TDS applies to interest on bank deposits made from MACT awards

TDS applies to interest on bank deposits made from MACT awards as it loses its exempt character.

Issue

Whether the tax exemption on interest from Motor Accidents Claims Tribunal (MACT) compensation under Section 194A(3)(ix) and (ixa) extends to subsequent interest earned on bank fixed deposits created using that compensation amount.
Whether a bank is legally justified in deducting Tax Deducted at Source (TDS) on interest accrued from such fixed deposits once the initial award amount has been deposited into the banking system.

Facts

The petitioners, who were minors at the time, along with their mother, were awarded a compensation amount by the Motor Accidents Claims Tribunal following the death of their father in an accident.
The Insurance Company was directed to deposit the awarded compensation amounts directly into the names of the minor petitioners.
The Tribunal ordered these funds to be securely placed in long-term fixed deposits with the respondent-Bank during the petitioners’ minority.
Upon attaining the age of majority, the petitioners withdrew the accumulated fixed deposits.
Upon withdrawal, the petitioners discovered that the respondent-Bank had systematically deducted TDS on the interest accrued on those deposits over multiple assessment years.

Decision

The court held that the statutory tax exemptions provided under Section 194A(3)(ix) and (ixa) apply strictly and exclusively to interest credited directly on the core compensation amount awarded by the MACT.
The court ruled that once the compensation money is deposited with a commercial bank, it legally loses its original identity as an “amount awarded by the Tribunal.”
Upon conversion into a standard bank deposit, the interest generated transitions into “Income from Other Sources” belonging to the account holders.
Consequently, the court held that the TDS deducted by the Bank on the interest accrued from these fixed deposits was fully valid, and the petitioners were not entitled to a refund or exemption under the invoked clauses.

Key Takeaways

Loss of Exempt Character: A tax-exempt statutory award or compensation loses its protective blanket the moment it is deployed into general commercial banking instruments like fixed deposits.
Strict Statutory Interpretation: Exemption provisions in tax laws must be construed strictly. The exemption for MACT interest is limited to the delay period between the accident/award and the actual payout by the insurance agency or court; it does not follow the money into subsequent personal investments.
Bank’s Standard Obligation: Banks are legally bound to treat fixed deposits originating from court awards just like any other interest-bearing retail deposit, rendering them subject to mandatory domestic TDS provisions under Section 194A once the threshold limits are breached.

HIGH COURT OF KERALA

Kavya Shaji

Union of India

ZIYAD RAHMAN A.A., J.

WP (C) NO. 20937 OF 2022

JUNE 17, 2026

P.B. Muhammed Ajeesh and Raieez M. Ashraf, Advs. for the Petitioner. A. Kumar, Sr. Adv., P.G. Jayashankar, SC, P.J. Anilkumar, Smt. G. mini, P.S. Sree Prasad, Job Abraham, P.J. Anilkumar and Smt. G. mini, Advs. for the Respondent.

JUDGMENT

1. This writ petition is submitted by the petitioners seeking the following reliefs:

“i. Issue a writ of Mandamus or other appropriate writ order or direction commanding the respondents to return the money collected under the head of TDS to the petitioners with interest of 12% till the realization.

ii. Issue such other writ, direction or order that this Hon’ble Court may deem fit, just and necessary in the facts and circumstances of the case.”

2. The facts which led to the filing of this writ petition are as follows:

The petitioners are the children of late K.A. Shaji, who died in a motor accident occurred on 01.08.2005. Claiming compensation, the petitioners along with their mother filed O.P(MV) No.373/2006 before the Motor Accidents Claims Tribunal, Ernakulam. The Tribunal awarded compensation and accordingly, the Insurance Company was directed to deposit Rs.2,21,870/- and Rs.18,581/- in the name of each petitioner, since they were minors. Exts.P1 and P2 are the F.D. receipts dated 18.01.2011, evidencing the fixed deposits made by the Tribunal with 2^nd respondent.

3. Later, on attaining majority, the petitioners have withdrawn the fixed deposits in the year 2021 and 2022 respectively. Thereupon, the petitioners came to be aware that, the TDS has been deducted from the interest accrued on the said deposits, for the period from 2011 to 2021 and 2013 to 2020. According to the petitioners, since this is an income obtained by way of compensation as per the award passed by the Motor Accidents Claims Tribunal, the same is exempted from TDS in the light of Section 194A(3)(ix) and (ixa) of the Income Tax Act. It was in these circumstances this writ petition was submitted seeking the above reliefs.

4. I have heard the learned Counsel for the petitioners and the learned Standing Counsel for the Income Tax Department and the learned Counsel for the respondent Bank.

5. The contentions raised by the petitioners are by placing reliance upon Section 194A(3)(ix) and (ixa) of the Income Tax Act, which reads as follows:

“(ix) to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal;

(ixa) to such income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees;”

The crucial aspect to be noticed with respect to the stipulations contained in the aforesaid provision is that, the said provision contemplates an exemption from TDS, only in respect of income credited by way of interest on compensation awarded by the Motor Accidents Claims Tribunal. However, in this case, the TDS deducted as evidenced by Exts.P5 and P6, is in respect of the interest accrued on the deposit made by the Tribunal with bank, as compensation for the death of the father of the petitioners along with interest. As rightly pointed out by the learned Counsel for the respondent Bank, the moment the said amount is deposited with the Bank account, it is liable to be treated as “other income”. What is contemplated under Section 194A(3)(ix) and (ixa) is the amount credited as interest on the compensation amount awarded by the Motor Accidents Claims Tribunal. As far as the interest accrued on the deposit made with the respondent Bank is concerned, the same would not come within the category of the income of interest referred to in Sub-clause(ix) and (ixa) of Section 194A(3) of the Act, as it is an income on the deposit and as it is not an interest on the amount awarded by the Motor Accidents Claims Tribunal. The deposit already made with the respondent Bank, is inclusive of the interest awarded by the Motor Accident Claims Tribunal and therefore, as mentioned above, upon deposit of the same with the respondent Bank, it losses its character of being an amount awarded by the Tribunal and the same becomes the ‘other income’ of the petitioners and the exemption contemplated under the aforesaid provision would no longer be applicable to the same.

In such circumstances, I do not find any scope for granting the reliefs sought for. It is also to be noted in this regard that, the Bank has already deducted the amount at 20%, as the petitioners failed to provide the Bank details of Form 15G declaration, as required. Moreover, the said amount is already deposited by the Bank with the Income Tax Authorities. In such circumstances, it is for the petitioners to invoke appropriate remedies for getting the refund of the said amounts after complying with the statutory requirements. Accordingly, this writ petition is dismissed without prejudice to those rights if any, available .