The award under the Motor Vehicle Act is
like a decree of the court. It do not come within the definition of income as
mentioned in Section 194A(1) read with Section 2(28A) of the Income Tax Act.
Proceedings regarding claim under Motor
Vehicle Act are in the nature of a garnishee proceedings under which the MACT
has a right to attach the judgment debt payable by the insurance company.
Even in the MAC award, there is no
direction of any court that before paying the award, the insurance company is
required to deduct the tax at source. In view of Ramchandra D. Datar (supra),
if no provision has been made in the decree for deduction of tax, before paying
that debt, the insurance company cannot deduct the tax at source from the
amount payable to the legal heirs of the deceased.
In Chiranji Lal Multani Mal Rai Bahadur (P.) Ltd.
(supra), Dr. N.K. Gupta (supra), H.P. Housing Board (supra), Sahib Chits
(Delhi) (P.) Ltd. (supra), it has been clearly held that if interest is awarded
by the court for loss suffered on account of deprivation of property or paid
for breach of contract by means of damages or were not paid in respect of any
debt incurred or money borrowed, shall not attract the provisions of Section
2(28A) read with Section 194A(1) of the Income Tax Act.
In view of the above discussion, we hold that the
interest paid on compensation under motor accident claims awards prior to
1.6.2003 cannot be treated as income from the interest.
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
Oriental Insurance Co.
Ltd.
IT Appeal Nos. 441 of 2006 & 398 of 2009
IT Appeal Defective Nos. 279, 281, 284 & 285
of 2006
September 13, 2012
ORDER
Aditya Nath Mittal, J. –
These Income Tax Appeals have been admitted on the following
substantial questions of law:-
“1. Whether on the facts and circumstances
of the case, the Tribunal is legally correct in allowing relief to the tax
deductor by cancelling the TDS liability imposed by the ITO (TDS) on the amount
of interest paid on delayed payment of compensation for all the assessment years
1998-99 to 2002-03?
2. Whether on the facts and
circumstances of the case the Hon’ble Tribunal is legally correct in holding
that the interest paid on delayed payment of compensation under MACT does not
come with in the ambit of section 2(28A) of the Income-tax Act, 1961 and
therefore, the tax deductor was not under any legal obligation to deduct
Income-tax at source (TDS) on the amount of decree which is known as interest
on delayed payment of compensation?”
2. The brief facts of the case are that the
respondent Insurance Company paid compensation and interest thereon under the
Motor Vehicle Act to the claimants without complying with the provision of
Section 194A of the Income Tax Act, 1961. It was the legal obligation of the
respondent to deduct tax on the amount of interest under Section 194A of the
Income Tax Act, 1961. The Assessing Authority established that the respondent
has failed to deduct the income tax on the amount of interest and accordingly
they were liable to deposit the amount of short deduction of tax (TDS) under
Section 201(1) along with interest under Section 201(1)A of the Act.
3. The respondent preferred an appeal being Appeal
No.223 to 227/CIT (A)-1/ITO (TDS)/Agra/2002-2003/187 before the Commissioner,
Income Tax (Appeals)-1, Agra, who vide order dated 28.3.2003 confirmed the
action of the Assessing Authority for all the five assessment years.
4. The Insurance Company filed second appeals
before the I.T.A.T., Agra, who decided the appeals in favour of the respondent
and the issue was decided against the revenue and in favour of assessee. The
decision of the I.T.A.T. has been challenged before us by the revenue.
5. Heard Sri Shambhu Chopra, learned counsel for
the appellant and Sri R.R. Agarwal for the respondent.
6. Learned counsel for the revenue has submitted
that it was the responsibility of the payer of interest to deduct the tax on
such payment of interest because Section 2(28A) clearly envisages that interest
means interest payable at any manner in respect of money borrowed or debts
incurred (including a deposit, claim or other similar right or obligation) and
includes any services fee or other charges in respect of the money borrowed or
debt incurred or in respect of any credit facility which has not been utilized.
The Tribunal has not gone through the citation in Bikram Singh v. Land
Acquisition Collector [1997] 224 ITR 551, in which it was held that “interest
paid on the delayed payment of the compensation is a revenue receipt eligible
to tax under Section 4 of the Income Tax Act, 1961″. It has further been
submitted that the decisions of the I.T.A.T. in the cases of New India
Assurance Company Limited and the Oriental Insurance Company Limited have not
been accepted by the revenue thus the I.T.A.T. is not legally correct in allowing
relief to the tax deduction and holding that the interest paid on delayed
payment of compensation under M.A.C.T. does not come within the ambit of
Section 2 (28A) of the Income Tax Act, 1961.
7. Sri R.R. Agarwal, learned counsel for the
respondent has submitted that sufficient explanation was submitted before the
Assessing Authority. The explanation offered by the respondent Insurance
Company was as under:-
“That at the end we request your honour that for
the following reasons provisions of section 194 A are not applicable:-
(i) Interest being paid on the award
of compensation is not interest as understood in general parlance and it is not
an income of the claimant.
(ii) The compensation award by the M.A.C.T.
Courts to the claimants is a capital receipt in the hands of recipients and not
taxable under any provisions of the Income Tax Act. Since when the award is not
taxable in the hands of recipient, it is not an income but it is a capital
receipt.
(iii) Interest paid by insurance company as
per provisions of section 171 of the Motor Vehicle act is not the interest as
contemplated u/s 194A of the I.T. Act, 1961 because interest contemplated u/s
194A is income taxable in the hands of the recipients whereas interest received
by the recipients u/s 171 of Motor Vehicle Act is a capital receipt in the
hands of recipients because it is nothing but an enhanced compensation on
account of delay in the payment of compensation.”
8. The Assessing Authority held that debt incurred
includes claims (in this case insurance claims) and interest on such claims is
clearly covered under Section 2(28A) of the Act and further held as follows:-
(“4.1) Interest paid under Motor Vehicle Act is a
revenue receipt like interest received on delayed payment on compensation under
Land Acquisition Act. Provisions of sec. 194A of the I.T. Act are applicable in
respect of interest on compensation under Land Acquisition Act. Similarly,
these provisions are also applicable in respect of interest on compensation
under Motor Vehicle Act.
(4.2) Interest element in total award is different
than compensation. However, interest on such compensation is on account of
delayed payment of such compensation and therefore it is clearly an income in
the hands of recipients and taxable under the I.T. Act, 1961 as such.
(4.3) Interest element is different than
compensation as provided in section 171 of the Motor Vehicle Act, 1988 that
Where any Claims Tribunals 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.
(4.4) The provisions of sec. 194A are very clear
and there is no such exemption of TDS on interest payment by the insurance
companies on MACT awards.
(4.5) The actual payer of interest is the
insurance company and the responsibility to deduct tax lies squarely on it and
the peson making payment i.e. the Divisional Manager of the company. The
provisions of sec. 204(iii) are very clear that person responsible for paying
means ‘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.
(4.6) Payment award under the Motor Vehicle Act,
1988 is identical to the award under Land Acquisition Act. Deduction of tax at
source is made under section 194A of the I.T. Act, 1961 out of interest paid or
credited for delayed payment of compensation. Therefore, provisions of sec.
194A are also applicable in respect of interest paid or credited on delayed
payment of compensation under the Motor Vehicle Act, 1988.
(4.7) The interest under Motor Vehicle Act, 1988
is similar to interest paid under I.T. Act, 1961 as both arise by operation of
law. The nature of payment will remain as mentioned in these Acts i.e.
“Interest”. T.D.S. on interest payment under I.T. Act is not deducted in view
of specific exemption u/s 194A(3)(viii). However, no such exemption is there
for interest payment under Motor Vehicle Act, 1988. Hence, provisions of
section 194A will apply on these payments.
Thus, it is clear that the company including the
principal officer (Divisional Manager of the company at Agra) has failed to
deduct tax at source out of interest paid on compensation awards u/s. 194A of
the I.T Act, 1961 without obtaining certificate u/s. 197 or form No.15H from
the recipient of the interest and therefore he is an assessee in default and
liable to pay the demand equal to the amount of TDS u/s. 201(1) of the I.T.
Act, 1961.”
9. The above findings of the Assessing Authority
was approved by the CIT (Appeals)-1, Agra vide order dated 28.3.2003 and held
that the interest payment awarded under Section 171 of the Motor Vehicle Act
was nothing but interest and, therefore, subjected to the provisions of section
194A.
10. The I.T.A.T., Agra Bench, Agra, allowing the
appeals filed by the assessee held as under:-
“3. We have heard the rival submissions and have
also perused the records. We find that the issue involved in these appeals is
squarely covered by the order dated 24.01.2006 of this Bench in ITA No.317 to
321/Agra/2003 for the assessment years 1998-99 to 2002-2003 in the case of the
Divisional Manager, New India Insurance Co. Ltd. Agra v. ITO wherein the issue
was decided against the Revenue and in favour of the assessee by following the
findings of ITAT Delhi Bench ‘D’ given in the order dated 27.09.2004 in the
case of Oriental Insurance Company Ltd. And also the order dated 31.01.2005 of
Agra Bench in ITA No.276 & 280/Agra/2003 in the case of Oriental Insurance
Company Ltd. v. ITO. Respectfully following the order of this Bench in the case
of Divisional Manager, New Insurance Company Ltd. (supra) for the A. Yrs.
1998-99 to 2002-2003 and also keeping in view that the facts of the present
cases are similar, the appeals of the assessee deserve to be allowed.
4. In the result, the appeals, filed by the
assessee are allowed.”
11. The word “Interest” has been defined under
Section 2 (28A) as follows:-
” ‘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.”
12. Section 194A (as stood before amendment w.e.f.
1.6.2003) provides as under:-
“194A(1) Any person, not being an individual or a
Hindu undivided family, who is responsible for paying to a resident any income
by way of interest other than income by way of interest on securities, shall at
the time of credit of such income to the account of the payee or at the time of
payment thereof in cash or by issue of a cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rates in force.
Explanation- For the purposes of this section,
where any income byway of interests as aforesaid is credited to any account,
whether called ‘interest payable account’ or ‘suspense account’ or by any other
name, in the books of account of the person liable to pay such income, such
crediting shall be deemed to be credit of such income to the account of the
payee and the provisions of this section shall apply accordingly.”
13. The Central Board of Direct Taxes has also
issued a circular (reported in 105 ITR 24 of 1976) explaining the concept of
“interest” as follows:-
“The Term interest’ has been defined in new clause
(28A) inserted in section 2 of the Income Tax Act with a view to removing
doubts about the true character of fees or other charges paid in respect of
moneys borrowed or in respect of the credit facilities which have not been
utilised. The definition is very wide and covers interest payable in any manner
in respect of loans, debts, deposits, claims and other similar rights or
obligations. It also includes any service fees or other charges in respect of
such loans, debts, deposits, etc. as also fees in the nature of commitment
charges on unutilised portion of credit facilities. This definition will be
applicable for all purposes of the Income Tax Act.”
14. It is relevant to mention that by Finance Act,
2003, Section 194A has been amended and following clause in sub section (3) has
been inserted with effect from 1st day of June, 2003:-
“(ix) 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 amounts of such income credited or paid during the financial year does
not exceed fifty thousand rupees.”
15. Under the Motor Vehicle Act, 1988, a liability
has been casted on the owner of the motor vehicle or the authorized insurer to
pay compensation in the case of death or permanent disablement due to accident
arising out of use of motor vehicle. 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
accident, the Motor Accident Claims Tribunals have been established. The Motor
Vehicle Act, 1988 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 taking into consideration the nature of
injury in case of injured person and the age, monthly income and dependency in
case of death cases. The Motor Vehicle Act, 1988 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 considered. Undoubtedly the claims under
Motor Vehicle Act are awarded with some delay which may be due to filing of the
compensation claim, investigation, adjudication of claim and various other
factors. Invariably the interest is also awarded on delayed payments because
such claims are also challenged before the superior courts. Hence the main
point for consideration is whether interest paid on such claims is covered and
attracts the provision of Section 2(28A) of the Income Tax Act, 1961 or not.
16. It is also relevant to mention that in the
motor accident claims compensation, there are various legal heirs who are
entitled to receive the amount of claim and the interest so accrued may relate
to more than one financial year.
17. Sri R.R. Agrawal, learned counsel for the
assessee has relied upon following case laws:-
18. In All India Reporter Ltd. v. Ramchandra D.
Datar [1961] 41 ITR 446, hon’ble the Apex Court, while considering the decree
of a civil court in relation to wrongful termination of employment has held as
under:-
“(i) That as there was no assessment by the
Income-tax Officer of the tax due on the amount payable to the respondent under
the decree, and an order under section 46(5) of the Income-tax Act could be
passed only if income-tax had been assessed and remained unpaid, the Income-tax
Officer had no authority to issue a notice under section 46(5). Nor could the
Income-tax Officer claim to recover tax due by a proceeding in the nature of a
garnishee proceeding by applying to the civil court to attach the judgment debt
payable by the company. The application submitted to the court by the
Income-tax Officer had, therefore, to be ignored.
(ii) That under the scheme of the Civil
Procedure Code, the decree had to be executed as it stood, subject to such
deductions or adjustments as were permissible under the Code. There was no tax
liability which the respondent was assessed to pay in respect of the amount of
the decree. As between the company and the respondent the amount did not
represent salary: it represented a judgment debt, and or payment of income-tax
thereon no provision was made in the decree. Before paying that debt, the
appellant company could not claim to deduct at source the tax payable by the
respondent.”
19. In CIT v. Chiranji Lal Multani Mal Rai Bahadur
(P.) Ltd. [1989] 179 ITR 157, the Punjab and Haryana High Court while
considering the matter of interest awarded by court for loss suffered on
account of deprivation of property, has held that it amounts to compensation
and is not taxable. It has been further held that the amount of interest
received by the assessee by way of compensation was a casual receipt and could
not be included in the income of the assessee in the relevant assessment year.
It has been further held that if interest is received on the basis of a
contract or under a statute, the same is taxable, but if interest is awarded by
the court for loss suffered on account of deprivation of property, it amounts
to compensation, though called interest, and would not be taxable.
20. In Ghaziabad Development Authority v. Dr. N.K.
Gupta [2002] 258 ITR 337, the National Consumer Disputes Redressal Commission
interpreting Section 194A of the Income Tax Act, 1961 has held that if proper
infrastructure facilities have not been provided to a person who was provided
with a flat, is entitled to the refund of amount paid by him along with the
interest at the rate of 18% and the paying authority was not entitled to deduct
income tax on the said amount of interest. The Commission further held as
follows:-
“The word used in the order of the State
Commission was not “interest” as defined in section 2(28A). Interest, in the
order of the Commission, meant compensation or damages for delay in
construction or handling over possession of the same causing consequential loss
to the complainant by way of escalation in the price of the property and also
on account of distress and disappointment faced by him. Interest, in the order,
had been used merely as a convenient method to calculate the amount of
compensation in order to standardise it. Otherwise, each case of an allottee
would have to be dealt with differently. Nomenclature did not decide the issue.
In view of the definition of “interest” in section 2(28A), the provisions of
section 194A were not applicable and the petitioner Authority was wrong in
deducting tax at source from the interest payable to the respondent
(complainant).”
21. In CIT v. H.P. Housing Board [2012] 340 ITR
388, the Himachal Pradesh High Court, interpreting Section 2(28A) and 194A of
the Income Tax Act has held as follows:-
“In case the houses were ready within the
stipulated period the assessee would not be liable to pay interest. When
construction of a house was delayed there could be escalation in the cost of construction.
The allottee does not get the right to use the house and was deprived of the
rental income from such house. He was also deprived of the right of living in
his own house. In these circumstances, the amount which was paid by the
assessee was not payment of interest but was payment of damages to compensate
the allottee for the delay in the construction of his house/flat and the
harassment caused to him. Though compensation had been calculated in terms of
interest this was because the parties by mutual agreement agreed to find out a
suitable and convenient system of calculating the damages which would be
uniform for all the allottees. The allottees had not given the money to the
assessee by way of deposit nor had the assessee borrowed the amount from the
allottees. The amount was paid under a self-financing scheme for construction
of the flats and the interest was paid on account of damages suffered by the
claimant for delay in completion of the flats.”
22. In CIT v. Cargill Global Trading (P.) Ltd.
[2011] 335 ITR 94, the Delhi High Court while interpreting Section 2(28A) of
the Income Tax Act, 1961 has held that before any amount paid is construed as
interest, it has to be established that the same is payable in respect of any
money borrowed or debt incurred. In this case the bills of exchange were
discounted by the assessee. The discount charges paid by the assessee were
treated as interest within the meaning of Section 2(28A) of the Income Tax Act
by the Assessing Officer but it was held by the Delhi High Court that the
discount charges paid were not in respect of any debt incurred or money
borrowed. Hence the tax was not taxable at source on the amount.
23. In CIT v. Sahib Chits (Delhi) (P.) Ltd. [2010]
328 ITR 342 the Delhi High Court interpreting Section 2(28A) of the Income Tax
Act, 1961 has held that the contribution given by the subscribers/members,
every month in a chit fund scheme is not a deposit with the chit fund company
and the amount of bid disbursed equally among the members is not to be treated
as interest payable on money borrowed, therefore, the chit fund company is not
required to deduct the tax at source within the meaning of Section 194A of the
Income Tax Act.
24. In CIT v. Govinda Choudhury & Sons [1993]
203 ITR 881, hon’ble the Supreme Court has held that when there were disputes
with the State Government with regard to payments under the contracts, receipt
of certain amount under the award of the arbitrators and the interest for delay
in payment of amounts due to it, such interests were only an accretion to the
respondent’s receipts from the contract and was attributable to and incidental
to the business carried on by it. It was further held that the interest awarded
could not be separated from the other amounts granted to the respondent under
the awards and treated as “Income from other sources”.
25. In Islamic Investment Co. v. Union of India
[2004] 265 ITR 254, the Bombay High Court has held as follows:-
“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 amount of Rs. 10,31,344 paid on account of interest
could not retain its character as interest. Hence, the FCI was not entitled to
withdraw the amount of Rs. 2,06,269 towards tax deducted at source on the
interest accrued to the petitioner on the decretal amount of Rs. 18,65,419.82.”
26. Sri Shambhu Chopra, learned counsel for the
revenue has relied upon the following judgments:-
27. In CIT v. United Insurance Co. Ltd. [2010] 325
ITR 231 (Kar.), the Karnataka High Court following the provisions of Section
194A(3)(ix) has held that the Tribunal had rightly directed that the 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. This judgment relates
to the period after insertion of new sub clause (ix) to Section 194A(3).
Present appeals are for the period relating to pre-amendment by the Finance
Act, 2003 hence this law is not applicable to the present set of appeals.
28. In CIT v. Wipro Systems [2010] 325 ITR 234 the
Karnataka High Court has held that if the assessee had provided money to an
officer to purchase the club membership and if the subscription and the amount
incurred by the officers for his personal benefit was reimbursed by the
assessee such amount sent by the officers of the assessee could not be
considered as business promotion and this would fall under section 17(2)(iv).
This judgment do not cover any question of law in the present appeals.
29. In Registrar University of Agricultural
Science v. Fakiragowda [2010] 325 ITR 239, the Karnataka High Court in the
matter of payment of compensation for acquisition of land has held that the
interest received on belated payment of compensation is a revenue receipt
exigible to income-tax and it is income and the claimants are liable to pay the
tax as provided under the relevant provisions of the Income-tax Act, 1961. Tax
has to be deducted at source on such interest.
30. In Lt. Col. K.D. Gupta v. Union of India
[1990] 181 ITR 530 hon’ble the Supreme Court directed to pay an amount of Rs.
4,00,000/- to the petitioner who was a member of the Armed Forces but
Rs.1,20,000/- was withheld from this amount on the plea that the Union of India
had the obligation to deduct the tax at source on it. Hon’ble the Apex Court
directed the petitioner to file his income tax return for decision of the
question of liability to tax.
31. In T.N.K. Govindaraju Chetty v. CIT [1967] 66
ITR 465, hon’ble the Supreme Court regarding interest on compensation awarded
for acquisition of land, has held that if the source of the obligation imposed
by the statute to pay interest arises because the claimant is kept out of his
money, the interest received is chargeable to tax as income, will apply if
interest is payable under the terms of an agreement, express or implied, and
the court or the arbitrator gives effect to the terms of the agreement and
awards interest which has been agreed to be paid.
32. In K.S. Krishna Rao v. CIT [1990] 181 ITR 408,
hon’ble the Supreme Court has held that interest paid on compensation awarded
for compulsory acquisition of land under section 28 of the Land Acquisition
Act, 1894 is of the nature of income and not capital.
33. Similarly in Bikram Singh v. Land Acquisition
Collector [1997] 224 ITR 551, hon’ble the Apex Court has held that interest
received on delayed payment of the compensation under the Land Acquisition Act,
is a revenue receipt exigible to income-tax. The amended definition of interest
in section 2(28A) of the Income-tax Act, 1961, was not intended to exclude the
revenue receipt of interest on delayed payment of such compensation from
taxability. Once it is construed to be a revenue receipt, necessarily, unless there
is an exemption under the appropriate provisions of the Act, the revenue
receipt is exigible to tax. The amendment is only to bring within its tax net,
income received from the transaction covered under the definition of interest.
34. In Dr. Shamlal Narula v. CIT [1964] 53 ITR 151
hon’ble the Supreme Court has held as under:-
“Under the scheme of the Land Acquisition Act,
1894, land acquired compulsorily vests absolutely in the Government after the
Collector has taken possession of the land, whether before or after making his
award determining the compensation. A statutory liability has been imposed upon
the Collector to pay interest on the compensation awarded from the time of his
taking possession until it is paid or deposited. This amount is not compensation
for the land acquired or for depriving the claimant of his right to possession
but is paid to the claimant for the use of his money by the State.
The statutory interest paid under section 34 of
the Land Acquisition Act, 1894, on the amount of compensation awarded for the
period from the date the Collector has taken possession of land compulsorily
acquired is interest paid for the delayed payment of the compensation and is
therefore a revenue receipt liable to tax under the Income-tax Act.”
35. Most of the rulings cited by learned counsel
for the revenue relates to interest paid on the delayed payment of compensation
awarded under Land Acquisition Act. The award under Land Acquisition Act and
the award under Motor Vehicle Act cannot be equated for the simple reason that
in land acquisition cases, the payment is made regarding the price of the land
and on such price, the provisions of Capital Gain Tax are attracted, while in
the motor accidents claims, the payment is made to the legal representatives of
the deceased for loss of life of their bread earner. In most of the cases under
motor vehicle accidents claims, the recipients of awards are poor and
illiterate persons who even do not come within the ambit of Income Tax Act. The
amount of compensation under Motor Vehicle Act, also do not come within the
definition of “income”. Therefore, the analogy of compensation under land
acquisition cannot be applied to the motor vehicle accidents claims.
36. The word “interest” as defined under Section
2(28A) has to be construed strictly. We may refer to Polestar Electronic (P.)
Ltd. v. Addl. CST [1978] 41 STC 409 in which hon’ble the Apex Court has held as
under:-
“if there is one principle of interpretation more
well settled than any other, it is that statutory enactment must ordinarily be
construed according to the plain natural meaning of its language and that no
words should be added, altered or modified unless it is plainly necessary to do
so in order to prevent a provision from being unintelligible, absurd, unreasonable,
unworkable or totally irreconcilable with the rest of the statute.”
37. The necessary
ingredients of such interest are that it should be in respect of any money
borrowed or debt incurred. The award under the Motor Vehicle Act is neither the
money borrowed by the insurance company nor the debt incurred upon the
insurance company. As far as the word “claim” is concerned, it should also be
regarding a deposit or other similar right or obligation. The definition of
Section 2(28A) of the Income Tax Act again repeats the words “monies borrowed
or debt incurred” which clearly shows the intention of the legislature is that
if the assessee has received any interest in respect of monies borrowed or debt
incurred including a deposit, claim or other similar right or obligation, or
any service fee or other charge in respect of monies borrowed or debt incurred
has been received then certainly it shall come within the definition of
interest.
38. The word
“claim” used in the definition may relates to claims under contractual
liability but certainly do not cover the claims under the statutory liability.
The claim under the Motor Vehicle Act regarding compensation for death or
injury is a statutory liability.
39. Insertion of
clause (ix) to Section 194A(3) by the Finance Act 2003 with effect from
1.6.2003 also goes to show that prior to 1.6.2003, the legislature had no
intention to charge any tax on the interest received as compensation under the
Motor Vehicle Act. Even under the amended Act, interest received in excess of
Rs.50,000/- has been subjected to tax liability. Certainly such interest
exceeding Rs.50,000/- has further to be split amongst all the claimants and has
to be spread over for each of the assessment years.
Accordingly there appears
to be no justification to cast liability to deduct the tax at source on the
amount of interest paid on compensation under Motor Vehicle Act prior to
1.6.2003.
40. Further more the definition as provided under
Section 194A(1) is also relevant which provides that if any person is
responsible for paying to a resident any income by way of interest on
securities, shall at the time of credit of such income to the account of the
payee deduct income tax thereon at the rates in force.
41. To our opinion, the award of compensation under
motor accidents claims cannot be regarded as income. The award is in the form
of compensation to the legal heirs for the loss of life of their bread earner.
Hence the interest on such award also cannot be termed as income to the legal
heirs of the deceased or the victim himself.
42. Learned Commissioner of Income Tax
(Appeals)-I, Agra in his order dated 28.3.2003 has discussed most of the cases
relating to interest on land acquisition cases which have also been cited by
learned counsel for the revenue before us. But as mentioned above, the award
under land acquisition can not be equated in any way with the award under motor
accidents claims.
43. The award under the Motor Vehicle Act is like
a decree of the court. It do not come within the definition of income as
mentioned in Section 194A(1) read with Section 2(28A) of the Income Tax Act.
Proceedings regarding claim under Motor Vehicle Act are in the nature of a
garnishee proceedings under which the MACT has a right to attach the judgment
debt payable by the insurance company. Even in the MAC award, there is no
direction of any court that before paying the award, the insurance company is
required to deduct the tax at source. In view of Ramchandra D. Datar (supra),
if no provision has been made in the decree for deduction of tax, before paying
that debt, the insurance company cannot deduct the tax at source from the
amount payable to the legal heirs of the deceased.
44. In Chiranji Lal Multani Mal Rai Bahadur (P.)
Ltd. (supra), Dr. N.K. Gupta (supra), H.P. Housing Board (supra), Sahib Chits
(Delhi) (P.) Ltd. (supra), it has been clearly held that if interest is awarded
by the court for loss suffered on account of deprivation of property or paid
for breach of contract by means of damages or were not paid in respect of any
debt incurred or money borrowed, shall not attract the provisions of Section
2(28A) read with Section 194A(1) of the Income Tax Act.
45. In view of the above discussion, we hold that
the interest paid on compensation under motor accident claims awards prior to
1.6.2003 cannot be treated as income from the interest.
46. In the result, both the substantial questions
of law are answered against the revenue and in favour of the assessee.
47. All the appeals are dismissed.
