Income tax not applicable on interest awarded by Car Accident Claims Tribunal: Gujarat High Court


the Gujarat High Courtt bench Judge JB Pardiwala and Judge Nisha M. Thakore held that interest awarded by the Motor Accident Claim Tribunal (MACT) under section 171 of the Motor Vehicles Act 1988 is not taxable under the Income Tax Act 1961 .

The plaintiff, Oriental Insurance Co. Ltd., is an insurance company. A car accident claim petition has been filed in the Civil Court of Ahmedabad City. The complaint request has been authorized by the MACT.

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

The insurance company argued that although the Court issued an interim order in the special civil claim, the Income Tax Department proceeded to issue an order whereby the department denied the claim filed by the insurer seeking interest waiver for the late filing of the TDS Amount.

The insurance company argued that this litigation raises many issues of public importance. The practice 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 change in section 194A, the TDS should be deducted from the actual payment of interest on the indemnity. The rate would be 10% if the applicants had produced the PAN card before payment and 20% if the PAN card had not been produced. Mr. Raval maintains that despite the aforementioned modification, the insurance companies are obliged to deposit the amount with the Tribunal itself.

The department argued that the insurance company was not justified in filing the TDS with the city’s civil court instead of the income tax department. There was no ambiguity or confusion as to where the TDS should be deposited.

The question raised was whether the interest awarded by the MACT in the accident case on the amount of compensation can be qualified as “interest income” or whether it is part of the compensation for the delay caused in the legal proceedings.

Another question raised was whether the interest awarded on the compensation amount can be equated to the interest earned on the principal amount and whether the interest awarded by the MACT is not part of the compensation.

The court held that the interest awarded in automobile accident claim cases from the date of the application for the claim until the adoption of the award, or in the case of an appeal, until the judgment of the High Court in such an appeal, would not be taxable as it would not be income. This position would not change as a result of clause (b) of Section 145A of the Income Tax Act as it stood at the relevant time, as amended by the Finance Act 2009, which provision is now found in subsection (1) of Section 145B of the Income Tax Act. Neither clause (b) of section 145A, as it existed at the relevant time, nor clause (viii) of subsection (2) of section 56 render interest taxable, whether the either the beneficiary’s income or not. Section 194A is only a provision for withholding tax. Any provision relating to withholding tax in said article would not govern the imposition of the receipt. The issue of withholding tax would only arise if the payment is of the nature of the recipient’s income.

“Insurance companies or owners of motor vehicles who deposit the required amount pursuant to Motor Accident Compensation Tribunal rulings must deposit the full amount with the Tribunal and must not deduct tax u/s 194A of the Income Tax Act on interest awarded by the Motor Accident Claims Tribunal,” the court said.

The court clarified that the submissions and findings would apply to interest awarded on compensation or enhanced compensation awarded by the Automobile Accident Claims Tribunal or the High Court from the date of the application. of complaint until the pronouncement of the sentence or the judgment.

The court held that any interest which may be payable for the delay in depositing the amount awarded would not form part of the compensation and therefore would fall within the bracket of interest income and be liable for tax under normal arrangements.

Case title: Oriental Insurance Co.Ltd. Versus Chief Commissioner of Income Tax (TDS)

Quote: R/Special Civil Application No. 4800 of 2021

Date: 05/04/2022

Applicant’s lawyer: Lawyer Rathin P. Raval

Counsel for the Respondent: Lawyer Bhatt & Co.

Click here to read/download the order


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