The Income Tax Appellate Tribunal, Ahemdabad in a recent ruling held that the interest amount received by the assessee as part of enhanced accident compensation is not chargeable to income tax since it is a Capital receipt. The question involved in this appeal was “whether the learned CIT(A) was justified in upholding the addition of Rs 7,47,143 on account of interest awarded to the assessee for the AY 2012-13, as a part of enhanced accident compensation, by Hon’ble Supreme Court.”
The assessee was permanently disabled due to a motor accident. She claimed a compensation of Rs 15,00,000 for this tragic loss of her physical abilities. She did eventually get it but she had to knock the doors of Hon’ble Supreme Court, and it was finally on 26th April 2011 that her claim was upheld. The Assessing Officer took a stand that that interest component on compensation awarded by Hon’ble Supreme Court is taxable as it is covered under section 145A(b) r.w.s. 56(viii) of the Act. On appeal, the Commissioner of Income Tax (Appeals) sustained the said order by holding that the amount received by the assessee is chargeable to income tax under the head “Income from Other Sources.”
Being dissatisfied by the order, the assessee knocked on the door of the Appellate Tribunal. The Tribunal while deciding the case considered the fact that the assessee got the verdict in her favor as a result of a long term legal battle. Supreme Court in its judgment observed 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”. In the light of the above observation of the Supreme Court, the Tribunal pointed out that “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 is specifically taxable under section 45.”
It was further observed that “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 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, the interest payment is to factor for fall in the 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 in 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.”
Read the full text of the order here.
