Interest on Motor Accident Claim Compensation Held Not Taxable; Addition Deleted

Interest on Motor Accident Claim Compensation Held Not Taxable; Addition Deleted

Issue

1. Taxability of Interest: Whether interest awarded on compensation under the Motor Vehicles Act (MACT) is taxable as “Income from Other Sources” or if it constitutes a non-taxable “Capital Receipt.”

2. Receipt vs. Accrual: Can interest income be taxed under Section 145B (which mandates taxation on a receipt basis) if the funds are deposited in court Fixed Deposits (FDs) under a strict lien due to a pending appeal and have not actually been received by the assessee?

Facts

• The Tragedy: The assessee’s son passed away in a motor accident in 2015.

• The Award: In 2018, the MACT awarded compensation of Rs. 69.34 Lakhs plus interest @ 7.5% from the date of the petition.

• The Litigation: The Insurance Company appealed against the award to the Punjab & Haryana High Court.

• The Stay: The High Court stayed the release of funds to the assessee but ordered the Insurance Company to deposit the amount with the Executing Court. These funds were placed in Fixed Deposits (FDs) under strict lien.

• Tax Dispute: The Insurance Company deducted TDS on the interest component (Rs. 15.13 Lakhs). The assessee did not offer this interest to tax in her return (AY 2020-21), arguing it was a capital receipt and she hadn’t received the money.

• AO’s Action: The Assessing Officer (AO) reopened the case and added the accrued interest of Rs. 15.13 Lakhs to her income on a “protective basis,” treating it as revenue receipt taxable under Section 56(2).

Decision

The Tribunal allowed the appeal in favour of the assessee on two main grounds:

1. Nature of Receipt (Capital vs. Revenue):

• Relying on the jurisdictional High Court judgment in Nirmal Devi vs. CIT (Punjab & Haryana HC), the Tribunal held that compensation under the Motor Vehicles Act is intended to mitigate the loss of life or limb. Therefore, the principal amount is a Capital Receipt.

• Consequently, the interest awarded on such compensation (from the date of filing the petition) is considered part and parcel of the compensation itself and retains the character of a Capital Receipt. It is not “income” and thus not exigible to tax.

2. No Actual Receipt (Section 145B):

• Section 145B(1) of the Income Tax Act explicitly states that interest on compensation shall be deemed to be income of the previous year “in which it is received.”

• In this case, the funds were locked in court FDs under a lien due to the pending appeal. The assessee had no access to the money.

• Tax applies to Real Income, not hypothetical accrual. Since the assessee never received the money, it cannot be taxed in the current year under Section 145B.

Verdict: The addition of Rs. 15,13,626/- was deleted. The AO was directed to re-compute the income and grant credit for the TDS deducted. [In favour of assessee]

Key Takeaways

• MACT Interest is Tax-Free (in P&H Jurisdiction): This order reinforces the view (specific to Punjab & Haryana jurisdiction) that interest on motor accident claims is not taxable income but part of the capital compensation.

• Section 145B requires “Receipt”: Even if interest is theoretically taxable, Section 145B shifts the tax point to the year of actual receipt. Money deposited in court FDs during a stay order does not constitute “receipt” by the assessee.

• TDS Credit: Even if income is held to be exempt/non-taxable, the assessee is generally entitled to claim a refund of the TDS deducted on that exempt income.