In the case of Oriental Insurance Co. Ltd. vs Smt. Kala Bai & Ors. on 20th March 2020, The Oriental Insurance Co. Ltd. filed the present writ petition being aggrieved by orders on 23.10.2019 and 6.11.2019 passed by learned Motor Accident Claims Tribunal (MACT), Ujjain whereby the petitioner has been directed to deposit the amount of interest accrued on the amount of compensation without deduction of Tax Deduction at Source (TDS).
Respondents No.1 to 6, who were claimants, approached the MACT, Ujjain by an application u/s. 166 of the Motor Vehicle Act,1988 claiming compensation of 91,85,180/- on account of the death of Amritlal in a road accident.
After recording the negligence on the part of the offending driver, MACT on 2.7.2019 awarded total compensation of Rs.49,84,000/- along with interest @ 7.5% per annum from the date of application, i.e. 23.6.2017.
The petitioner deposited the compensation i.e. Rs. 49,84,000/- and Rs. 6,93,118/- towards interest component. As the interest was exceeding 50,000/- per claimant per financial year, Insurance co. has deducted TDS and deposited in the Income Tax Department as per the requirement of Section 194-A of the Income Tax Act.
The Chartered Account said that when the interest exceeds 50,000/-, the person paying has to deduct TDS, hence, the insurance company was under a legal obligation to make a deduction because the interest was exceeding 50,000/- per claimant per year.
MACT had passed the order on 6.11.2019 by directing the petitioner to deposit the deducted the amount in the light of judgment on 24.6.2019 passed by this Court in the case of The Oriental Insurance Co. Ltd. V/s. Smt. Swaroopibai and fixed the case for deposition of balance the amount on 29.11.2019.
The petitioner then has filed the present petition before this Court by submitting that the Insurance Co. was legally bound to deduct the TDS because the interest the amount was exceeding 50,000/-, so the MACT ought to have directed the claimants to file income tax and claim a refund of the TDS if their total income does not exceed 50,000/-.
Arguments of the Petitioner
The petitioner’s counsel (Shri S.V. Dandwate) referred to the judgment of United India Insurance Co. Ltd. vs. Ramlal & Ors. in which the deduction made by the Insurance co. has been upheld.
It has also been held that before realising the amount of interest, the claimant shall be required to submit an affidavit to the effect that he has furnished a declaration in Form 15-G of Rule 29-C of the Income Tax Rules in terms of Section 197A (1-A) of the Income Tax Act for each financial year in the office of Insurance Co. so that concerned Insurance Co. gets relieved of its obligation of the payment of TDS.
The Oriental Insurance Co. Ltd. V/s. Smt. Swaroopibai case has also held that the Insurance Co. is liable to deduct the TDS on the interest paid by it as per provisions of Section 194A(3)(ix)(ix-a) of the Income Tax Act and if the assessee thinks that the tax has been deducted in excess, then he can always claim a refund of the same from the Income Tax Department.
In National Insurance Co. Ltd. V/s. Smt. Draupadibai, it has been held that the interest payable to each of the claimants being Rs.20,208.33, Insurance Co. does not entitled to deduct the tax at source. The court was of the opinion that the word “such income” in sub-section (3)(ix) refers to the interest income covered by sub-section (1), and so, a reading of sub-section (1) and sub-section (3)(ix) together makes it clear that it is the interest income of a resident in a financial year which is to be taken into account for calculating the limit of 50,000/-.
Arguments of the Respondent
Shri Sumeet Neema (amicus curiae, advocate for Respondents didn’t turn up) submitted that a similar issue came up for consideration before the Division Bench of High Court of Bombay in the case of Rupesh Rashmikant Shah V/s. Union of India in which it has been held that interest awarded in Motor Accident Claim Case from the date of claim petition till the passing of the award or in case of appeal, till the judgment of the High Court in such an appeal, would not be exigible to tax, not being an income.
He claimed that Section 194A of the Income Tax Act is the only provision in the IT Act for deduction of tax at source. The provision of deduction of tax at source is not a charging provision. Such provision of deducting tax at source cannot govern the taxability of the amount which is being paid. However, the Division Bench has clarified that these observations would apply to the interest on compensation or enhanced compensation awarded by the MACT or High Court from the date of claim petition till passing of the judgment and the further interest would not form part of the compensation and, therefore, would fall in the bracket of interest income and would be exigible to tax under the normal provisions.
He also referred to the judgment of Himachal Pradesh, State of H.P. vs. H.P. State Cooperative Bank Ltd. The Division Bench came to the conclusion that the provisions of Section 194A of the Income Tax Act does not apply to the accident claim cases and the compensation awarded under the Motor Vehicles Act cannot be said to be a taxable income because the compensation is awarded in lieu of death of a person or bodily injury suffered in a vehicular accident, which is damage and not income, hence hon’ble High Court quashed the order passed by the MACT and directed for a refund of the amount.
He had also cited judgment of Commissioner of Income Tax vs. Oriental Insurance Co. Ltd., where it has been held that the award of compensation under the motor accidents claims cannot be regarded as income. The award is in the form of compensation to a legal heir for the loss of life of their family’s breadwinner. Thus, the interest on such award also cannot be termed as income to the a legal heirs of the deceased or the victim himself. It does not come within the definition of income as mentioned in Section 194A(1) read with Section 2(28A).
New India Assurance Co. Ltd. vs. Sudesh Chawla case has held that the payment of compensation on account of death and injury is not a business transaction or a receipt of any charges on account of services rendered by any other party. Award of compensation is based on the principle of restitution to place the claimant in the same position in which he would have been had the loss of life or injury not been there. Thus, the insurance company could not be called upon to pay the TDS/deduct TDS on the interest part on such compensation.
Court’s Analysis
The main issue is whether the Insurance Co. can deduct the TDS if the amount of interest exceeds Rs.50,000 per claimant or not.
In Ramlal case, unlike the present case, the MACT judgment was final as neither the claimants nor the Insurance Co. has filed any appeal before this High Court. The Insurance Co. has already been directed by learned Motor Accident Claims Tribunal to examine whether the interest payable to respondent No.1 was exceeding Rs.50,000/-, then only the interest is liable to be deducted.
Currently, the issue of the deduction of TDS on the interest payable to Respondent No.1 is not liable to be considered again.
The Court in the three cases- Ramlal, Smt. Swaroopi Bai and Draupadibai has consistently held that the tax is payable on the interest accrued on the amount of compensation under Motor Vehicle Act with the condition that the interest should not be more than Rs.50,000 per claimant per financial year. After the aforesaid award, the Insurance Co. has calculated the interest payable on the entire amount of compensation and deducted the TDS @ 20% i.e. Rs.1,73,297/-.
In Ramlal case, the Court held that it is the responsibility of the Insurance Co. to obtain the declaration in Form 15-G of rule 29-C of the Income Tax Rules from the claimants at the time of the payment of compensation in order to get relieved of the obligation of the payment of TDS.
In Draupadibai case, this Court has held that after distribution of the amount between the claimants and if the interest payable to each claimant comes below Rs.50,000/-, then the Insurance Co. is not entitled to deduct the TDS while depositing the amount of interest before the Tribunal.
Court’s Decision
Justice Vivek Rusia dismissed the petition of Insurance Co. to deduct TDS based on the 3 precedents given in the analysis, because it does not exceed 50,000 per claimant. In the present case, the MACT has only directed the Insurance Co. to ascertain the interest payable to respondent No.1 only and if it exceeds Rs.50,000, then only the deduction of TDS be made.
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