Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

June 2019

TDS UNDER SECTION 194A ON PAYMENT OF ‘INTEREST’ UNDER MOTOR ACCIDENT CLAIM

By PRADIP KAPASI | GAUTAM NAYAK | BHADRESH DOSHI
Chartered Accountants
Reading Time 31 mins

ISSUE FOR CONSIDERATION

Under the Motor Vehicles Act, 1988 (MVA), a liability has been cast on the owner of the motor vehicle or the insurer to pay compensation in the case of death or permanent disablement due to a motor vehicle accident. This compensation is payable to the legal heirs in case of death and to the victim in case of permanent disablement. For the purposes of adjudicating upon claims for compensation in respect of motor accidents, the Motor Accident Claims Tribunals (MACTs) have been established. The MVA further provides that in case of death the claim may be preferred by all or any of the legal representatives of the deceased. The quantum of compensation is decided by taking into consideration the nature of injury in case of an injured person and the age, monthly income and dependency in death cases. The MVA contains the 2nd Schedule for compensation in fatal accidents and injury cases claims. While awarding general damages in case of death, the funeral expenses, loss of consortium, loss of estate and medical expenses are also the factors that are considered.

 

The claims under the MVA may involve delay which may be due to late filing of the compensation claim, investigation, adjudication of claim and various other factors. A provision is made u/s. 171 of the MVA to compensate the injured or his legal heir for the delay, which reads as under:

 

“Section 171. Award of interest where any claim is allowed.

Where any Claims Tribunal allows a claim for compensation made under this Act, such Tribunal may direct that in addition to the amount of compensation, simple interest shall also be paid at such rate and from such date not earlier than the date of making the claim as it may specify in this behalf.”

 

CBDT circular No. 8 of 2011 requires deduction of income tax at source on payment of the award amount and interest on deposit made under orders of the court in motor accident claims cases. The issue has arisen before courts as to whether tax is deductible at source u/s. 194A on such interest awarded by the MACTs u/s. 171 of the MVA for delay.

 

While the Allahabad, Himachal Pradesh and Punjab and Haryana High Courts have held that such payment is not income by way of interest as defined in section 2(28A) and no tax is deductible at source u/s. 194A, the Patna and Madras High Courts have taken a contrary view, holding that such payment is interest on which tax is deductible at source u/s. 194A.

 

THE ORIENTAL INSURANCE CO. LTD. CASE

The issue first arose before the Allahabad High Court in the case of CIT vs. Oriental Insurance Co. Ltd. 27 taxmann.com 28.

 

In this case, the assessee, an insurance company, paid compensation and interest thereon under the MVA to claimants without complying with the provisions of section 194A. The assessing authority took a view that the assessee had failed to deduct income tax on the amount of interest u/s. 194A and held that it was accordingly liable to deposit the amount of short deduction of tax u/s. 201(1) along with interest u/s. 201(1A) for a period of five assessment years. According to the assessing officer, debt incurred included claims and interest on such claims was clearly covered u/s. 2(28A). His reasoning was as below:

 

1. Interest paid under the MVA was a revenue receipt like interest received on delayed payment of compensation under the Land Acquisition Act. Since section 194A applied to interest on compensation under the Land Acquisition Act, it also applied in respect of interest on compensation under the MVA.

2. The interest element in a total award was different from compensation. However, interest on such compensation was on account of delayed payment of such compensation, and therefore it was clearly an income in the hands of the recipient, taxable under the Income-tax Act.

3. The interest element was different from compensation as provided in section 171 of the MVA  as that section provided that the tribunal might direct that in addition to the amount of compensation, simple interest should also be paid.

4. There was no exemption u/s. 194A for TDS on interest payment by insurance companies on MACT awards.

5. The actual payer of interest was the insurance company and the responsibility to deduct tax lay squarely on it. The provisions of section 204(iii) were very clear that the person responsible for payment meant “in the case of credit or as the case may be, payment of any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof.”

6. Payment awarded under the MVA was identical to the award under the Land Acquisition Act. Tax was deducted u/s. 194A on interest paid or credited for late payment of compensation under the Land Acquisition Act. Therefore, section 194A was also applicable in respect of interest paid or credited on delayed payment of compensation under the MVA.

7. Interest under the MVA was similar to interest paid under the Income-tax Act, as both arose by operation of law. The nature of payment mentioned in both the Acts was “interest”. TDS on interest payment under the Income-tax Act was not deductible in view of the specific exemption u/s. 194A(3)(viii). Since there was no similar exemption for interest payment under the MVA, the provisions of section 194A applied to these payments.

 

The Commissioner (Appeals) dismissed the appeal of the assessee, confirming the action of the assessing authority and holding that the interest payment awarded u/s. 171 of the MVA was nothing but interest, subject to the provisions of section 194A.

 

In the second appeal before the tribunal, the Agra Tribunal decided the issue in favour of the assessee, following its own earlier decisions in the cases of Divisional Manager, New India Insurance Co. Ltd., Agra vs. ITO [ITA Nos. 317 to 321/Agra/2003], which, in turn, had followed the decision of the Delhi Tribunal in the case of Oriental Insurance Co. Ltd. vs. ITO dated 27.9.2004, and in Oriental Insurance Company Ltd. vs. ITO [ITA Nos. 276 & 280/Agra/2003 dated 31.1.2005].

 

It was argued before the Allahabad High Court on behalf of the Revenue that it was the responsibility of the payer of interest to deduct tax on such payment of interest, because section 2(28A) clearly envisaged that interest meant interest payable in any manner in respect of moneys borrowed or debt incurred (including a deposit, claim or other similar right / obligation) and includes any service fee or other charges in respect of the money borrowed or debt incurred, or in respect of any credit facility which had not been utilised. It was argued that the Tribunal had not referred to the decision of the Supreme Court in the case of Bikram Singh vs. Land Acquisition Collector 224 ITR 551, in which it had been held that interest paid on the delayed payment of compensation was a revenue receipt eligible to tax u/s. 4 of the Income-tax Act, 1961.

 

On behalf of the Revenue, reliance was placed upon the following decisions:

 

a) The Karnataka High Court in the case of CIT vs. United Insurance Co. Ltd. 325 ITR 231, where the court held that interest paid above Rs. 50,000 was to be split and spread over the period from the date interest was directed to be paid till its payment.

b) The Karnataka High Court in the case of Registrar University of Agricultural Science vs. Fakiragowda 324 ITR 239 where interest received on belated payment of compensation for acquisition of land was held to be a revenue receipt chargeable to income tax on which tax was deductible at source.

c) The Supreme Court, in the case of T.N.K. Govindaraju Chetty vs. CIT 66 ITR 465, in the context of interest on compensation awarded for acquisition of land, held that if the source of the obligation imposed by the statute to pay interest arose because the claimant was kept out of his money, the interest received was chargeable to tax as income.

d) The Supreme Court, in the case of K.S. Krishna Rao vs. CIT 181 ITR 408, where interest paid on compensation awarded for compulsory acquisition of land u/s. 28 of the Land Acquisition Act, 1894 was held to be in the nature of income and not capital.

 

On behalf of the assessee, it was argued before the Allahabad High Court that:

 

1. The interest paid on the award of compensation was not interest as understood in general parlance and it was not an income of the claimant.

2. The compensation awarded by the MACT to the claimants was a capital receipt in the hands of the recipients, not taxable under any provision of the Income-tax Act. Since the award was not taxable in the hands of the recipient, it was not an income but was a capital receipt.

3. Interest paid by the insurance company u/s. 171 of the MVA was not interest as contemplated u/s. 194A, because interest that was contented under that section was an income taxable in the hands of the recipient, whereas interest received by the recipient u/s. 171 of the MVA was a capital receipt in the hands of the recipient, being nothing but an enhanced compensation on account of delay in the payment of compensation.

 

The Allahabad High Court referred to the definition of interest u/s. 2(28A), which reads as under:

 

“ ‘interest’ means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.”

 

After referring to the language of section 194A, the Allahabad High Court referred to the CBDT circular 24 of 1976 (105 ITR 24), where the concept of interest had been explained. It also referred to clause (ix) of section 194A(3), which had been inserted by the Finance Act, 2003 with effect from 1st June, 2003, which read as under:

 

“to such income credited or 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 amount of such income credited or paid during the financial year does not exceed Rs. 50,000.”

 

The Allahabad High Court referred to the following decisions:

 

1. The Punjab and Haryana High Court in the case of CIT vs. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd. 179 ITR 157, where it had been held that interest awarded by the court for loss suffered on account of deprivation of property amounted to compensation and was not taxable.

2. The National Consumer Disputes Redressal Commission in Ghaziabad Development Authority vs. Dr. N.K. Gupta 258 ITR 337, where it had been held that if proper infrastructure facilities had not been provided to a person who was provided with a flat and was therefore entitled to refund of the amount paid by him along with interest at 18%, the paying authority was not entitled to deduct income tax on the amount of interest, as it was not interest as defined in section 2(28A), but was compensation or damages for delay in construction or handing over possession of the property, consequential loss to the complainant by way of escalation in the price of property, and also on account of distress and disappointment faced by him.

3. The Himachal Pradesh High Court in the case of CIT vs. H.P. Housing Board 340 ITR 388, where the High Court had held that payment for delayed construction of house was not payment of interest but was payment of damages to compensate the claimant for the delay in the construction of the house and the harassment caused to him.

4. The Supreme Court, in the case of CIT vs. Govind Choudhury & Sons 203 ITR 881, had held that when there were disputes with the state government with regard to payments under the contracts, receipt of certain amount under the arbitration award and the interest for delay in payment of amounts due to it, such interest was attributable to and incidental to the business carried on by it. It was also held that interest awarded could not be separated from the other amounts granted under the awards and could not be taxed under the head “income from other sources”.

5. The Bombay High Court decision in the case of Islamic Investment Co. vs. Union of India 265 ITR 254, where it had been held that there was no provision under the Income-tax Act or under the Code of Civil Procedure to show that from the amount of interest payable under a decree, tax was deductible from the decretal amount on the ground that it was an interest component on which tax was liable to be deducted at source.

 

The Allahabad High Court also referred to the decisions of the Delhi High Court in the case of CIT vs. Cargill Global Trading (P) Ltd. 335 ITR 94 and CIT vs. Sahib Chits (Delhi) (P) Ltd. 328 ITR 342, which had analysed the meaning of the term “interest”.

 

The Allahabad High Court observed that most of the rulings relied upon by the Revenue related to interest paid on delayed payment of compensation awarded under the Land Acquisition Act. According to the Allahabad High Court, an award under the Land Acquisition Act and an award under the MVA could not be equated for the simple reason that in land acquisition cases the payment was made regarding the price of the land and on such price the provisions of capital gains tax were attracted. On the other hand, in motor accident claims, the payment was made to the legal representatives of the deceased for loss of life of their bread-earner, the recipients of awards being poor and illiterate persons who did not even come within the ambit of the Income-tax Act, and the amount of compensation under the MVA also did not come within the definition of “income”.

 

According to the Allahabad High Court, the term “interest” as defined in section 2(28A) had to be strictly construed. The necessary ingredient was that it should be in respect of any money borrowed or debt incurred. The award under the MVA was neither money borrowed by the insurance company nor debt incurred by the insurance company. The word “claim” in section 2(28A) should also be regarding a deposit or other similar right or obligation.

 

The Allahabad High Court observed that the intention of the legislature was that if the assessee had received any interest in respect of moneys borrowed or debt incurred, including a deposit, claim or other similar right or obligation, or any service fee or other charge in respect of moneys borrowed or debt incurred had been received, then certainly it would come within the definition of interest. The word “claim” used in the definition may relate to claims under contractual liability, but certainly did not cover claims under a statutory liability, the claim under the MVA regarding compensation for death or injury being a statutory liability.

 

Further, the Allahabad High Court referred to the insertion of clause (ix) to section 194A(3), stating that it showed that prior to 1st June, 2003 the legislature had no intention to charge any tax on interest received as compensation under the MVA. According to the High Court, there was therefore no justification to cast a liability to deduct TDS on interest paid on compensation under the MVA prior to 1st June, 2003.

 

The Allahabad High Court also noted that u/s. 194A(1), tax was deductible at source if a person was responsible for paying to a resident any income by way of interest other than interest on securities. In the opinion of the Allahabad High Court, the award of compensation under motor accident claims could not be regarded as income, being compensation to the legal heirs for the loss of life of their bread-earner. Therefore, interest on such award also could not be termed as income to the legal heirs of the deceased or the victim himself.

 

It was noted by the Allahabad High Court that an award under the MVA was like a decree of the court, which would not come within the definition of income referred to in section 194A(1) read with section 2(28A) of the Income-tax Act. According to the court, proceedings regarding claims under the MVA were in the nature of garnishee proceedings, where the MACT had a right to attach the judgement debt payable by the insurance company. Even in the award, there was no direction of any court that before paying the award the insurance company was required to deduct tax at source. As held by the Supreme Court in the case of All India Reporter Ltd. vs. Ramachandra D. Datar 41 ITR 446, if no provision had been made in the decree for deduction of tax before paying the debt, the insurance company could not deduct the tax at source from the amount payable to the legal heirs of the deceased.

 

The Allahabad High Court observed that the different High Courts in the cases of Chiranji Lal Multani Mal Rai Bahadur (P) Ltd. (supra), Dr. N.K. Gupta (supra), H.P. Housing Board (supra) and Sahib Chits (Delhi) (P) Ltd. (supra), held that if interest was awarded by the court for loss suffered on account of deprivation of property or paid for breach of contract by means of damages or was not paid in respect of any debt incurred or money borrowed, it would not attract the provisions of section 2(28A) read with section 194A(1). The Allahabad High Court, therefore, held that interest paid on compensation under motor accident claims awards was not liable to income tax.

 

A similar view has been taken by the Himachal Pradesh High Court in the case of Court on Its Own Motion vs. H.P. State Co-operative Bank Ltd. 228 Taxmann 151, where the High Court quashed the CBDT circular No. 8 of 2011 which required deduction of income tax on award amount and interest accrued on deposit made under orders of the court in motor accident claims cases, and in the case of National Insurance Co. Ltd. vs. Indra Devi 100 taxmann.com 160, and by the Punjab and Haryana High Court in the case of New India Assurance Co. Ltd. vs. Sudesh Chawla 80 taxmann.com 331.

 

THE NATIONAL INSURANCE CO. LTD. CASE

The issue again came up before the Patna High Court in the case of National Insurance Co. Ltd. vs. ACIT 59 taxmann.com 269.

 

In this case, the District Judge gave an award to the claimant under the MVA of Rs. 3,70,000 plus interest at 6% per annum from the date of filing of the claim. The amount was to be paid within two months of the passing of the order, failing which the further direction was to pay interest at 9% per annum from the date of the order till the date of final payment. The insurance company deducted and deposited TDS of Rs. 24,715 u/s. 194A while making the payment of the amount of the award. The claimant objected to the deduction of TDS by filing a petition before the District Judge. The District Judge held that the deduction of Rs. 24,175 by way of TDS was not sustainable and directed the insurance company to disburse the amount to the claimant without TDS. The insurance company filed a writ petition in the High Court against this order of the District Judge for seeking permission to deduct tax at source on payment of the interest on compensation.

 

Before the Patna High Court, on behalf of the insurance company, reliance was placed upon the relevant provisions of the Income-tax Act in support of the stand that the insurance company was under a statutory liability u/s. 194A of the Act to have made deduction of the amount of TDS while making payment by way of interest on the compensation amount awarded by the MACT. The total interest component under the award came to a little over Rs. 1,20,000, and therefore, the insurance company was bound under the Act to make deduction of TDS while making payment; accordingly, an amount of Rs. 24,175 was to be deducted as TDS.

 

Reliance was also placed upon a decision of the Patna High Court in C.W.J.C. No. 5352 of 2013, National Insurance Co. Ltd. vs. CIT, where the court had held as under:

 

“It appears that the Tribunal below has ignored the statutory duty conferred upon the insurer under section 194 (1) (sic) of the Income-tax Act. Under the said provision, the insurer is obliged to deduct tax at source from the amount of interest paid by the insurer to the claimant. The said amount has to be deposited with the Government of India as the income tax deducted at source. The Tribunal below has grossly erred in directing the insurer to pay the said sum to the claimant.”

 

Reliance was further placed upon a decision of the Madras High Court in the case of New India Assurance Co. Ltd. vs. Mani 270 ITR 394, in which it had been held as follows:

 

“A plain reading of section 194A of the IT Act would indicate that the insurance company is bound to deduct the income tax amount on interest, treating it as a revenue, if the amount paid during the financial year exceeds Rs. 50,000. In this case, admittedly, when the compensation amount has been deposited during the financial year, including interest, the interest amount alone exceeded Rs. 50,000 and therefore the insurance company has no other option except to deduct the income tax at source for the interest amount exceeding Rs. 50,000, failing which they may have to face the consequences, such as prosecution, even. In this view alone, when the execution petition was filed for the realisation of the award amount, deducting the income tax at source for the interest, since it exceeded Rs. 50,000, on the basis of the above said provision, the balance alone had been deposited, for which the court cannot find fault.”

 

It was highlighted that the Madras High Court in the said case had relied upon the decision of the Supreme Court in the case of Bikram Singh vs. Land Acquisition Collector 224 ITR 551, where the Supreme Court had held that interest received on delayed payment of compensation under the Land Acquisition Act was a revenue receipt eligible to income tax. It was explained that the Madras High Court in the said case had further held that the trial court had not considered the actual effect of the amendment to section 194A, which came into effect from 1st June, 2003. The Madras High Court observed that if the claimant was not liable to pay tax, his remedy was to approach the department concerned for refund of the amount. According to the Madras High Court, the executing court did not have the power to direct the insurance company not to deduct the amount and pay the entire amount, thereby compelling the insurance company to commit an illegal act, violating the statutory provisions.

 

The Patna High Court examined the provisions of sections 194A(1) and (3)(ix) of the Income-tax Act. According to the Patna High Court, it was evident from the above provisions that any person responsible for paying any income by way of interest (other than the interest on securities) was obliged to deduct income tax thereon. The only exception was in case of income paid by way of interest on compensation amount awarded by MACT, where the amount of such income or the aggregate of the amounts of such income credited or paid during the financial year did not exceed Rs. 50,000. The court was therefore of the view that if the interest component of the payment to be made during the financial year on the basis of award of the MACT exceeded Rs. 50,000, then the person making the payment was obliged to deduct TDS while making payment.

 

The Patna High Court further held that while exercising his jurisdiction with regard to execution of the award, the District Judge had to be conscious of the fact that any such payment would be subjected to statutory provisions. Since there was a clear provision under the Income-tax Act with regard to TDS, the District Judge could not have held to the contrary. The only remedy for the claimant under such circumstances was to approach the assessing officer u/s. 197 for a certificate for a lower rate of TDS or non-deduction of TDS, or alternatively to approach the tax authorities for refund of the amount in case no tax was due or payable by the claimant.

 

The Patna High Court therefore allowed the writ petition of the company and set aside the order of the District Judge.

 

OBSERVATIONS

Section194A requires a person responsible for payment of interest to deduct tax at source in the circumstances specified therein. Clause (ix), inserted with effect from  1st June, 2003 in section 194A(3) exempted income credited or paid by way of interest on the compensation amount awarded by the MACT where the amount of such income or the aggregate of the amounts of such income credited or paid during the financial year did not exceed Rs. 50,000. This clause (ix) has been substituted by clauses (ix) and (ixa) with effect from  1st June, 2015. The new clause (ix) altogether exempts income credited by way of interest on the compensation amount awarded by the MACT from the liability to deduct tax at source u/s. 194A, while clause (ixa) continues to provide for exemption to income paid by way of interest on compensation amount awarded by the MACT where the amount of such income or the aggregate of the amounts of such income paid during the financial year does not exceed Rs. 50,000. In effect, therefore, no TDS is deductible on interest on such compensation which is merely credited but not paid, or on payment of interest where the amount of interest paid during the financial year does not exceed Rs. 50,000. The issue of applicability of TDS therefore is really relevant only to cases where there is payment of such interest exceeding Rs. 50,000 during the year and that, too, when it was not preceded by the credit thereof.

 

Section 2(28A) defines the term “interest” in a manner that includes the interest payable in any manner in respect of any moneys borrowed or debt incurred. In a motor claim award, there is obviously no borrowing of monies. Is there any debt incurred? The “incurring” of the debt, if at all,  may arise only on grant of the award. Before the award of the claim, there is really no debt that can be said to have been incurred in favour of the person receiving compensation. In fact, till such time as a claim is awarded there is no certainty about the eligibility to the claim, leave alone the quantum of the claim. In our considered view, no part of the amount awarded as compensation under the MVA till the date of award could be considered as in the nature of interest. The amount so awarded till the time it is awarded cannot be construed as interest even where it includes the payment of “interest” u/s. 171 of the MVA for the reason that such “interest” cannot be construed as “‘interest” within the meaning of section 2(28A) of the Act and as a consequence cannot be subjected to TDS u/s. 194A of the Act.

 

If one looks at the award of “interest” u/s. 171 of the MVA, typically in most cases, such interest is a part of the amount of compensation awarded and is not attributable to the late payment of the compensation, but is for the reasons mentioned in section 171 and at the best relates to the period ending with the date of award. This “interest” u/s. 171 for the period up to the date of award, would not fit in within the definition of interest u/s. 2(28A). Interest for the period after the date of award, if related to the delayed payment of the awarded compensation, would fall within the definition of interest, being interest payable in respect of debt incurred. It would only be the interest for the period after the date of award which would be liable to TDS u/s. 194A of the Income-tax Act provided, of course, that the amount being paid is exceeding Rs. 50, 000 and was not otherwise credited to the payee’s account before the payment.

 

Looked at differently, the interest up to the date of award would also partake of the same character as the compensation awarded, being damages for a personal loss, and would therefore not be regarded as an income at all, opening a new possibility of contending that the provisions of section 194A may not apply to a case where the payment otherwise is not taxable in the hands of the recipient.

 

In cases where the payment of the awarded compensation is delayed, the ultimate amount of payment to be made may include interest for the post-award period. In such a case, the ultimate amount will have to be bifurcated into two parts, one towards compensation including interest for the pre-award period, and the other being interest which may be subjected to TDS. This need for bifurcation of interest into pre-award interest and post-award interest, and the character of each, is supported by the decision of the Supreme Court in the case of CIT vs. Ghanshyam (HUF) 315 ITR 1, where the Supreme Court held as under in the context of interest on compensation under the Land Acquisition Act:

 

“To sum up, interest is different from compensation. However, interest paid on the excess amount under section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under section 28 is part of the amount of compensation whereas interest under section 34 is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under section 34.”

 

One of the side questions is whether such interest included in MACT compensation awarded under the MVA is chargeable to tax at all? There is no doubt that the amount of compensation awarded is for the loss of a personal nature and is therefore a capital receipt of a personal nature, which is not chargeable to tax at all. The payment, though labelled “interest” u/s. 171 of the MVA, bears the same character of such compensation inasmuch as it has no relation to the dent or the period and is nothing but a compensation to an injured person determined on due consideration of the relevant factors, including for the period during the date of injury to the date of award.

 

The mere fact that such income credited by way of interest on MACT compensation awards is subjected to the provisions of section 194A and the payer is required to deduct tax at source does not necessarily mean that such amounts are otherwise chargeable to tax. It is important to note that section 194A, in any case, refers to a person responsible for paying to a resident “any income” by way of interest and demands compliance only where the payment is in the nature of income. As interpreted by the Allahabad High Court and the other courts, such income would mean income which is chargeable to tax. If the interest is not chargeable to tax, then the question of deduction of TDS u/s. 194A does not arise.

 

The question of chargeability to tax of such income has also been recently considered by the Rajasthan High Court in case of Sarda Pareek vs. ACIT 104 taxmann.com 76, where the High Court took the view that on a plain reading of section 2(28A), though the original amount of MACT compensation is not income but capital, the interest on the capital (compensation) is liable to tax. The Supreme Court has admitted the special leave petition against this order of the Rajasthan High Court in 104 taxmann.com 77. In the case of New India Assurance Company Ltd. vs. Mani (supra) the Madras High Court held that the interest awarded as a part of the compensation was income chargeable to tax; however, in a later decision in the case of Managing Director, Tamil Nadu State Transport Corpn. (Salem) Ltd. vs. Chinnadurai, 385 ITR 656, the High Court took a contrary view and held that such interest awarded did not fall under the term “income” as defined under the Income-tax Act. An SLP is admitted by the Supreme Court against this decision, too. Therefore, clearly the issue of chargeability of even the post-award interest to income tax is still a matter of dispute.

 

As observed by the Allahabad High Court, the one significant difference between the compensation under the Land Acquisition Act and under the MVA is that the compensation under the Land Acquisition Act may be chargeable to tax under the head capital gains, whereas the compensation under the MVA is not chargeable to tax at all.

 

One has to also keep in mind the provisions of section 145A(b), as applicable from assessment year 2010-11 to assessment year 2016-17, which provided that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. With effect from assessment year 2017-18, an identical provision is found u/s. 145B(1). However, the provisions of section 145A and section 145B merely deal with how the income is to be computed and in which year it is to be taxed, and do not deal with the issue of whether a particular item of interest is chargeable to income tax or not. Therefore, these provisions would apply only to interest on compensation which is otherwise chargeable to income tax, and would not be applicable to interest which is not so chargeable.

 

One also needs to refer to the provisions of section 56(2)(viii), which provides for chargeability under the head “income from other sources” of interest received on compensation or on enhanced compensation referred to in section 145A(b). Again, this provision merely prescribes the head of income under which such interest would fall, provided such interest income is chargeable to tax. It does not necessarily mean that the interest in question is in the nature of income in the first place.

This is further clear from the fact that section 2(24), which contains the definition of income, specifically includes receipts under various clauses of section 56(2), such as clauses (v), (vi), (vii), (viia) and (x) – gifts and deemed gifts, (viib) – excess premium received by a company for shares, (ix) – forfeited advance for transfer of capital asset, and (xi) – compensation in connection with termination or modification of terms of employment for ensuring that such receipts so specified are treated as an “income” for the purposes of the Act. In contrast, receipt of the nature specified under clause (viii) of section 56(2) is not included in section 2(24) indicating that such interest on compensation is not deemed always to be an income.

 

One Mr. Amit Sahni has recently knocked the doors of the Delhi High Court by filing a writ petition seeking quashing of the provision which mandates deduction of tax on the interest on compensation awarded under the MVA. The court, vide order dated 16th April, 2019, has directed the CBDT to pass a reasoned order latest by 30th June, 2019 in response to the representation made by the petitioner in this regard.

 

The better view, therefore, seems to be that of the Allahabad, Himachal Pradesh and Punjab and Haryana High Courts, that no tax is deductible in respect of interest awarded u/s. 171 of the Motor Vehicles Act, even if such interest exceeds Rs. 50,000, unless such interest is (i) attributable to the delay in payment of the awarded compensation and (ii) pertains to the period after the date of the award and is (iii) calculated w.r.t. the amount of the compensation awarded. This view is unaffected by the fact of the insertion of clause (x) in section 194A(3), w.e.f. 1st June, 2003 and the substitution thereof w.e.f.  1st June, 2015.

 

Given this position, and since the issue involves TDS, which is merely a procedural requirement, one hopes that the CBDT will come out with a clarification explaining that the provisions of section 194A have a restricted application to the cases involving payment of interest for the delay in payment of awarded compensation, so that neither the insurance companies nor the poor claimants have to unnecessarily suffer through unwarranted tax deduction or litigation in this regard.

You May Also Like