C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

R/SPECIAL CIVIL APPLICATION NO. 4800 of 2021

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR. JUSTICE J.B.PARDIWALA

and

HONOURABLE MS. JUSTICE NISHA M. THAKORE

==========================================================

1Whether Reporters of Local Papers may be allowed to

see the judgment ?

YES

2To be referred to the Reporter or not ? YES

3Whether their Lordships wish to see the fair copy of

the judgment ?

NO

4Whether this case involves a substantial question of

law as to the interpretation of the Constitution of India

or any order made thereunder ?

NO

==========================================================

THE ORIENTAL INSURANCE CO. LTD.

Versus

CHIEF COMMISSIONER OF INCOME TAX (TDS)

==========================================================

Appearance:

MR RATHIN P RAVAL(5013) for the Petitioner(s) No. 1

M R BHATT & CO.(5953) for the Respondent(s) No. 1

==========================================================

CORAM:HONOURABLE MR. JUSTICE J.B.PARDIWALA

and

HONOURABLE MS. JUSTICE NISHA M. THAKORE

Date : 05/04/2022

ORAL JUDGMENT

(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)

1 By this writ application under Article 226 of the Constitution of

Page 1 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

India, the writ applicant – an Insurance Company has prayed for the

following reliefs:

“(A) Your Lordships be pleased to admit and allow this petition.

(B) Your Lordships be pleased to issue an appropriate

writ/direction/order to quash and set aside the order at ANNEXURE A

issued by the respondent and thereby allow waiver of interest charged

u/s 201(1A) of the Income Tax Act, 1961.

(C) Your Lordships be pleased to as an ad-interim ex-parte relief to stay

the impugned order at Annexure A.

(D) Your Lordships may be pleased to quash and set aside any penalty /

interest that may be levied by the Income Tax Department pursuant to

the Annexure A order.

(E) Your Lordships may be pleased to lay down a fixed procedure to

deal with the TDS issue in the MACP cases across the state.

(F) Your Lordships be pleased to pass such other and further orders

may be deemed just and proper looking to the facts and circumstances

of the case and in the interest of the justice.”

2 The facts giving rise to this writ application may be summarized as

under:

3 The writ applicant before us is an Insurance Company. One Motor

Accident Claim Petition bearing No.518 of 1999 came to be filed in the

City Civil Court at Ahmedabad. The said claim petition came to be

Page 2 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

allowed by the MACT (Aux.) Judge, City Civil Court, Ahmedabad, vide

judgement and award dated 18

th

January 2017.

4 The operative part of the order passed by the Tribunal in the

above referred MACP reads thus:

“(a) The petitioners in MACP No. 518/1999 do recover Rs. 16.28,008/-

(Rs. Sixteen lacs twenty-eight thousand eight only) from the opponent

1, 2 and 3 jointly and/or severally, together with running interest at the

rate of 8% p.a from the date of petition till realization of the amount

along with proportionate costs of the petition.

(b) The opponents are directed to follow the ratio laid down in the

judgment of Hansgauri P. Ladhani V Oriental Ins. Co. Ltd, reported in

2007-GLH-2-291 as far as TDS is concerned".

5 Thus, the Insurance Company was directed to deposit the amount

as awarded with interest and so far as the TDS was concerned, the

Insurance Company was directed to follow the decision of this High

Court rendered in the case of Hansaguri Prafulchandra Ladhani and

others vs. The Oriental Insurance Company Ltd rendered in 2007 ACJ

1897.

6 The writ applicant herein in due compliance of the judgement and

award passed by the Tribunal, deposited the entire amount along with

the TDS. The TDS to the tune of Rs.2,21,516/- was deposited through a

cheque on 26

th

May 2017.

7 The deposit of the TDS referred to above was in accordance with

the judgement of this High Court in the case of Hansaguri (supra).

Page 3 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

8 It appears that thereafter, the original claimants preferred a

Miscellaneous Application No.298 of 2017 before the Motor Accident

Claim Tribunal, City Civil Court at Ahmedabad with a prayer to release

the amount of Rs.2,21,516/- deducted towards the TDS as referred to

above.

9 The Miscellaneous Application came to be partly allowed by the

Tribunal vide order dated 4

th

August 2018, which reads thus:

“ORDER BELOW EXHIBIT – 1

1. The present application has been given by the applicants to release

the amount of Rs.2,21,516/- deducted towards TDS which has been

deposited in the Tribunal vide 'C' No.521, on 26.05.2017.

2. Against the afore stated application, Advocate for the Insurance Co.

has made an endorsement stating that he has no objection for

withdrawal as no appeal or review has been filed by the Insurance Co.

3. Considering the papers on record, it transpires that the Tribunal has

passed an order in MACP No.518/1999 on 18.01.2017, allowing the

said petition and award of Rs.16,28,008/- was passed. The Insurance

Co. has deposited the awarded amount with the Interest and had

deducted the amount of Rs.2,21,516/- being the amount of TDS out of

the interest amount. As regards the aforestated amount of TDS is

concerned, no dispute has been raised by the applicant and they have

also admitted that the amount deducted towards TDS is proper.

4. As far as the aforestated amount is concerned, the said amount is

deposited as Tax in the income-tax department but the Insurance Co.

Page 4 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

said amount has deposited the in the court. So, the said amount is

required to be sent back to the insurance Co. for depositing the same

with the Income Tax department and in my view it cannot be given to

the applicants. So, considering the peculiar facts and circumstance on

hand, this application is required to be partly allowed and in the

interest of justice I pass the following order.

ORDER

The present application is hereby partly allowed.

The Registry is hereby directed to send back the amount of Rs.

2,21,516/- deposited vide 'C' No.521, dated 18.05.2017, to the Oriental

Insurance Co. Ltd. with a direction that the Insurance Co. shall deposit

the said amount with the Income Tax department and then after would

produce the necessary document regarding the same to this Court and

supply the same to the applicants.

The Insurance Co. Is further directed to follow the procedure

regarding depositing the amount of TDS with the Income Tax

department and issue the necessary certificate along with the relevant

papers of depositing the amount to the applicants and the copy be send

to this Court.

Date : 04/08/2018.

sd/-

(Pratik J. Tamakuwala)

MACT (Aux.) Judge,

City Civil Court, Ahmedabad

UNIQUE ID CODE NO.GJ00581”

10Thus, in view of the aforesaid order passed by the Tribunal, the

writ applicant deposited the TDS amount with the Income Tax

Department on 26

th

March 2019 and also filed correction statement for

26Q for the Q-1 of F. Y. 2017-18, which resulted in the demand of

Page 5 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

interest of Rs.69,741/- under Section 201(1A) of the Income Tax Act,

1961.

11It appears that the directions issued by the Tribunal as above were

challenged by the writ applicant herein by filing the Special Civil

Application No.10060 of 2019 on 10

th

June 2019.

12The Insurer filed an application dated 19

th

June 2019 with the

Income Tax Department requesting waiver of the additional late

payment interest of Rs.69741/- against processing of the latest

correction statement for the F. Y. 2017-18.

13The writ applicant herein also preferred an application to implead

the Income Tax Department in the Special Civil Application No.10060 of

2019.

14A learned Single Judge of this Court, vide order dated 30

th

August

2019, directed that no coercive steps shall be taken against the

Insurance Company till the issue of TDS was not set at rest.

15It appears that although this Court had passed an interim order in

the Special Civil Application No.10060 of 2019 as above, yet the Income

Tax Department proceeded to pass an order dated 22

nd

January 2021,

whereby the department rejected the application filed by the Insurer

seeking waiver of interest for the late deposit of the TDS amount.

16In such circumstances referred to above, the writ applicant –

Insurance Company has come up with the present writ application.

Page 6 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

SUBMISSIONS ON BEHALF OF THE WRIT APPLICANT –

INSURANCE COMPANY:

17Mr. Rathin Raval, the learned counsel appearing for the Insurance

Company submitted that this litigation raised many issues of public

importance. He pointed out that the practice of deducting tax at source

(TDS) on interest under Section 194A of the Income Tax Act is on the

basis of the ratio of the decision of this High Court in the case of

Hansaguri (supra). According to Mr. Raval, Hansaguri (supra) is based

on the decision of the Supreme Court rendered in the case of Rama Bai

vs. CIT (1990) 181 ITR 400 (SC), wherein the Supreme Court held that

the interest as awarded by the Tribunal shall first spread over the

relevant F. Y. covering the period for which the interest is granted. It is

only if the interest for any particular financial year exceeds Rs.50,000/-,

the amount would be liable to be deducted at source and shall have to

be deposited with the MACT.

18Mr. Raval submitted that the Finance Act, 2015 has inserted new

Section 194A(3) (ixa) with effect from 1

st

June 2015. The effect of the

amendment is as under:

“(1) No liability for TDS shall be attracted in respect of any income

credited by way of interest on the compensation amount awarded by

the MACT.

(2) Such liability for deduction of tax in respect of interest on

compensation will be attracted, only at the time of actual payment and

only if the amount of such payment or aggregate amounts of such

payments during a financial year exceeds Rs. 50,000/-.”

19Mr. Raval pointed out that in view of the aforesaid amendment to

Page 7 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

Section 194A, the TDS would have to be deducted out of the actual

payment of interest on compensation. The rate would be 10% if the

claimants had produced the PAN Card before the payment and 20% if

the PAN Card had not been produced. Mr. Raval would submit that in

spite of the aforesaid amendment, the Insurance Companies are being

compelled to deposit the amount with the Tribunal itself. The Tribunal

would thereafter decide accordingly.

20In such circumstances referred to above, Mr. Raval prays that this

Court may clarify the issue by explaining the correct position of law as

regards the liability of the Insurance Company to deduct the TDS and

deposit the same with the Tribunal; or with the Income Tax Department.

SUBMISSIONS ON BEHALF OF THE REVENUE:

21Per contra, Mr. M. R. Bhatt, the learned Senior Counsel appearing

for the Revenue submitted that the writ applicant – Insurance Company

was not justified in depositing the TDS with the City Civil Court instead

of the Income Tax Department. Mr. Bhatt would submit that there is no

ambiguity or confusion as regards the question as to where the TDS is

required to be deposited. According to Mr. Bhatt, the provisions of

Sections 194A(3)(ix)(ixa), 145(b), 145B, 56(1)(viii), 201(1), 201(1A)

and 200 resply of the Income Tax Act make the legal position

abundantly clear.

22Mr. Bhatt would submit that the Insurance Company is liable to

deduct the TDS on the interest paid by it in accordance with the

provisions of Section 194A(3)(ix) and (ixa) of the Act and if the assessee

is of the view that tax has been deducted in excess, then he can always

claim refund of the same from the Income Tax Department.

Page 8 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

23Mr. Bhatt has also filed a note explaining the position of Section

194A post amendment. Mr. Bhatt has also discussed few judgements on

the issue in question including Hansaguri (supra). The same reads thus:

“As per Section 194A of Income Tax Act, 1961, when any person not

being an individual or HUF who becomes responsible for paying to a

resident any income by way of interest other than income by way of

interest on securities. shall at 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. Sub-section (3)

excludes the application of sub-section (1) sub-clause (ix) thereof and

provides that the provisions of sub-section (1) shall not apply to such

income credited or paid by way of interest on the compensation

awarded by the Motor Accident Claims Tribunal, where amount of such

income or, as case may be, aggregate of the amounts of such income

paid during financial year does not exceed Rs.50,000/. Thus, for

exemption from provisions of Sub-section (1) of Section 194A, such

income paid by way of interest on compensation amount awarded by

Tribunal will not be liable for tax if aggregate amount of such interest

income paid during financial year does not exceed Rs.50,000/- .

Relevant provisions are reproduced for ready reference:

194A. Interest other than "Interest on securities".

(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:

Provided that an individual or a Hindu undivided family, whose total

sales, gross receipts or turnover from the business or profession carried

on by him exceed [one crore rupees in case of business or fifty lakh

rupees in case of profession] during the financial year immediately

preceding the financial year in which such interest is credited or paid,

shall be liable to deduct income-tax under this section.]

Explanation - For the purposes of this section, where any income by

way of interest as aforesaid is credited to any account, whether called

"Interest payable account" or "Suspense account" or by any other name,

Page 9 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

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.

(3) The provisions of sub-section (1) shall not apply

(ix) to such income credited by way of interest on the

compensation amount awarded by the Motor Accidents Claims

Tribunal:

(ixa) to such income 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 paid during the

financial year does not exceed fifty thousand rupees;

145B. Taxability of certain income.

(1) Notwithstanding anything to the contrary contained in section 145,

the interest received by an assessee on any compensation or on

enhanced compensation, as the case may be, shall be deemed to be the

income of the previous year in which it is received.

(2) Any claim for escalation of price in a contract or export incentives

shall be deemed to be the income of the previous year in which

reasonable certainty of its realisation is achieved.

(3) The income referred to in sub-clause (xviii) of clause (24) of section

2 shall be deemed to be the income of the previous year in which it is

received, if not charged to income-tax in any earlier previous year.

56. Income from other sources.

(1) Income of every kind which is not to be excluded from the total

income under this 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 specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the

provisions of sub-section (1), the following incomes, shall be chargeable

to income-tax under the head "Income from other sources", namely :

(viii) income by way of interest received on compensation or on

enhanced compensation referred to in [sub-section (1) of section

145B]:

Page 10 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

Sr.

No.

Judgment Particulars

1Hansaguri

Prafulchandra Ladhani

and Ors. vs. The

Oriental Insurance

Company Ltd. (Gujarat

High Court (decision

rendered on

04.10.2006)

Hon’ble Gujarat High Court gave

detailed guidelines for the cases arising

out of motor vehicle accident claims (at

para 14 of the judgment) held that in

order to attract provisions of TDS on

interest component on compensation

awarded in motor vehicle accident

claims;

(a) first spread the interest amount over

to the relevant financial years for the

period from the date of filing the claim

petition till the date of deposit.

(b) thereafter, if the interest for any

particular financial year exceeds

Rs.50,000/- separately deposit before

the Tribunal the amount liable to be

deducted at source under the provisions

of Section 194A(3) (ix) of the Income

Tax Act, 1961. Such amount shall not,

however, straightway, be paid over to

the Income Tax Department.

(c) produce before the Tribunal a

statement of computation of interest by

spreading the amount over the relevant

years from the date of claim petition till

the date of deposit if the interest for any

particular financial year exceeds

Rs.50,000/- and also request the

Tribunal to treat the amount as a

separate deposit.

2Commissioner of

Income-tax vs. Oriental

Insurance Co. Ltd

[2012] 27

taxmann.com 28

(Allahabad) (decision

rendered on

13.09.2012)

Does interest on delayed payment of

compensation from motor vehicle claims

exigible to TDS?

Necessary ingredients of interest to be

under the ambit of section 2(28A) of

Income Tax Act 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

Page 11 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

company. (para 37)

The award including interest under

motor vehicle claims cannot be

considered as “income” as it is awarded

to the legal heirs of the deceased for the

loss of their bread earner. (para 4)

3Court on its own

motion [2014] 52

taxmann.com 151

[Himachal Pradesh]

(decision rendered on

15.10.2014)

Whether TDS can be deducted on the

interest accrued on fixed term deposit of

the compensation awarded under motor

vehicle claims?

Hon’ble High Court held that

compensation awarded under Motor

Vehicles Act is in lieu of death of a

person or bodily injury suffered in a

vehicular accident and it could not be

taxed as income.

An SLP is preferred against the

judgment and is pending before Hon’ble

Supreme Court.

4Oriental Insurance Co.

vs. Chennabasavaiah

and Ors (decision

rendered on

18.02.2015)

In this case, interest component on the

compensation was 1,42,802/-. TDS on

the interest component in a sum of

Rs.28,560 was deducted. The Claimants

claimed that exemption from payment of

tax is available on interest component

upto a sum of Rs.50,000/- and

therefore, petitioner – insurance

company should not have deducted TDS

on the entire interest amount. MACT

accordingly, directed the petitioner –

insurance company to deposit an

amount of Rs.10,000/- which was

deducted towards TDS on Rs.50,000/-

Karnataka High Court held that “having

heard the learned Counsel for the

petitioner- Insurance Company, I am of

the view that the court below was not

justified in directing the petitioner-

Insurance Company to deposit a sum of

Rs.10,000/- deducted by it towards TDS.

Section 194-A(3)(ix) of the Income Tax

Act, 1961 grants exemption from

payment of tax on the interest

Page 12 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

component up-to a sum of Rs.50,000/-.

This exemption has to be claimed by the

respondent/claimants by filing necessary

returns before the assessing authority. It

is the statutory obligation of the

petitioner-Insurance Company to deduct

the TDS from the entire interest

component and deposit the same before

the competent authority, which has been

done in this case. A certificate to that

effect has been issued to the

respondent/claimants. The

respondent/claimants have to make a

claim for refund of the aforesaid amount

before the competent authority. With

these observations, writ petition is

allowed. The order dated 15.9.2012 in

Ex.Case No.80/2008 passed by the court

below is hereby quashed.

5New India Assurance

Co. Ltd [2017] 80

taxmann.com 331

(Punjab and Haryana)

(decision rendered on

30.11.2015)

Whether Insurance Company can be

called upon to pay the TDS /deduct TDS

on the interest part upon the

compensation awarded in motor vehicle

accident claims?

Relying on the above decision rendered

in [2014] 52 taxmann.com 151 by

Himachal Pradesh High Court, orders

calling upon the Insurance Company to

pay the TDS / deduct TDS on the

interest component, were set aside.

(para 9)

An SLP is preferred against the

judgment and is pending before Hon’ble

Supreme Court.

6New India Assurance

Co. Limited vs.

Bhoyabhai Haribhai

Bharvad and Ors.

(Gujarat High Court):

(decision rendered on

08.08.2016)

In this case, Insurance Company

deducted Rs.45,190 as TDS and

deposited the same with Dept. MACT

directed the Insurance Company to pay

the TDS to the victim-claimants owing to

the amended provision of Section 194A

of the Income Tax Act.

High Court upheld MACT order and

reiterated provisions of Section 194A

holding that TDS was not to be deducted

Page 13 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

given the new law and held that “the

insurance company should have

properly adviced itself before effecting

tax at source on the ground that the

judgement of this Court in case of Smt.

Hansagauri Prafulchandra Ladhani and

ors vs. The Oriental Insurance Company

Ltd (supra) was no longer good law in

view of the statutory amendments. Not

having done that the only course left

open to the insurance company would

be to approach the Income Tax

department for refund, as may be

adviced. “(para 13)

Imp paras 11 and 12

7Sr. Divisional Manager,

National Insurance Co.

vs. The Commissioner

of Income Tax, Alwar

(decision was rendered

on 21.04.2017)

(Rajasthan HC)

Rajasthan High Court followed decision

rendered in DB Income Tax Appeal

NO.517/2009 in which the decision of

Hansagauri was followed.

8Sharda Pareek vs. ACIT

[2019] 104

taxmann.com 76 (Raj)

decision rendered on

26.04.2017)

Rajasthan High Court held that interest

on compensation awarded by Motor

Accident Claims Tribunal is taxable on

year wise accrual basis, in following

words:

“On plain reading of Section 2(28A), it

is very clear that originally

compensation was received by the

claimant was not income but once

amount received, it has become capital

and interest on capital is liable to be

taxable. In that view of the matter, the

issue is required to be answered in

favour of the department and against

the assessee.” (para 9)

Other imp para 11

An SLP is preferred against the

judgment and is pending before Hon’ble

Supreme Court.

Page 14 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

9Union of India vs. Hari

Singh (Civil Appeal

No.15041/2017 order

dated 15

th

September

2017)

Hon’ble Supreme Court held that

deduction of tax is not permissible on

the compensation / enhanced

compensation received by the assessee

on compulsory acquisition of their

agricultural land.

In this case, Collector had deducted TDS

on the compensation received for

agricultural land as well.

With regard to demand of assessee for

refund of tax, Supreme Court held that

assessees must necessary returns before

Assessing Officer and it would be for the

Assessing Officer to determine whether

the land in question was agricultural

land in question was agricultural land or

not. Accordingly, it was made incumbent

on Assessing Officer to ascertain

whether refund of TDS can be made or

not.

10Iffco Tokio General

Insurance Company Ltd

vs. Krishnakumar

Munshiram Agrawal

and others (Gujarat

High Court) (decision

rendered on

10.11.2017)

In this case, the petitioner – Insurance

Company deducted TDS amount from

the interest accrued on awarded amount

and deposited the TDS amount with

Income Tax Department as per amended

section 194A deducted 20% TDS as the

interest exceeded 50,000.

The claimant – respondent No.1 filed

Execution Application before the

Tribunal wherein the learned Tribunal

issued attachment warrant against the

Insurance Company.

Gujarat High Court held that the

petitioner – Insurance Company was not

justified in deducting at source in view

of the guideline issued in Hansaguri’s

case. Therefore, it instructed Insurance

Company to approach the Income Tax

Dept for refund.

11Oriental Insurance Co.

Ltd. vs. Swaroopi Bai

(MP HC) (decision

rendered on

In this case, the interest component of

the compensation exceeded Rs.50,000,

however MACT ruled that the interest

amount if spread over to the number of

Page 15 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

24.06.2019) years from the date of filing of the claim,

then in none of the financial years, the

interest would be more than Rs.50,000.

Hence, it directed Insurance company to

pay over the deducted TDS to the

claimants. Hon’ble MP High Court

resorting to section 194-A(3)(ix) and

(ix-a), held that MACT committed

material illegality by holding that the

insurance company is not liable to

deduct TDS.

12Rupesh Rashmikant

Shah vs. Union of India

[2019] 108

taxman..com 181

(Bombay High Court)

(decision rendered on

08.08.2019)

Q. Whether interest awarded on

compensation from motor vehicle

accidents is an income?

Does section 194A make the interest

income chargeable to tax if it otherwise

is not. The answer has to be in the

negative. The provision for deduction of

tax at source is not a charging provision.

It only makes deduction of tax at source

on payment of same, which, in the

hands of payee, is income. If the payee

has no liability to pay such income, the

liability to deduct tax at source in the

hands of payer cannot be fastened. In

other words, the provision of deducting

tax at source cannot govern the

taxability of the amount which is being

paid. (para 59)

“We may clarify that these observations

and conclusions would apply to interest

on compensation or enhanced

compensation awarded by the Motor

Accident Claims Tribunal or High Court

from the date of the Claim Petition till

passing of the award or the judgment.

Further interest which may be paid for

delay in depositing the awarded

amount, 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.” (para 61)

(other important paras 48 to 58)

Page 16 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

An SLP is preferred against the

judgment and is pending before Hon’ble

Supreme Court.

13The New India

Assurance Company

Limited vs. Govindlal

Hiralal Mandora

(Gujarat High Court –

decision rendered on

03.10.2019)

Referring to guidelines emanating from

the decision of Hansagauri, any TDS

deducted in excess, assessee will have to

approach Income Tax Dept.

14Satya Narayan – D. B.

Civil Writ Petition

No.22025/2018

(Rajasthan HC)

(18/02/2022)

Question whether an insurance company

can deduct tax at source on the interest

component of the compensation

awarded in a motor vehicle accident

claim was raised before Hon’ble

Rajasthan High Court.

Taking cognizance of the decision

rendered in 262 Taxman 253, Rajasthan

High Court referred the present case to a

large bench and is pending.

PRIMARY ANALYSIS:

24Having regard to the important issues we are called upon to

decide, we also took the assistance of the learned Senior Counsel Mr.

Tushar Hemani and also the learned counsel Mr. Bandish Soparkar.

25While the writ applicant – Insurance Company seeks a declaration

from this Court with regard to the non-applicability of the decision of

Hansaguri (supra); the issue is inherently linked with the question

whether the interest awarded by the MACT is chargeable to the income

tax in the first place. Only if it is found chargeable, then the question

would arise as to in what manner should the writ applicant – Insurance

Company deduct the tax and deposit with the Tribunal or the Income

Tax Department. If the interest awarded by the MACT is not chargeable

Page 17 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

to income tax, then there would be no occasion for the Insurance

Company to deduct the tax.

26In view of the aforesaid, the following questions fall for our

consideration:

(i) Whether interest allowed by the MACT in the accident case on

the amount of award can be termed as the 'Income from interest'

or the same is a part of compensation for the delay caused in the

legal proceedings?

(ii) Whether interest allowed on the compensation amount can be

equated with interest earned on the principal amount?

(iii) Whether the interest awarded by the MACT is not a part of

compensation?

27Before we proceed to answer the aforesaid question, we must look

into few provisions of law.

28Section 2(28A) of the Income Tax Act defines the term “interest”.

The same reads thus:

“(28A) “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;”

29Section 56(2)(viii) of the Income Tax Act is with regard to

Page 18 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

“income from other sources”. The same reads thus:

“Income from other sources.

Section 56 -

…

(2) In particular, and without prejudice to the generality of the

provisions of sub-section (1), the following incomes, shall be chargeable

to income-tax under the head “Income from other sources”, namely-

….

….

(viii) income by way of interest received on compensation or on

enhanced compensation referred to in [sub-section (1) of section

145(B)”

30Section 194A(3)(ix) and (ixa) of the Income Tax Act is with

regard to “interest other than interest on securities”. The same reads

thus:

“Interest other than “Interest on securities.

Section 194A.

….

(3) The provisions of sub-section (1) shall not apply -

…

…

(ix) to such income credited by way of interest on the compensation

amount awarded by the Motor Accidents Claims Tribunal.

(ixa) To such income 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

Page 19 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

amounts of such income paid during the financial year does not exceed

fifty thousand rupees;”

31Section 145B(1) of the Income Tax Act is with regard to

“taxability of certain income”. The same reads thus:

“Taxability of certain income.

145B. (1) Notwithstanding anything to the contrary contained in

section-145, the interest received by an assessee on any compensation

or on enhanced compensation, as the case may be, shall be deemed to

be the income of the previous year in which it is received.

(2) Any claim for escalation of price in a contract or export incentives

shall be deemed to be the income of the previous year in which

reasonable certainty of its realisation is achieved.

(3) The income referred to in sub-clause (xviii) of clause (24) of

section-2 shall be deemed to be the income of the previous year in

which it is received, if not charged to income-tax in any earlier previous

year.”

32Section 171 of the Motor Vehicles Act, 1988 reads thus:

“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.

33Section 28 and Section 34 resply of the Land Acquisition Act, 1894

Page 20 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

read thus:

“Section 28. Collector may be directed to pay interest on excess

compensation. —If the sum which, in the opinion of the Court, the

Collector ought to have awarded as compensation is in excess of the

sum which the Collector did award as compensation, the award of the

Court may direct that the Collector shall pay interest on such excess at

the rate of [nine per centum] per annum from the date on which he

took possession of the land to the date of payment of such excess into

Court:

Provided that the award of the Court may also direct that where

such excess or any part thereof is paid into Court after the date of

expiry of a period of one year from the date on which possession is

taken, interest at the rate of fifteen per centum per annum shall be

payable from the date of expiry of the said period of one year on the

amount of such excess or part thereof which has not been paid into

Court before the date of such expiry.”

“Section 34. Payment of interest. —When the amount of such

compensation is not paid or deposited on or before taking possession of

the land, the Collector shall pay the amount awarded with interest

thereon at the rate of [nine per centum] per annum from the time of so

taking possession until it shall have been so paid or deposited:

Provided that if such compensation or any part thereof is not

paid or deposited within a period of one year from the date on which

possession is taken, interest at the rate of fifteen per centum per annum

shall be payable from the date of expiry of the said period of one year

on the amount of compensation or part thereof which has not been paid

or deposited before the date of such expiry.”

Page 21 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

34In Rama Bai (supra), the Supreme Court held that the arrears

towards interest computed on delayed or enhanced compensation under

Section 28 or Section 34 of the Land Acquisition Act, 1894 shall be

taxable on accrual basis from year to year basis and not at one go – in

the year of actual receipt of the award.

35In 2003, Section 194A(3)(ix) came to be inserted to prescribe that

on credit or payment of interest awarded by the MACT exceeding

Rs.50,000/-, TDS is required.

36In Hansaguri (supra), the applicant claimed before this High Court

that the amount of interest awarded by the MACT should be spread

across the different claimants as well as across the different years.

Following Rama Bai (supra), a Coordinate Bench of this Court held that

the interest would be spread over different years and if thereafter, if it

exceeds Rs.50,000/- in any year, then for that year to year, the TDS

would be liable to be deducted.

37In 2009, by Finance (No.2) Act, 2009, Section 145A(b) and

Section 56(2)(viii) came to be amended and with the same, Rama Bai

(supra) got diluted. Two sections came to be amended to provide that so

far as the interest on delayed or enhanced compensation (under the

Land Acquisition Act, 1894) was concerned, the same was taxable only

in the year of receipt and would not be spread over the years.

38The Finance Act, 2015 amended Section 194A(3) to divide it into

two parts:

(ix) said that in relation to only credit, no TDS is required.

Page 22 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

(ixa) said that in relation to payment, if it is less than 50,000/-,

then no TDS.

The aforesaid was done to rationalise Section 194A so as to give

effect of the earlier amendment of 2009 which said that the taxability of

interest would arise only in the year of receipt and therefore, in the years

of its accrual there was no tax incidence. Therefore, to that extent the

194A(3)(ix) was inconsistent and was accordingly corrected.

39In 2016, one another judgement came to be delivered by this High

Court in the case of New India Assurance Co. Limited vs. Bhoyabhai

Haribhai Bharvad reported in 2017 ACJ 1727. In the case of Bhoyabhai

(supra), the Insurance Company had deducted tax and deposited with

the Income Tax Department. The claimant asserted that the total sum

without deduction should have been deposited with the Tribunal itself.

This Court examined the issue keeping the amended Section 194A in

mind (but not Section 145A(b)) and proceeded to take the view on facts

that none of the spread overs the ceiling of Rs.50,000/- was breached

and therefore, the Insurance Company ought to have deducted the tax.

We quote the relevant observations:

“9. Sub section (3) of Section 194A, however, includes those cases

which would be excluded from the purview of sub section (1). Relevant

portion of sub section (3) as its stood prior to 01.06.2015 amendment

read as under:

“194A. (3) The provisions of sub-section (1) shall not apply- (ix)

to such income credited or paid by way of interest on the

compensation amount awarded by the Motor Accident 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;”

10. The Gujarat High Court in case of Smt. Hansagauri Prafulchandra

Ladhani and ors vs. The Oriental Insurance Company Ltd (supra) had

Page 23 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

occasion to interpret this provision. W.e.f. 01.06.2015, however, this

Clause (ix) of sub section (3) of Section 194A has been omitted and is

replaced by Clauses (ix) and (ixa) which read as under:

“(ix) to such income credited by way of interest on the

compensation amount awarded by the Motor Accidents Claims

Tribunal; (ixa) to such income paid by way of interest on the

compensation amount awarded by the Motor Accident Claims

Tribunal where the amount of such income or, as the case may

be, the aggregate of the amounts of such income paid during the

financial year does not exceed fifty thousand rupees.”

11. Under Clause (ix) to sub section (3) of Section 194A of the Act, as it

originally stood, requirement of deducting tax at source under sub

section (1) would not apply in a case where any income is credited or

paid by way of interest on compensation amount awarded by Motor

Accident Claims Tribunal where the amount of such income or, the

aggregate amounts of such income credited or paid during the financial

year does not exceed fifty thousand rupees. This provision of Clause

(ix) is now divide into two parts and is replaced by Clauses (ix) and

(ixa). Clause (ix), in the present form, refers to such income credited by

way of interest on the compensation amount awarded by the Claims

Tribunal. The case of crediting of interest on compensation therefore,

would fall in Clause (ix) as it stands currently. Under Clause (ixa)

would fall, any payment of interest on compensation awarded by the

Claims Tribunal where the amount of such income or the aggregate

paid during the financial year does not exceed fifty thousand rupees.

12. It would, therefore, be wholly incorrect to read the current

provision of sub section (3) of Section 194A to argue that the cases of

income credited by way of interest on compensation awarded by the

Claims Tribunal is no longer part of sub section (3) for exclusion from

purview of sub section (1) of Section 194A. In other words, worded

slightly differently. The case of credit of interest on compensation

awarded by the Claims Tribunal continues to find place in the exclusion

clause contained in sub section (3) of Section 194A. In fact, it would

prima facie appear that the ceiling of Rs. 50,000/- per annum for such

exclusion is now done away with in case of crediting of interest on

compensation awarded by the Claims Tribunal while retaining such

limit in cases of payment of interest on such compensation. However,

we need not thresh out this last part of the issue since admittedly, in

the present case, for none of the years under consideration, the interest

income exceeded Rs. 50,000/-. In fact, this Court in case of Smt.

Hansagauri Prafulchandra Ladhani and ors vs. The Oriental Insurance

Company Ltd (supra) provided for further splitting up of this ceiling of

Rs. 50,000/- per claimant basis. Looked from any angle, the insurance

company was not justified in deducting tax at source while depositing

the compensation in favour of the claimants. It therefore, cannot avoid

Page 24 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

liability of depositing such amount with the Claims Tribunal. The

Claims Tribunal had committed no error in insisting on the insurance

company in making good the shortfall.

13. At this stage, learned counsel for the petitioner drew our attention

to the order dated 05.03.2012 passed by this Court in Civil Application

No. 2592 of 2012, in which, the insurance company had deposited with

the Income Tax Department a sum of Rs. 7, 91, 971/- by way of tax on

compensation of Rs. 34,39,070/- awarded by the Claims Tribunal. This

Court allowed the claimants to seek refund of such amount from the

Income Tax department and permitted the insurance company to

receive it back from the claimants as and when such refund would be

made by the Income Tax department. However, in the present case, we

are not inclined to accept such a formula. Firstly, the amount in

question is not very large. Secondly, in order to provide for such

formula, we would have to call upon the claimants to appear before us,

a luxury which poor litigants can ill-afford. Thirdly, the insurance

company should have properly adviced itself before effecting tax at

source on the ground that the judgement of this Court in case of Smt.

Hansagauri Prafulchandra Ladhani and ors vs. The Oriental Insurance

Company Ltd (supra) was no longer good law in view of the statutory

amendments. Not having done that the only course left open to the

insurance company would be to approach the Income Tax department

for refund, as may be adviced.”

40In the Finance Act, 2021, the erstwhile Section 145A(b) is now

Section 145B(1).

41The case of the Revenue is that the legislative intent in insertion of

Section 145A(b) is very clear. According to the Revenue, the interest

received on any compensation or enhanced compensation is deemed to

be income of the assessee in the year of its receipt after the insertion of

Section 145A(b). The ratio of Rama Bai (supra) stands overruled by

Section 145A(b) and therefore, to that extent, even Hansaguri (supra) is

not relevant after the insertion of Section 145A(b). According to the

Revenue, the interest received as a part of the award is deemed to be

income in the year of its receipt and is not to be accounted across many

years under the accrual system.

Page 25 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

42According to the Revenue, such interest income is liable to the

TDS under Section 194A(3)(ixa) if it exceeds Rs.50,000/- for any

claimant at the time of its deposit by the Insurance Company with the

Tribunal.

43The stance of the Revenue is that Bhoyabhai (supra) failed to take

notice of the amendment in Section 145A(b) and thereby ordered to

spread over the ceiling of Rs.50,000/- over years.

44The stance of the Revenue is that whenever any Insurance

Company would deposit the amount with the Tribunal, at that time, if

the total sum deposited exceeds Rs.50,000/- for any claimant, then for

that claimant, tax is required to be deducted.

 FINAL ANALYSIS:

45Section 171 of the Motor Vehicles Act, 1988 empowers the

Tribunal to award interest on the claim made under the Motor Vehicles

Act from the date of making the claim. Sections 28 and 34 resply of the

Land Acquisition Act, 1894 relate to the interest on compensation for the

land compulsorily acquired and the compensation received for.

46It is very essential to bear the fine distinction between the interest

awarded under the two enactments viz. the Motor Vehicles Act,1988 and

the Land Acquisition Act, 1894 resply. There are few amendments

brought under the Income Tax Act keeping a specific law (Land

Acquisition Act, 1894) in mind. Various High Courts have taken the view

that the treatment of all the three Sections 28, & 34 resply of the Land

Acquisition Act and Section 171 of the Motor Vehicles Act interest is not

Page 26 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

the same so far as taxability under the Income Tax Act is concerned.

47The amendment in Section 145A(b) only creates a deeming fiction

as to the year of taxability of the interest on compensation. It does not

create a deeming fiction as to the taxability of the interest on

compensation. Even after the insertion of Section 145A(b), the interest

on compensation under the Motor Vehicles Act which is exempt does not

become taxable by operation of Section 145A(b).

48The compensation received under the compulsory acquisition of

land is in any case taxable under Section 45 as the Capital Gains and

therefore, the issue under the Land Acquisition with regard to interest

under Sections 28 and 34 i.e limited to the extent that the same would

be taxable under Section 56(2)(viii) (Section 34 interest) or Section 45

the Capital Gains (Section 28 interest that is part of the compensation)

and therefore, only the year of its taxability is decided by Section

145A(b) and not the taxability of interest on the compulsory acquisition

of land. Whereas under the Motor Vehicles Act, the compensation itself

is exempt. The nature of interest, therefore, would assume significance

and cannot be given the same treatment as interest on compensation

under the Land Acquisition Act and be taxed by operation of Section

145A(b).

49It is crucial to note that in Rama Bai (supra), the Supreme Court

drew no distinction between the interest under Section 28 and interest

under Section 34 of the Land Acquisition Act, 1894. Later in Ghanshyam

(2009) 315 ITR 1 (SC), the Supreme Court drew this distinction and

held that the interest under Section 28 of the Land Acquisition Act, 1894

would form part of the compensation itself and is taxable under the

capital gain only. The amendment of Section 145A(b), Sections 56(2)

Page 27 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

(viii) and 194A resply would therefore not apply to the interest under

Section 28 of the Land Acquisition Act, 1894, but would apply only to

Section 34 interest as is held in the case of [2016] 388 ITR 343

(Gujarat) Movaliya Bhikhubhai Balabhai. Therefore, the implication of

Sections 145A(b) is not absolute even with respect to the interest

awarded under Section 28 of the Land Acquisition Act and cannot apply

to the interest awarded by the MACT as well.

50The term “income” is inclusively defined in Section 2(24). Such

definition does not include the “interest” referred to in the Section 56(2)

(viii) or interest received in the MACT award.

51The words of Section 194A(3) are crucial i.e “income by way of

interest” and not simply “interest”. Therefore, even when interest is paid,

if the same is received not in the name of “income”, then Section

194A(3) would not operate.

52Therefore, the interest on compensation not being taxable at all

there is no question of deducting tax on the same under Section 194(A).

53In Hansaguri (supra), the Court had no occasion to examine the

taxability of the interest which proceeded on the basis that it is taxable.

Therefore, now if it is held to be exempt, the guidelines prescribed in

Hansaguri (supra) are no longer applicable. The Insurance Company

must deposit the full award before the Tribunal without deducting tax

and the same is to be disbursed to the claimants.

 RATIONALIZATION OF PROVISIONS FOR TAXATION OF

INTEREST RECEIVED ON ENHANCED COMPENSATION OR

DELAYED COMPENSATION:

Page 28 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

54The existing provisions of the Income Tax Act provide that the

income chargeable under the head “Profits and gains of business or

profession” or “Income from other sources”, shall be computed in

accordance with either cash or mercantile system of accounting

regularly employed by the assessee. Further, the Supreme Court, in the

case of Rama Bai (supra) has held that arrears of interest computed on

delayed or enhanced compensation shall be taxable on accrual basis.

This has caused undue hardship to the taxpayers. With a view to

mitigating the hardships, it is proposed to amend Section 145A to

provide that the interest received by an assessee on compensation or

enhanced compensation shall be deemed to be his income for the year in

which it is received, irrespective of the method of accounting followed

by the assessee. Further, it is proposed to insert clause (viii) in sub-

section (2) of Section 56 to provide 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. This amendment will take

effect from 1

st

April 2010 and shall accordingly apply in relation to the

assessment year 1998-99 and subsequent assessment years. [Clauses 26,

27, 56]

 RATIONALISATION OF PROVISIONS RELATING TO DEDUCTION

OF TAX ON INTEREST (OTHER THAN INTEREST ON

SECURITIES):

55Under Section 194(3)(ix) of the Act, tax is not required to be

deducted from the interest or paid on the compensation amount

awarded by the Motor Accident Claim Tribunal if the amount of such

interest credited or paid during a financial year does not exceed

Page 29 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

Rs.50,000/-. Finance (No.2) Act, 2009 amended the provisions of

Section 56 of the Act as well as substituted Section 145A of the Act to,

inter alia, provide that interest income received on compensation or

enhanced compensation shall be deemed to be the income of the year in

which the same has been received. However, the existing provisions of

Section 194A of the Act provide for deduction of tax from the interest

paid or credited on compensation, whichever is earlier. Section 145A(b)

of the Act provides an exception to the method of accounting contained

in Section 145 of the Act and mandates for taxation of interest on

compensation on receipt basis only. Therefore, deduction of tax on such

interest on mercantile / accrual basis results into undue hardship and

mismatch. It is, therefore, proposed to amend the provisions of Section

194A of the Income Tax Act, 1961 to provide that deduction of tax

under Section 194A of the Act from the interest payment on the

compensation amount awarded by the Motor Accident Claim Tribunal

compensation shall be made only at the time of payment, if the amount

of such payment or aggregate amount of such payments during a

financial year exceeds Rs.50,000/-. These amendments will take effect

from 1

st

June, 2015. [Clause 42].

56We are of the view that compensation under the award of the

MACT is not income. The expression “income” used in the Entry 82 of

List I of Seventh Schedule to the Constitution can be given widest

meaning. Under Section 2(24), the definition is inclusive and not

exhaustive. In the absence of any express provision to the contrary,

income can be held to refer to something earned. What is received as

compensation for loss in one or the other form may not be income.

CASE LAW:

57It was observed in the Commissioner of Income Tax, Bengal Vs.

Page 30 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

Shaw Wallace and Company [AIR 1932 Privy Council 138] by the Privy

Council as under:

“The object of the Indian Act is to tax “income” a term which it does not

define. It is expanded, no doubt, into income, profits and gains,” but

the expansion is more a matter of words than of substance, Income,

their Lordships think, in this cannotes a periodical monetary return

“coming in” with some sort of regularity, or expected regularity, from

definite sources. The source is not necessary one which is expected to

be continuously productive, but it must be one whose object is the

production of a definite return, excluding anything in the nature of a

mere windfall. Thus income has been likened pictorially to the fruit of a

tree, or the crop of a field. It is essential the produce of something,

which is often loosely spoken of as “capital”. But capital, though

possibly the source in the case of income from securities, is in most

cases hardly more than an element in the process of production.”

58In Rani Amrit Kunwar Vs. Commissioner of Income Tax, C. P. &

U.P. (1946) XIV ITR 561, the Allahabad High Court observed:-

“Under Indian law, therefore, we come back in my opinion, to the

relatively simple test whether in the ordinary parlance of language

what the assessee receives is “income” or not. I should not dream of

suggesting that every payment made by one person to another is

necessarily the recipient's income since it may, as Viscount Dunedin has

said, be merely a casual payment or, as Sir George Lowndes has

suggested, a mere windfall. Such sweeping proposition would be

absurd. Many things have to be considered. In the case of a payment by

a parent to a child or by a husband to a wife or by one relation to

another obvious questions arise whether in the particular circumstances

of each case the payments are made in such a way as to constitute what

is paid the money of the recipient at all or whether the payments

themselves are not merely a series of casual payments or windfalls. But

there seems to me to be another class of cases altogether in which in

particular circumstances payments may be made by one person to

another which can only be explained on the ground that the giver

intends to give, and the recipient expects to receive, with regularity or

expected regularity and from a source the nature of which is to produce

such a payment, an “income” which is in the income-tax sense his own.

I can find nothing in the Indian Income-tax Act to warrant any general

conclusion that it is only in a case in which, if the payment is

discontinued, the recipient will have an immediate right of action

against the payer, that it will be income in his hands in the Indian

income-tax sense. That is to put too limited a construction on the word

Page 31 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

“income.” If the payments are such as to come within the category of

payments which are casual and nonrecurring, then it is to be observed

that the Act itself has taken them out of the category of “income”. The

very fact that the framers of the Indian Income-tax Act found it

necessary by a special clause to exempt casual and non-recurring

receipts from the category of income, profits and gains is itself, in my

opinion, an indication that, but for that exemption, they are to be

regarded as capable of falling within the class of income, profits or

gains under the charging section. If it is to be assumed that ex

hypothesi a casual and nonrecurring payment could never be income,

then, as I see it, the statutory exception of it would be otiose and

unnecessary. Another reason is afforded by Section 4 (3)(ii) of the

Income-tax Act for inducing me to think that so narrow a construction

cannot be placed on the word “income”. If the assessee were right in

saying that the test of “obligation” has in all cases to be applied in

deciding what is or is not “income”, it is difficult to see why voluntary

contributions to a religious or charitable institution (whether applicable

solely to religious or charitable purposes or not) should be specially

excepted by the Act. The conclusion, therefore, I have reached is that,

in construing that word “income” in the Indian Income-tax Act, one has

to ask oneself whether, having regard to all the circumstances

surrounding the particular payments and receipts in question, what is

received is of the character of income according to the ordinary

meaning of that word in the English language or whether it is merely a

casual receipt or mere windfall.”

59In Raghuvanshi Mills Ltd., Bombay Vs. Commissioner of Income-

Tax, Bombay City, (1952) XXII ITR 484 while considering the nature of

receipt of insurance claim for the business loss, the Supreme Court

observed:-

“It is true the Judicial Committee attempted a narrower definition in

Commissioner of Income-tax v. Shaw Wallace & Co., by limiting income

to “a periodical monetary return 'coming in' with some sort of

regularity, or expected regularity, from definite sources” but, in our

opinion, those remarks must be read with reference to the particular

facts of that case. The non-recurring aspect of this kind of receipt was

considered by the Privy Council in The King v. B.C. Fir and Cedar

Lumber Co. and we do not think their Lordships had in mind a case of

this nature when they decided Shaw Wallace & Company's case.”

60In Raja Bahadur Kamakshya Narain Singh of Ramgarh Vs.

Commissioner of Income-Tax, Bihar and Orissa, AIR 1943 Privy Council

Page 32 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

153, it was observed:-

“Income is not necessarily the recurrent return from a definite source,

though it is generally of that character. Income again may consist of a

series of separate receipts, as it generally does in the case of

professional earnings. The multiplicity of forms which “income” may

assume is beyond enumeration. Generally, however, the mere fact that

the income flows from some capital assets, of which the simplest

illustration is the purchase of an annuity for a lump sum, does not

prevent it from being income, though in some analogous cases the true

view may be that the payments, though spread over a period, are not

income, but instalments payable at specified future dates of a purchase

price. Such a case is illustrated by (1903) A.C.299. But, in their

Lordships' judgment, the royalties here are clearly income and not

capital. They are periodical payments for the continuous enjoyment of

the various benefits under the leases. The actual acquisition of the

property in a particular ton of coal at the moment when the lessees

have cut and taken away the coal is only the final stage.”

61In Navinchandra Mafatlal, Bombay Vs. Commissioner of Income

Tax, Bombay City, AIR 1955 S.C. 58, while considering the question

whether capital gain could be treated as income if so provided for under

statutory provisions, it was observed:-

“7. What, then, is the ordinary, natural and grammatical meaning of the

word "income"? According to the dictionary it means "a thing that

comes in." (See Oxford Dictionary, Vol. V. p. 162; Stroud, Vol. II, pp.

14-16). In the United States of America and in Australia both of which

also are English speaking countries the word "income" is understood in

a wide sense so as to include a capital gain. Reference may be made to -

'Eisner v. Macomber', (1919) 252 US 189 (K); -'Merchants' Loan and

Trust Co. v. Smietanka', (1920) 255 US 509 (L) and - 'United States of

America v. stewat', (1940) 311 US 60 (M) and - 'Resch v. Federal

Commissioner of Taxation', (1943) 66 CLR 198 (N). In each of these

cases very wide meaning was ascribed to the word "income" as its

natural meaning.”

62In The Commissioner of Income-Tax, Hyderabad, Deccan Vs. M/s

Vazir Sultan and sons, AIR 1959 SC 814 the issue was whether

compensation for loss of agency was a capital receipt. The compensation

Page 33 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

for loss of agency was held to be a capital receipt on the ground that the

agency was a capital asset in that case. It was observed:-

“35. .....The agency agreements in fact formed a capital asset of the

assessee's business worked or exploited by the assessee by entering into

contracts for the sale of the "charminar" cigarettes manufactured by the

Company to the various customer and dealers in the respective

territories. This asset really formed part of the fixed capital of the

assessee's business. It did not constitute the business of the assessee but

was the means by which the assessee entered into the business

transactions by way of distributing those cigarettes within the

respective territories. It really formed the profit-making apparatus of

the assessee's business of distribution of the cigarettes manufactured by

the Company. If it was thus neither circulating capital nor stock-in-trade

of the business carried on by the assessee it could certainly not be

anything but a capital asset of its business and any payment made by

the Company as and by way of compensation for terminating or

cancelling the same would only be a capital receipt in the hands of the

assessee.”

63In Navnit Lal C. Javeri Vs. K. K.Sen AIR 1965 SC 1375, it was

observed:-

“16. The question which now arises is, if the impugned section treats

the loan received by a shareholder as a dividend paid to him by the

company, has the legislature in enacting the section exceeded the limits

of the legislative field prescribed by the present Entry 82 in List I? As

we have already noticed, the word "income" in the context must receive

a wide interpretation; how wide it should be it is unnecessary to

consider, because such an enquiry would be hypothetical. The question

must be decided on the facts of each case. There must no doubt be

some rational connection between the item taxed and the concept of

income liberally construed. If the legislature realises that the private

controlled companies generally adopt the device of making advances or

giving loans to their shareholders with the object of evading the

payment of tax, it can step in to meet this mischief, and in that

connection, it has created a fiction by which the amount ostensibly and

nominally advanced to a shareholder, as a loan is treated in reality for

tax purposes as the payment of dividend to him. We have already

explainer how a small number of shareholders controlling a private

company adopt this device. Having regard to the fact that the

legislature was aware of such devices, would it not be competent to the

legislature to device a fiction for treating the ostensible loan as the

receipt of dividend? In our opinion, it would be difficult to hold that in

Page 34 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

making the fiction, the legislature has travelled beyond the legislative

field assigned to it by entry 82 in List 1.”

64In Senairam Doongarmall Vs. Commissioner of Income-Tax,

Assam, AIR 1961 SC 1579, the question was whether compensation

received from military authority on account of loss of earning of tea

estate was income or capital receipt. It was observed that quality of

payment was decisive of the character of income and compensation

received was not income. During the discussion following passage from

English judgment in Sutherland Vs. Commissioners of Inland Revenue

(1918) 12 Tax Case 63 was referred:-

“Now it is quite clear that if a source of income is destroyed by the

exercise of the paramount right... and compensation is paid for it, that

that is not income, although the amount of compensation is the same

sum as the total of the income that has been lost.”

65In CIT v. G.R. Karthikeyan, 1993 Supp 3 SCC 222, it was

observed:-

“7. It is not easy to define income. The definition in the Act is an

inclusive one. As said by Lord Wright in Kamakshya Narayan Singh v.

CIT, (1943) 11 ITR 513 (PC) “income ... is a word difficult and perhaps

impossible to define in any precise general formula. It is a word of the

broadest connotation”. In Gopal Saran Narain Singh v. CIT (1935) 3

ITR 237 (PC) the Privy Council pointed out that “anything that can

properly be described as income is taxable under the Act unless

expressly exempted”. This Court had to deal with the ambit of the

expression ‘income’ in Navinchandra Mafatlal v. CIT, (1954) 26 ITR

758. The Indian Income Tax and Excess Profits Tax (Amendment) Act,

1947 had inserted Section 12(B) in the Indian Income Tax Act, 1922.

Section 12(B) imposed a tax on capital gains. The validity of the said

amendment was questioned on the ground that tax on capital gains is

not a tax on ‘income’ within the meaning of Entry 54 of List 1, nor is it a

tax on the capital value of the assets of individuals and companies

within the meaning of Entry 55 of List 1 of the Seventh Schedule to the

Government of India Act, 1935. The Bombay High Court repelled the

attack. The matter was brought to this Court. After rejecting the

Page 35 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

argument on behalf of the assessee that the word ‘income’ has acquired,

by legislative practice, a restricted meaning — and after affirming that

the entries in the Seventh Schedule should receive the most liberal

construction — the Court observed thus:

“What, then, is the ordinary, natural and grammatical meaning of the

word ‘income’? According to the dictionary it means ‘a thing that comes

in’. (See Oxford Dictionary, Vol. V, p. 162; Stroud, Vol. II, pp. 14-16).

In the United States of America and in Australia both of which also are

English speaking countries the word ‘income’ is understood in a wide

sense so as to include a capital gain. Reference may be made to Eisner

v. Macomber, 252 US 189; Merchants’ Loan and Trust Co. v.

Smietunka, 255 US 209 and United States v. Stewart, 311 US 60 and

Resch v. Federal Commissioner of Taxation, 66 CLR 198 (1943). In

each of these cases very wide meaning was ascribed to the word

‘income’ as its natural meaning. The relevant observations of learned

Judges deciding those cases which have been quoted in the judgment of

Tendolkar, J. quite clearly indicate that such wide meaning was put

upon the word ‘income’ not because of any particular legislative

practice either in the United States or in the Commonwealth of

Australia but because such was the normal concept and connotation of

the ordinary English word ‘income’. Its natural meaning embraces any

profit or gain which is actually received. This is in consonance with the

observations of Lord Wright to which reference has already been made.

The argument founded on an assumed legislative practice being thus

out of the way, there can be no difficulty in applying its natural and

grammatical meaning to the ordinary English word ‘income’. As already

observed, the word should be given its widest connotation in view of

the fact that it occurs in a legislative head conferring legislative power.”

(emphasis supplied)

8. Since the definition of income in Section 2(24) is an inclusive one, its

ambit, in our opinion, should be the same as that of the word income

occurring in Entry 82 of List I of the Seventh Schedule to the

Constitution (corresponding to Entry 54 of List I of the Seventh

Schedule to the Government of India Act).”

66In the context of compensation received under the Motor Vehicles

Act, the compensation is either on account of loss of earning capacity on

account of death or injury or on account of pain and suffering. Such

receipt is not by way of earning or profit. Award of compensation is 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

Page 36 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

suffered. In Gobald Motor Service Ltd. and another Vs. R. M. K.

Veluswami and others [AIR 1962 SC 1], it was observed:-

“The same principle was restated with force and clarity by Viscount

Simon in Nance v. British Columbia Electric Railway Co. Ltd., 195l AC

601. There, the learned Lord was considering the analogous provisions

of the British Columbia legislation, and he put the principle thus at p.

614:

"The claim for damages in the present case falls under two

separate heads. First, if the deceased had not been killed, but

had eked out the full span of life to which in the absence of the

accident he could reasonably have looked forward, what sums

during that period would he probably have applied out of his

income to the maintenance of his wife and family?".”

67In Central Bank of India Vs. Ravindra and others [AIR 2001 SC

3095], the question was whether the interest component of the principal

sum could carry further interest. It was observed:-

“44. We are of the opinion that the meaning assigned to the expression

'the principal sum adjudged' should continue to be assigned to

"principal sum" at such other places in Section 34(1) where the

expression has been used qualified by the adjective "such", that is to

say, as "such principal sum". Recognition of the method of capitalisation

of interest so as to make it a part of the principal consistently with the

contract between the parties or established banking practice does not

offend the sense of reason, justice and equity. As we have noticed such

a system has a long established practice and a series of judicial

precedents upholding the same. Secondly, the underlying principle as

noticed in several decided cases is that when interest is debited to the

account of the borrower on periodical rests, it is debited because of its

having fallen due on that day. Nothing prevents the borrower from

paying the amount of interest on the date it falls due. If the amount of

interest is paid there will be no occasion for capitalising the amount of

interest and converting it into principal. If the interest is not paid on the

date due, from that date the creditor is deprived of such use of the

money which it would have made if the debtor had paid the amount of

interest on the date due. The creditor needs to be compensated for

deprivation. As held in Pazhaniappa Mudaliar v. Narayana Ayyar

(supra), the fact situation is analogous to one as if the creditor has

advanced money to the borrower equivalent to the amount of interest

debited. We are, therefore, of the opinion that the expression "the

principal sum adjudged" may include the amount of interest, charged

Page 37 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

on periodical rests, and capitalised with the principal sum actually

advanced, so as to become an amalgam of principal in such cases where

it is permissible or obligatory for the Court to hold so. Where the

principal sum (on the date of suit) has been so adjudged, the same shall

be treated as "principal sum" for the purpose of "such principal sum" -

the expression employed later in Section 34 of C.P.C. The expression

"principal sum" cannot be given different meanings at different places in

the language of same section, i.e. Section 34 of C.P.C.”

68In Drawing and Disbursing Officer vs. Income Tax Officer [Income

Tax Appeal No.495 of 2009 decided on 30

th

March 2011], the Punjab

and Haryana High Court held as under:

“21. Having regard to nature of receipt of compensation as per award

under the M.V.Act, compensation is in the nature of capital receipt for

death or injury and cannot be held to be in the nature of income.

Learned counsel for the revenue also fairly accepts this legal position. It

appears to be for this reason that the said receipt is not sought to be

treated as income.

22. We may now consider the question whether interest on account of

delay in adjudication becomes part of compensation or can be treated

as a separate component of income.

23. Section 171 of the M.V.Act authorizes the Tribunal to award

interest on the claim made under the Act from the date of making the

claim. It reads thus:

“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.”

24. In the context of compensation under the provisions of Land

Acquisition Act, 1894, the Hon'ble Supreme Court in Commissioner of

Income-Tax Vs. Ghanshyam (HUF), (2009) 315 ITR 1 SC held that

interest paid by the Collector under Section 34 of the said Act was part

of compensation and was treated to be at par with the compensation for

purposes of taxability. The relevant observations therein are:-

“…Section 28 of the 1894 Act applies only in respect of the

Page 38 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

excess amount determined by the Court after reference under

Section 18 of the 1894 Act. It depends upon the claim, unlike

interest under Section 34 which depends on undue delay in

making the award. It is true that “interest” is not compensation.

It is equally true that Section 45(5) of the 1961 Act refers to

compensation. But as discussed hereinabove, we have to go by

the provisions of the 1894 Act which awards “interest” both as

an accretion in the value of the lands acquired and interest for

undue delay. Interest under Section 28 unlike interest under

Section 34 is an accretion to the value, hence it is a part of

enhanced compensation or consideration which is not the case

with interest under Section 34 of the 1894 Act…”

69We have a very erudite and lucid order passed by the Income Tax

Appellate Tribunal, Ahmedabad Bench in the case of Urvi Chirag Sheth

vs. Income-tax Officer, Ward 5(2)(3), Ahmedabad reported in [2016] 70

taxmann.com 33(Ahmedabad-Trib.), wherein the following has been

observed:

“5. As we have noted earlier in this order, the assessee had to go right

upto Hon’ble Supreme Court to have her compensation claim accepted.

What ought to have been paid to her soon after the accident, was

eventually paid in full after twenty one years of the tragic incident.

Hon’ble Supreme Court, vide judgment dated 26th April 2011,

concluded that “Considering all this, we grant compensation of Rs 15

lacs (Rupees fifteen lacs) with interest at the rate of 8% on the

enhanced compensation from the date of filing the claim petition before

MACT (Motor Accidents Claims Tribunal) till the date of realization”.

The payment made to the assessee, therefore, 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 as are specifically taxable under section 45. Hon'ble

Supreme Court has, in the case of Padmaraje R. Kadambande vs. CIT

[(1992) 195 ITR 877 (SC)], observed that, ". . . . we hold that the

amounts received by the assessee during the financial years in question

have to be regarded as capital receipts and, therefore, are not income

within meaning of s. 2(24) of the Income Tax Act." [Emphasis

supplied]. This clearly implies, as 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 of the Income Tax Act. The accident

compensation is thus not taxable as income of the assessee. What is

Page 39 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

termed as interest also is of the same character and it 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 of interest. Right now, however, we are

dealing with a situation in which the interest is awarded by Hon’ble

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 MACT, it would have been Rs 15

lacs 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. Viewed thus, the amount of compensation received at this

point of time, whichever way is it 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. In the case of CIT

Vs Oriental Insurance Co Ltd [(2012) 211 Taxman 369 (All)], Hon’ble

Allahabad High Court has, inter alia, held that “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 an award cannot be termed as income to the legal heirs or to

the victim himself”. Their Lordships have also observed, referring to a

series of judicial precedents on the issue, that “if interest 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”. Essentially, this conclusion supports the school of thought that

when principal transaction, i.e. accident compensation for the delayed

payment of which the 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. Touching a

different chord but coming to the rescue of the assessee, Hon’ble Punjab

& Haryana High Court, in the case of CIT Vs B Rai [(2004) 264 ITR 617

(P&H)], draws a line of demarcation between the interest granted

under the statutory provisions 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 Income Tax Act, 1961. As Their

Lordships stated, in so many words, “where interest………is to be paid

is in the discretion of the court, as in the present case, the said interest

Page 40 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

would not amount to ‘income’ for the purposes of income tax”. That

precisely is the situation before us as well.

6. Revenue, however, does not even challenge these propositions, and,

in our considered view, rightly so; it is only on the scope of provisions

of Section 145A(b) and section 56(2)(viii) that they rest their case. It is,

therefore, perhaps only appropriate to appreciate the scope of these

provisions and take a look at the facts surrounding introduction of these

provisions vide the Finance Act 2009.

7. Ironically, the statutory provisions being pressed into service to bring

this income to tax, were provisions meant to give relief to the assessee.

When these provisions were introduced, the Memorandum Explaining

the Provisions of the Finance Bill 2009 had this to say:

Rationalization of provisions for taxation of interest received on

delayed compensation or enhanced compensation

The existing provisions of Income-tax Act provide that income

chargeable under the head “Profits and gains of business or profession”

or “Income from other sources”, shall be computed in accordance with

either cash or mercantile system of accounting regularly employed by

the assessee. Further, the Hon’ble Supreme Court, in the case of Rama

Bai Vs. CIT (181 ITR 400) has held that arrears of interest computed on

delayed or enhanced compensation shall be taxable on accrual basis.

This has caused undue hardship to tax payers. With a view to

mitigating the hardship, it is proposed to amend section 145A to

provide that the interest received by an assessee on compensation or

enhanced compensation shall be deemed to be his income for the year

in which it is received, irrespective of the method of accounting

followed by the assessee. Further, it is proposed to insert clause (viii) in

sub-section (2) of section 56 to provide 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. This amendment will take

effect from 1st April, 2010 and shall accordingly apply in relation to

assessment year 1998-99 and subsequent assessment years. [Clauses

26,27,56]

8. In the case of Rama Bai (supra), which is raison d'être for this

amendment in law, Hon’ble Supreme Court, speaking through Hon’ble

Justice S Ranganathan- as he then was, one of the most illustrious

former Presidents of this Tribunal, had observed that “the interest

cannot be taken to have accrued on the date of the order of the Court

granting enhanced compensation but has to be taken as having accrued

year after year from the date of delivery of possession of the lands till

the date of such order”. What is significant, however, that taxability of

interest was not in dispute in the said case; the only dispute was the

Page 41 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

year in which the income should be taxed. The amendment in law,

therefore, deals with the point of time when an income is it to be

taxable. It does not bring to tax an income which was, until the point of

time when amendment was made, not taxable earlier. Section 145A, it

is important to bear in mind, deals with the method of accounting on

cash or mercantile basis which again has its focus on the point of time

when an income is taxable rather than taxability of income itself. When

an income is not taxable, section 145A has no relevance. It is in this

backdrop that we can take a look at Section 145A which is as follows:

“Section 145A: Method of accounting in certain cases—

Notwithstanding anything to the contrary contained in section

145,—

(a)…………………………..(not relevant for our purposes)

(b) 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.”

9. Section 145A starts with a non obstante clause which restricts the

scope of Section 145 dealing with the method of accounting. It is not a

charging provision. The only impact it has on taxability of an income is

its timing of taxability. What is not taxable is not made taxable under

section 145A(b) but what is taxable under the mercantile method of

accounting, i.e. on accrual basis, is made taxable on cash basis of

accounting, i.e. at the point of time when interest is actually received.

Nothing else needs to read into this provision, and the memorandum

explaining the provision of Finance Bill 2009, as reproduced earlier,

makes that amply clear. As for the provisions of Section 56(2)(viii), it is

only an enabling provision, as unambiguously made clear in the above

memorandum as well, to bring interest income to tax in the year of

receipt rather than in the year of accrual. Section 56(2)(viii) provides

that……”incomes, shall be chargeable to income tax under the head

‘income from other sources’, namely ….(viii) income by way of interest

received on compensation or enhanced compensation referred to in

clause (b) of Section 145A”. The starting point of this exercise is

income, and it is only when the receipt is in the nature of an income,

that the classification of income under a particular category arises. In

other words, when interest received by the assessee is in the nature of

income, such interest can be taxed under section 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

this 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 specified in Section 14, items A to E”, and then, in the

subsequent provision, i.e. Section 56(2), proceeds to set out an

Page 42 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

illustrative, rather than exhaustive list of, such “incomes”. Clearly,

unless a receipt is not an income, there is no occasion for the provisions

of Section 56(1) or 56(2) coming into play. Section 56 does not decide

what is an income. What it holds is that if there is an income, which is

not taxable under any of the heads under Section 14, i.e item A to E, it

is taxable under the head ‘income from other sources’. The receipt being

in the nature of income is a condition precedent for Section 56 coming

into play, and not vice versa. To suggest that since an item is listed

under section 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 very approach of the authorities below is devoid

of legally sustainable merits. The authorities below were thus

completely in error in bringing the interest awarded by Hon’ble

Supreme Court to tax. The question of deduction under section 57(iii),

given the above conclusion, is wholly irrelevant. We vacate this action

of the Assessing Officer, and disapprove the CIT(A)’s action of

confirming the same. Grievance of the assessee is thus upheld.

10. As we part with the matter, we must say that, as fellow citizens, we

are deeply anguished to take note of the long journey that the assessee

had to undertake to get her dues and then to fight this unjust income

tax demand on her. In order to ensure that others do not have to tread

the same arduous path- at least with respect to the tax demand, and to

bring an element of certainty, we would suggest that the Central Board

of Direct Taxes may as well take a conscious call on issuing appropriate

administrative instructions in this regard and ensuring that what was

brought as a measure of relief to the taxpayers is not used, by the field

officers, as a source of taxation. Such a step certainly cannot mitigate

the pain of an accident victim but it can probably help in ensuring that

hardships of the accident victim are not further compounded, and that’s

the least that a responsive tax administration, like the one we

fortunately have at present, can do. We must also place on record that

fact that despite smallness of amount involved, learned representatives

have rendered valuable assistance in this case, and that we deeply

appreciate their assistance.”

70In the case of Managing Director, Tamil Nadu State Transport

Corpn. (Salem) Ltd vs. Chinnadurai reported in [2016] 70 taxmann.com

53 (Madras), the Madras High Court held as under:

“13. The question is whether the provisions of the Income Tax Act

1961, and more specifically, whether the compensation awarded by the

Motor Accident Claims Tribunal to the victim can be classified as a

taxable income under the Income Tax law?. The answer to this question

in the opinion of this Court is in the negative. Compensation cannot be

Page 43 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

categorized or even described as income as it has already been stated

that the intention of the legislature in awarding compensation to the

victims of Motor Accident cases is to restitute them and rehabilitate

them.

14. The Income Tax Department appears to have issued a circular dated

14.10.2011 whereby deduction of Income Tax has been ordered on the

award amount and the interest accrued on the deposits made under the

order of the Court in Motor Accident Cases. Taking serious view of this

circular, the Division Bench of the Himachal Pradesh High Court took

Suo-Moto cognizance of the matter and considered the same as a Public

Interest Litigation in the judgment reported in Court on its Motion Vs.

H.P.State Co-operative Bank Ltd & Ors 2014 SCC Online HP 4273 and

has quashed the circular and in an elaborate and well considered

judgment, His Lordship the Hon'ble Chief Justice Mansoor Ahmed Mir

has held that:

“13.While going through the said provisions of law, one comes to

the inescapable conclusion that the mandate of the said

provisions does not apply to the accident claim cases and the

compensation awarded under the Motor Vehicles Act cannot be

said to be taxable income. 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.

14. Chapters X and XI of the Motor Vehicles Act, 1988 provides

for grant of compensation to the victims of a vehicular accident.

The Motor Vehicles Act has undergone a sea change and the

purpose of granting compensation under the Motor Vehicles Act

is to ameliorate the sufferings of the victims so that they may be

saved from social evils and starvation, and that the victims get

some sort of help as early as possible. It is just to save them from

sufferings, agony and to rehabilitate them. We wonder how and

under what provisions of law the Income Tax Authorities have

treated the amount awarded or interest accrued on term deposits

made in Motor Accident Claims Cases as income. Therefore, the

said Circular is against the concept and provisions referred to

hereinabove and runs contrary to the mandate of granting

compensation.

...23. Having said so, the Circular, dated 14.10.2011, issued by

the Income Tax Authorities, whereby deduction of income Tax

has been ordered on the award amount and interest accrued on

the deposits made under the orders of the Court in Motor

Accident Claims Cases, is quashed and in case any such

deduction has been made by respondents, they are directed to

refund the same, with interest at the rate of 12% from the date

of deduction till payment, within six weeks from today.”

Page 44 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

15. Following the Division Bench Judgment, a learned Single Judge of

the Punjab and Haryana High Court, in a recent decision, in New India

Assurance Company Ltd. Vs.Sudesh Chawla and others, CR.No.430 of

2015 (O&M), reiterating the reasoning given by the Division Bench of

Himachal Pradesh High Court, has opined that award of compensation

is on the principle of restitution to place the claimant in the same

position in which he would have been loss of life or injury has not been

suffered and accordingly held that the orders calling upon the

Insurance Company to pay TDS/deduct TDS on the interest part are not

sustainable.

16. If we look at other jurisdictions like Australia, Unites States and

United Kingdom, even there, the matters where a person has suffered

an injury or there has been a loss of life and a compensation has been

paid in lieu of that, then it has been held by the Courts that there

cannot be any Tax deduction on such compensation. The underlying

basis behind this is that a person who suffers a loss cannot be asked to

part with the solatium he receives since it is the only remedy he has

been provided with by the law.

17. If there is a conflict between a social welfare legislation and a

taxation legislation, then, this Court is of the view that a social welfare

legislation should prevail since it subserves larger public interest. The

Motor Vehicle Act is one such legislation which has been passed with a

benevolent intention for compensating the accident victims who have

suffered bodily disablement or loss of life and the Income Tax Act

which is primarily intended for Tax collection by the State cannot put

spokes in the effective and efficacious enforcement of the Motor

Vehicles Act. In fact, if one might deeply analyse, it could be seen that

there is no direct conflict between any provisions of the Income Tax Act

and the Motor Vehicles Act and it is only by the interpretation of the

provisions the concept of compulsory payment of TDS has crept into the

realm of compensation payment in Motor Vehicle Accident cases.

18. Hence, with due respect I am unable to concur with the findings of

the Karnataka High Court, the Chattisgarh High Court and this Court

cited by the Revision Petitioner. This Court is of the view that the

Division Bench judgment of the Himachal Pradesh high Court and the

judgment of the Single Judge of the Punjab and Haryana High Court lay

down the right law and hence, this Court arrives at the conclusion that

the compensation awarded or the interest accruing therein from the

compensation that has been awarded by the Motor Accident Claims

Tribunal cannot be subjected to TDS and the same cannot be insisted to

be paid to the Tax Authorities since the compensation and the interest

awarded therein does not fall under the term 'income' as defined under

the Income Tax Act, 1961.

Page 45 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

19. Therefore, this Court directs that the Petitioner Corporation cannot

deduct any amount towards TDS and the same shall also be deposited

in addition to the amount that has already been deposited to the credit

of M.C.O.P.No.879 of 2006, on the file of the Motor Accident Claims

Tribunal, Additional District Judge, Fast Track Court, Dharmapuri,

within a period of four weeks from the date of receipt of a copy of this

order and the Respondent is entitled to take appropriate steps in a

manner known to law to withdraw the amount.”

71A Division Bench of the Allahabad High Court in the case of

Commissioner of Income-tax vs. Oriental Insurance Co. Ltd. reported in

[2012] 27 taxmann.com 28 (All.) held as under:

“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 (Pvt.) Ltd. Vs.

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

Page 46 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

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

Page 47 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

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 All India Reporter Ltd. Vs. 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 Commissioner of Income Tax Vs. Chiranji Lal Multani Mal Rai

Bahadur (P.) Ltd. (supra), Ghaziabad Development Authority Vs. Dr.

N.K. Gupta (supra), Commissioner of Income-tax Vs. H.P. Housing

Board (supra), Commissioner of Income-tax Vs. Sahib Chits (Delhi)

(Pvt.) 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.”

72In the last, we take notice of a very recent pronouncement of the

Bombay High Court in the case of Shri Rupesh Rashmikant Shah vs.

Union of India and others [Writ Petition No.2902 of 2016 decided on 8

th

August 2019], wherein the following has been held:

“57. We, therefore, hold that the interest awarded in the motor accident

claim cases from the date of the Claim Petition till the passing of the

award or in case of Appeal, till the judgment of the High Court in such

Appeal, would not be exigible to tax, not being an income. This position

would not change on account of clause (b) of section 145A of the Act as

it stood at the relevant time amended by Finance Act, 2009 which

provision now finds place in sub-section (1) of section 145B of the Act.

Neither clause (b) of section 145A, as it stood at the relevant time, nor

clause (viii) of sub-section (2) of section 56 of the Act make the interest

chargeable to tax whether such interest is income of the recipient or

not. Section 194A of the Act is only a provision for deduction of tax at

source. Any provision for deduction of tax at source in the said section

would not govern the taxability of the receipt. The question of

deduction of tax at source would arise only if the payment is in the

nature of income of the payee.

58. We are not oblivion to erstwhile clause (ix) of sub-section (3) of

section 194A or the newly amended clauses (ix) and (ixa) thereof

Page 48 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

substituting original clause (ix) w.e.f. 1.6.2015 by Finance Act, 2015.

Subsection (1) of section 194A provides for deduction of tax at source

upon payment of any income by way of interest. Sub-section (3) of

section 194A contains exclusion clauses from the purview of sub-section

(1). Clause (ix) contained in sub- section (3) prior to amendment

pertained to income credited or paid by way of interest on the

compensation amount awarded by the Motor Accident Claims Tribunal

where such amount did not exceed Rs.50,000/-. In substitution of this

provision, clause (ix) now provides that the provision of sub-section (1)

will not apply to such income credited by way of interest on the

compensation awarded by the Motor Accident Claims Tribunal. Clause

(ixa) virtually retains the original provision of unamended clause (ix).

The learned ASG would, therefore, contend that by virtue of these

provisions, requirement of deducting tax at source on interest income

would not arise only if the same does not exceed Rs.50,000/- in a

financial year or where such income is merely credited. In other words,

at the time of payment of interest, the provision for deduction of tax at

source would kick in.

59. So far as the plain meaning of section 194A(1) read with erstwhile

clause (ix) and substituted clauses (ix) and (ixa) of sub- section (3) is

concerned, there can be no doubt or dispute. However, the

fundamental question is does section 194A make the interest income

chargeable to tax if it otherwise is not. The answer has to be in the

negative. The provision for deduction of tax at source is not a charging

provision. It only makes deduction of tax at source on payment of same,

which, in the hands of payee, is income. If the payee has no liability to

pay such income, the liability to deduct tax at source in the hands of

payer cannot be fastened. In other words, the provision of deducting

tax at source cannot govern the taxability of the amount which is being

paid.

60. In the decision of the Gujarat High Court in the case of Hansaguri

Prafulchandra (supra), the Court had no occasion to decide the

taxability of interest on compensation or enhanced compensation of

motor accident cases. This was also the position in the case of decision

of this Court in the Gauri Deepak Patel & ors. (supra).

61. We may clarify that these observations and conclusions would apply

to interest on compensation or enhanced compensation awarded by the

Motor Accident Claims Tribunal or High Court from the date of the

Claim Petition till passing of the award or the judgment. Further

interest which may be paid for delay in depositing the awarded

amount, 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.”

Page 49 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

73The upshot of the aforesaid discussion is that the compensation

received under the Motor Vehicles Act is either on account of loss of

earning capacity on account of death or injury or on account of pain and

suffering and such receipt is not by way of earning or profit. The award

of compensation is on the principle of restitution to place the claimant in

the same position in which he would have been as the loss of life or

injury would not have been suffered.

74Our final conclusion may be summarized as under:

[a]The interest awarded by the Motor Accident Claim Tribunal

u/s 171 of the Motor Vehicles Act 1988 is not taxable under the

Income Tax Act, 1961.

[b]The interest awarded in the motor accident claim cases

from the date of the Claim Petition till the passing of the award, or

in the case of Appeal, till the judgment of the High Court in such

appeal, would not be exigible to tax, not being an income. This

position would not change on account of clause (b) of Section

145A of the Act as it stood at the relevant time amended by

Finance Act, 2009, which provision now finds place in sub-section

(1) of Section 145B of the Act. Neither clause (b) of Section 145A,

as it stood at the relevant time, nor clause (viii) of sub-section (2)

of Section 56 of the Act make the interest chargeable to tax,

whether such interest is income of the recipient or not. Section

194A of the Act is only a provision for deduction of tax at source.

Any provision for deduction of tax at source in the said section

would not govern the taxability of the receipt. The question of

deduction of tax at source would arise only if the payment is in

the nature of income of the payee.

Page 50 of 51

C/SCA/4800/2021 JUDGMENT DATED: 05/04/2022

[c] The Insurance Companies or the owners of the motor vehicles

depositing the requisite amount in due compliance with the

awards of the Motor Accident Claims Tribunals shall deposit the

full amount with the Tribunal and shall not deduct tax u/s 194A

of the Income Tax Act on the interest awarded by the Motor

Accident Claims Tribunal.

75We may clarify that the aforesaid observations and conclusions

would apply to interest granted on compensation or enhanced

compensation awarded by the Motor Accident Claims Tribunal or the

High Court from the date of the Claim Petition till the passing of the

award or the judgment.

76Further, the interest that may be paid for the delay in depositing

the awarded amount, 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.

77The matter shall now be notified along with the other allied

matters for further hearing on other factual issues arising in the present

matter.

(J. B. PARDIWALA, J)

(NISHA M. THAKORE,J)

CHANDRESH

Page 51 of 51