No income tax on interest from accident compensation: High Court

Shah, a resident of South Mumbai, was crossing a road when a car hit him in 1978. He remained in coma for six months, and after regaining consciousness, he learnt that the accident had left him with severe injuries including permanent brain damage.

His parents approached the Motor Vehicles Accident Claim Tribunal seeking that Oriental Insurance, the company that had insured the car, be directed to pay compensation.

His plea was allowed but the insurance company went in appeals, first to the high court and then to the Supreme Court. The Supreme Court finally in 2015 upheld the Bombay High Court’s ruling that awarded Shah a compensation of 39.92 lakh.

The High Court also ruled that Shah be paid an interest of 9% on this principal amount of the compensation since the time he filed the insurance claim.

After the apex court upheld it, Shah received 1.42 crore in total in compensation.

This amount was arrived at with the Income Tax department deducting 30% tax at source’ on the amount of interest.

When Shah filed income tax returns and declared the compensation interest received, he was further served with a notice to pay additional tax of 37.97 lakh.

Shah then approached the high court challenging not just the fresh tax notice but also arguing that the department should not have deducted tax on the interest amount that he had received as part of compensation.

Under the Motor Vehicles Act, the principal amount of compensation is not taxable, so the interest accrued on the same should not have been taxed either.

As per shah,The interest too was compensatory in nature, its rate decided after taking into account factors such as the passage of time, inflation, etc.

The Income Tax Department, however, contended that the interest being distinct from the principal amount of compensation is taxable as income from an additional source.

The High Court held that the interest earned by Shah for the period between filing of the claim and awarding of compensation by the high court in 2014 should not have been considered as income, and therefore, not taxed.

The bench also said the IT Department assessor made a mistake in issuing the further tax liability notice to Shah. It sent back the notice, directing the department to re-assess the same.

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