ... of the Income Tax Act, 1961," it said.

It said the compensation awarded by the MACT established under the Motor Vehicle Act, 1988 is meant to substitute the loss of potential income of the victim, and in most cases, is in fact determined as a multiple of the victim's income.

"Under tax laws, it is well settled that if a receipt is meant to substitute a source of income, it is a capital receipt. Capital receipts are generally not taxable as income unless they are specifically roped in into the definition of income as such compensations is not specifically included, they are therefore not taxable," the petition said.

It added that the objective of compensation by the tribunal is to mitigate the impact of the misery due to the accident, so that the injured or the dependents do not have to face compulsions of life on account of discontinuance of the income earned by the victim.

"The insurance companies do not readily admit the claim of a person under the Motor Vehicle Act and the victim has to approach the MACT and many times it takes years and some time decades either before the tribunal or before the higher courts to finally determine the compensation payable to the victim. Therefore, the victim cannot be made liable for delayed payment of compensation," it said.

The plea, which has arrayed the Ministry of Finance and the CBDT as parties, said it has also made a representation to the respondents in December 2018 but no action was taken in this regard.