Sections. 2 and 4, read with sections 45, 56(2) (viii) and 145A – If the assessee receives interest, to compensate for the time value of money, on account of delay in payment of the motor accident compensation, then such interest takes the same character as that of the accident compensation and since the said accident compensation, being capital receipt, is not taxable, consequently receipt of interest on such compensation is also not taxable.
FACTS
The assessee had met with a serious motor car accident which had left her permanently disabled. The competent authority termed the disability at ninety per cent level.
She had claimed compensation of Rs.15,00,000/- for this tragic loss of her physical abilities. She was, finally after 21 years, awarded the said compensation along with the interest of Rs.14,94,286/- by Hon’ble Supreme Court. The said interest was computed using 8% interest rate, on the enhanced compensation, from the date of filing the claim petition before MACT (Motor Accidents Claims Tribunal) till the date of realization.
The assessee had not offered the said interest income to tax. The main contention of the assessee was that the interest which is received by any person under any statute is taxable under the Act, however, if the interest is awarded by courts of higher authorities as part of fair and equitable compensation, the same is capital receipt and hence not taxable in the hands of the assessee.
The AO was of the opinion that the interest received on the said compensation came within the purview of section 145A(b) read with section 56(2)(viii) and hence, after allowing deduction of Rs.7,47,143/- as per provisions of section 57(iv) of the Act, taxed the balance Rs.7,47,143/- as income from other source.
The CIT-(A) upheld order of the AO.
On second appeal before the Tribunal.
HELD
Section 145A provides that interest received on compensation or enhanced compensation shall be deemed to be income of the year in which it is received. This provision was enacted with a view to mitigate hardship to taxpayers, where interested was awarded by judicial forums but on account of the decision being challenged the same was not received.Clause (viii) in sub-section (2) of section 56 provides that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as ‘income from other sources’ in the year in which it is received.’
Section 145A deals with the method of accounting i.e. cash or mercantile and has its focus on the point of time when an income is taxable rather than taxability of income itself. Thus, when an income is not taxable, section 145A has no relevance. Nothing else needs to be read in this provision.
Section 56(2)(viii), is only an enabling provision, to bring interest income to tax in the year of receipt rather than in the year of accrual.
Thus only when interest received by the assessee is in the nature of income, such interest can be taxed u/s. 56(2)(viii). Section 56(1) makes this aspect even more clear when it states that income of every kind, which is not to be excluded from the total income under the Incometax Act, shall be chargeable to income tax under the head income from other sources, if it is not chargeable to income tax under any of the heads, and then, in the subsequent provision, i.e., section 56(2), proceeds to set out an illustrative, rather than exhaustive list of, such ‘incomes’. Clearly, section 56 does not decide what constitutes income. What section 56 holds is that if there is an income, which is not taxable under any of the other heads u/s. 14, then it is taxable under the head ‘income from other sources’.
To suggest that since an item is listed u/s. 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse.
The payment made to the assessee is in the nature of compensation for the loss of her mobility and physical damages. Clearly, such a receipt, in principle, is a capital receipt and beyond the ambit of taxability of income, since only such capital receipts can be brought to tax which are specifically taxable u/s. 45. As it is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of income by way of specific provisions. The accident compensation is thus not taxable as income of the assessee.
What is termed as interest takes the same character as that of the accident compensation and it seeks to compensate the time value of money on account of delay in payment of the compensation. Such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate of interest. In this case, the interest is awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-a-vis the point of time when it was actually paid, or, for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the Motor Accident Claims Tribunal, it would have been principal sum but since there is an inordinate, though partial, delay in payment of this amount, interest payment is to factor for fall in value of money in the meantime. The transaction thus remains the same, i.e., compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in a somewhat distant past.
If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. Essentially, this conclusion supports the school of thought that when principal transaction itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction as well.
The authorities below were thus completely in error in bringing the interest awarded by the Supreme Court to tax. The question of deduction u/s. 57(iii), given the above conclusion, is wholly irrelevant. The order of the AO taxing the interest on accident compensation and the order of the
CIT-(A) confirming AO’s order is disapproved.
In result, the appeal of the assessee is allowed.
