In case of bodily injury or death caused due to a motor accident, the victim (or his legal heirs) are entitled to compensation under the Motor Vehicles Act, 1988. A claim has to be lodged with the Motor Accidents Claim Tribunal (MACT), which awards compensation to the victim or his family members. Often, interest is also awarded on such compensations, on account of the delays in finalisation of the compensation. Is such claim or interest on such claim taxable?
What is the nature of such a compensation? Basically, the objective of the compensation is to ameliorate the sufferings of motor accident victims. The compensation is awarded to mitigate the impact of the misery on account of the accident, so that the injured or the dependents do not have to face the vagaries of life on account of discontinuance of the income earned by the victim. The compensation is thus meant as a solace to the victim or his family members for the suffering caused due to the motor accident. So far as the recipient of the compensation is concerned, it is in the nature of a receipt meant to relieve a personal loss.
The definition of income under the tax law does not specifically cover such compensations. However, the definition is not a comprehensive definition, and therefore the question does arise whether such compensation can be regarded as income. Compensation received for land acquisition is certainly treated as an income. However, in that case, there is a transfer of a capital asset (land) to the government, in exchange for which compensation is received, and hence it is liable to tax as capital gains. In the case of a motor accident compensation, there is no transfer of any capital asset, only personal suffering, and therefore that logic cannot apply.
Such compensation is really meant to substitute the loss of potential income of the victim, and in most cases is in fact determined as a multiple of the victim’s income. Under tax laws, it is well settled that if a receipt is meant to substitute a source of income, it is a capital receipt. Capital receipts are generally not taxable as income, unless they are specifically roped in into the definition of income. As such compensations is not specifically included, they are therefore not taxable. This view has been confirmed by the High Courts of Allahabad, Himachal Pradesh and Madras in recent years.
Is the interest awarded taxable? Can the interest be regarded as an income? Normally, interest received by a person is treated as income. In land acquisition compensation cases, the Supreme Court has held that the interest paid on delayed payment of land acquisition compensation is taxable as the income of the recipient. However, in cases of motor accident compensation the interest is awarded because the claims are awarded with some delay, which may be due to: late filing of the compensation claim, investigation, adjudication of claim and various other factors, or because such claims are challenged before superior courts.
Therefore, the interest awarded in a motor accident claim is really an enhancement of the claim to compensate for delays in awarding and finalising the claim. It is, thus, a part and parcel of the claim unlike in the case of a land acquisition compensation where there are specific provisions under the Land Acquisition Act for payment of interest on delayed payment of compensation. The character of the interest in motor accident cases is therefore the same as the compensation, that is, a personal receipt to alleviate the suffering of the victims.
Therefore, the High Courts of Allahabad, Himachal Pradesh and Madras have taken a view that such interest on motor accident compensation is not taxable as income. However, the provisions relating to tax deduction at source (TDS) on interest provide that no TDS is required to be deducted on interest on motor accident claims up to Rs50,000 paid during a year.
Does this mean that such interest is taxable, as tax is otherwise required to be deducted at source on such interest? It is clear that provisions of TDS do not necessarily govern the manner of taxation of an income. There are various instances where tax deduction is required, but the income is not subjected to tax. Therefore, the mere fact that TDS may be deducted does not mean that the interest is taxable.
Does the fact that there is no specific exemption for such compensation, or interest, affect the taxability given the fact that there are specific exemptions for life insurance policy maturity proceeds, workmen’s compensation and compensations for disasters? For a receipt to be taxed, it has to first qualify as an income under the tax laws. Only if it qualifies as an income does the question of an exemption arise. The mere fact that there are specific exemptions for items, which may even otherwise not be incomes, does not affect this position. Such exemptions may be by way of abundant precaution, but that does not make all other receipts chargeable to tax.
Therefore, receipts of compensation and interest under motor accident claims should not be taxable. However, given the amount of litigation that this has generated, adding to the woes of persons already suffering due to motor accidents, should the Central Board of Direct Taxes not come out with a circular, at least on humanitarian grounds, clarifying that such items are not taxable?
Gautam Nayak is a chartered accountant.