Section 56 – Interest on accident compensation, which is a capital receipt, can be characterized as income only if interest is a kind of statutory interest. Otherwise it retains the same character as that of the compensation and is not liable to tax
FACTS
The assessee met with a serious accident leaving her permanently disabled. She claimed compensation of Rs. 15,00,000 which was awarded to her by the Supreme Court. The Supreme Court also granted her interest at the rate of 8% on the enhanced compensation from the date of filing the claim petition before Motor Accidents Claims Tribunal (MACT) till the date of realisation. The amount of interest worked to Rs. 7,47,143. The Assessing Officer held that this interest of Rs. 7,47,143 is taxable and is covered by section 145A(b) r.w.s. 56(viii) of the Act.
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD
The Tribunal noted that the payment made to the assessee was in the nature of compensation for the loss of her mobility and physical damages and was therefore 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 under section 45. What is termed as interest also is of the same character and seeks to compensate the time value of money on account of delay in payment. On the first principles, such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate. It noted that in the present case interest was 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-à-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 MACT, it would have been Rs 15 lacs but since there was an inordinate delay, though partially, delay in payment of this amount, interest is to factor for fall in the 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 the distant past. Viewed thus, the amount of compensation received at this point of time, whichever way it is computed, has the same character. If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. The Tribunal held that the conclusion of the Allahabad High Court in the case of CIT v. Oriental Insurance Co. Ltd. 92012) 211 Taxman 369 (All) supports the school of thought that when principal transaction, i.e. accident compensation for delayed payment of which interest is awarded, itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction, i.e. interest for delay in payment of compensation as well. It also noted that the decision of the Punjab & Haryana High Court in the case of CIT v. B Rai (2004) 264 ITR 617 (P & H) which draws a line of demarcation between the interest granted under a statutory provision and interest granted under discretion of the court and holds that the latter is outside the scope of `income’ which can be brought to tax under the Act. It noted that the situation before it is covered by the observation of the Punjab & Haryana High Court viz. “where interest ….. is to be paid is in the discretion of the court, as in the present case, the said interest would not amount to `income’ for the purposes of income-tax”.
The Tribunal held that the authorities below were completely in error in bringing the interest awarded by the Supreme Court to tax. The Tribunal vacated the action of the AO and disapproved the CIT(A)’s action of confirming the same.
The appeal filed by the assessee was allowed.
