Income Tax Not Applicable On Interest Awarded By The Motor Accident Claim Tribunal: Gujarat High Court

The writ applicant, Oriental Insurance Co. Ltd., is an insurance company. One Motor Accident Claim Petition was filed in the City Civil Court of Ahmedabad. The claim petition was allowed by the MACT.

The insurance company deposited the TDS amount with the Income Tax Department on March 26, 2019 and also filed a correction statement for 26Q for the Q-1 of FY 2017-18, which resulted in the demand for interest of Rs.69,741 under Section 201(1A) of the Income Tax Act, 1961.

The insurance company contended that although the Court had passed an interim order in the special civil application, the Income Tax Department proceeded to pass an order by which the department rejected the application filed by the insurer seeking a waiver of interest for the late deposit of the TDS amount.

The insurance company submitted that this litigation raised many issues of public importance. The practise of deducting TDS on interest under Section 194A of the Income Tax Act is not new.

The insurance company pointed out that, in view of the amendment to Section 194A, the TDS would have to be deducted from the actual payment of interest on compensation. The rate would be 10% if the claimants had produced the PAN Card before the payment and 20% if the PAN Card had not been produced. Mr. Raval would submit that in spite of the aforesaid amendment, the insurance companies are being compelled to deposit the amount with the Tribunal itself.

The department submitted that the insurance company was not justified in depositing the TDS with the City Civil Court instead of the Income Tax Department. There was no ambiguity or confusion as regards the question as to where the TDS was required to be deposited.

The issue raised was whether interest allowed by the MACT in the accident case on the amount of award can be termed as "Income from Interest" or if it is a part of compensation for the delay caused in the legal proceedings.

Yet another issue raised was whether interest allowed on the compensation amount can be equated with interest earned on the principal amount and whether the interest awarded by the MACT is not a part of compensation.

The court held that the interest awarded in the motor accident claim cases from the date of the claim petition till the passing of the award, or in the case of an appeal, till the judgement of the High Court in such an appeal, would not be eligible for taxation as it would not be an income. This position would not change on account of clause (b) of Section 145A of the Income Tax Act as it stood at the relevant time, amended by the Finance Act, 2009, which provision now finds place in sub-section (1) of Section 145B of the Income Tax Act. Neither clause (b) of Section 145A, as it stood at the relevant time, nor clause (viii) of sub-section (2) of Section 56 make interest taxable, whether the recipient's income is or is not.Section 194A is only a provision for the deduction of tax at source. Any provision for deduction of tax at source in the said section would not govern the taxability of the receipt. The question of the deduction of tax at source would arise only if the payment is in the nature of the income of the payee.

"The insurance companies or the owners of the motor vehicles depositing the requisite amount in due compliance with the awards of the Motor Accident Claims Tribunals shall deposit the full amount with the Tribunal and shall not deduct tax u/s 194A of the Income Tax Act on the interest awarded by the Motor Accident Claims Tribunal," the court said.

The court clarified that the observations and conclusions would apply to interest granted on compensation or enhanced compensation awarded by the Motor Accident Claims Tribunal or the High Court from the date of the claim petition till the passing of the award or judgement.

The court held that the interest that may be paid for the delay in depositing the awarded amount would not form part of the compensation and, therefore, would fall into the bracket of interest income and would be exigible to tax under the normal provisions.

Case Title: Oriental Insurance Co. Ltd. Versus Chief Commissioner Of Income Tax (TDS)

Citation: 2022 LiveLaw (Guj) 148

Dated: 05/04/2022

Counsel For Petitioner: Advocate Rathin P Raval

Counsel For Respondent: Advocate Bhatt & Co.

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