2014 (10) TMI 972 - HC - Income Tax

TDS u/s 194A - whether accident claim cases and the compensation awarded under the Motor Vehicles Act cannot be said to be taxable income? - Held that - he Circular dated 14.10.2011 issued by the Income Tax Authorities whereby deduction of income tax has been ordered on the award amount and interest accrued on the deposits made under the orders of the Court in Motor Accident Claims cases is quashed and in case any such deduction has been made by respondents they are directed to refund the same with interest at the rate of 12% from the date of deduction till payment within six weeks from today.

Summary

Issues Involved:
1. Legitimacy of tax deductions on interest accrued from term deposits in Motor Accident Claims cases.
2. Applicability of the Income Tax Act, 1961 provisions to compensation awarded under the Motor Vehicles Act.
3. Validity of the Circular No. 8/2011 issued by the Income Tax Authorities.

Issue-wise Detailed Analysis:

1. Legitimacy of tax deductions on interest accrued from term deposits in Motor Accident Claims cases:
The Registrar (Judicial) noted that banks were deducting tax on interest accrued from fixed deposits made by the Registry in Motor Accident Claims cases. The Finance/Purchase Committee recommended judicial consideration due to the public interest involved. Respondents initially did not deduct tax but began doing so following objections from concerned authorities. They cited Circular No. 8/2011, which mandates tax deductions on interest accrued on deposits made under court orders.

2. Applicability of the Income Tax Act, 1961 provisions to compensation awarded under the Motor Vehicles Act:
The court examined Sections 2(42), 2(31), and 6 of the Income Tax Act, 1961, and concluded that these provisions do not apply to compensation awarded in Motor Accident Claims cases. Section 194A mandates tax deductions on interest payments, but the court clarified that compensation for death or bodily injury in vehicular accidents is not taxable income. The compensation is intended to ameliorate victims' sufferings and is not considered income under the Act.

3. Validity of the Circular No. 8/2011 issued by the Income Tax Authorities:
The circular dated 14.10.2011 was found to be inconsistent with the mandate of Sections 2(42), 2(31), and 194A of the Income Tax Act. The court emphasized that compensation awarded under the Motor Vehicles Act is for damages, not income. The circular's directive to deduct tax on such compensation contradicts the purpose of the Motor Vehicles Act, which aims to provide immediate relief to accident victims. The court referenced several Supreme Court judgments, including N.K.V. Bros. (P.) Ltd. v. M. Karumai Ammal, Sohan Lal Passi v. P. Sesh Reddy, Savita v. Bindar Singh, and others, which support the view that compensation for accident victims should not be subject to tax deductions.

Conclusion:
The court quashed the Circular No. 8/2011 issued by the Income Tax Authorities, ruling that tax deductions on compensation awarded and interest accrued in Motor Accident Claims cases are not permissible. Any such deductions made must be refunded with interest at the rate of 12% from the date of deduction until payment, within six weeks from the date of the judgment.