Whether Interest On Compensation For Motor Accident Claims Exigible To Tax & Is Insurance Company Required To Deduct Tax At Source?, Rajasthan HC Refers To Larger Bench

Chief Justice Akil Kureshi and Justice Uma Shanker Vyas, ordered,

"Under the circumstances reference may be made to the Larger Bench on following question:- 'Whether the interest payable on motor accident claim compensation is exigible to tax and resultantly is the insurance company required to deduct tax at source while making such payment to the claimants?"

The court observed,

"In view of this position and also considering the importance of the issue as also the fact that the issue is a recurring one arising in large number of motor accident claim cases, it is desirable that there is an authoritative pronouncement on this question by Larger Bench."

Essentially, the petition is filed by the claimants of motor accident compensation, whereby their claim petition was allowed by the Motor Accident Claims Tribunal awarding compensation with interest. At the time of payment of such compensation, the insurance company had deducted tax at source on the interest component. The petitioners contend that the interest is not taxable and insurance company ought not to have deducted tax at source thereon.

The court noticed that a Division Bench of this Court in Sharda Pareek and Ors. Vs. Astt. Commissioner of I.T. and Ors. reported in (2019)416 ITR 441 (Raj.) has dealt with this issue. The only discussion on the point in said case is as follows:

"9.On plain reading of Section 2(28A), it is very clear that originally compensation was received by the claimant was not income but once the amount received, it has become capital and interest on capital is liable to be taxable. In that view of the matter, the issue is required to be answered in favour of the department and against the assessee.

10. The contention of Mr. Kasliwal is that revenue income of compensation interest is also compensation, in our considered opinion, the contention is misconceived inasmuch as they are entitled benefits only for the compensation, the rest of the amount of interest is deferred amount of compensation, therefore, the interest income is to be calculated from the date of application which was preferred and they are entitled for the interest from the date of application as directed by all courts but subject to income liable to be taxed every year."

The court observed that there are divergent views amongst different High Courts on this point.

Notably, the court observed that in Shri Rupesh Rashmikant Shah Vs. Union of India and Ors. decided on 08.08.2019, a Division Bench of Bombay High Court has dealt with this issue at length and come to the conclusion that interest on the compensation awarded for motor accident claim cases upto the date of award is not exigible to tax.

Also Read: Income Tax Cannot Be Levied On Interest From Motor Accident Compensation: Bombay HC

Further, the court pointed out that Madras High Court in the case of Cholamandalam General Insurance Co. Ltd Vs. M. Ashok Kumar and Ors. has referred the aforesaid issue to Larger Bench. Scanning the entire nation, the Madras High Court also found that there are different viewpoints expressed by different High Courts and no one uniform or consistent application of the law. It was also brought to its notice that when the matter was escalated to the Supreme Court in 2014, the issue was not decided but kept alive upon dismissal of the challenge, on the ground that the stakes involved were too low.

Also Read: Madras HC Refers To Larger Bench Applicability of TDS On Interest In Motor Accident Claims ; Suggests Use Of Un-refunded TDS For Benefit Of Accident Victims

The court also remarked that several statutory provisions and judgments of various courts were not brought to its notice.

Adv. Sandeep Mathur and Adv. Prabhansh Sharma appeared for the petitioners, while Adv. Prakhar Agarwal on behalf of Adv. Virendra Agarwal and Adv. Nikhil Simlote on behalf of Sr. Adv. R.B. Mathur appeared for the respondents.

Case Title: Satya Narayan & Ors. v. The H.D.F.C. Irgo General Insurance Company Limited & Ors.

Citation: 2022 LiveLaw (Raj) 70

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