[Opinion] Is TDS attracted on interest component included in compensation awarded by Motor Accidents Claims Tribunal?

V. K. Subramani – [2022] 143 taxmann.com 349 (Article)

A receipt whether chargeable to income-tax, continues to be a bone of contention between the taxpayers and tax gatherers. While the taxpayers look for relief from tax by citing one reason or the other, the tax administration too at times resort to tax some receipts as income by over-reach. To further add to the misery, TDS provisions also have their part to play. Recently, in Circular 12 of 2022 a reference of section 195 and contrasting it when tax is deductible at source under section 194R shows that the tax administration, is trying to interpret the law beyond its domain. In this background, this refresher takes note of a writ before the Gujarat High Court in the case of Oriental Insurance Co. Ltd v. Chief CIT [2022] 138 taxmann.com 88 /287 Taxman 522/ 445 ITR 300 (Guj).

Oriental Insurance case:

The insurer in this case had to pay claim in an accident case allowed by the Motor Accidents Claims Tribunal of Rs. 16.28 lakhs together with interest thereon @ 8% per annum from the date of petition (i.e. making the claim) and till realization of the amount along with proportionate costs of the petition. The TDS component out of the said amount was Rs.2.22 lakhs. The entire amount alongwith TDS was deposited with the court. The claimant preferred a Miscellaneous Application with a prayer for the release of the amount of TDS. Subsequently, the civil court passed an order partly allowing the claim that the amount of TDS must be returned to insurer (claimant) who in turn had to pay the same to the income-tax department. It directed the insurer to produce the proof of remittance of TDS to the court.

Factually, the amount was initially remitted to court in May, 2017 and the TDS amount after refund from the court was remitted to Income-tax Department in March, 2019. The Q1 correction statement for the financial year 2017-18 when filed it led to interest under section 201(1A) of Rs.69,741. The insurer filed an application for waiver of additional payment by way of interest and hence, a writ was filed.

One of the prominent issues for which relief was sought in the writ was to lay down a fixed procedure to deal with the TDS issue in Motor Accident Claim Petition (MACP) by explaining the correct position of law as regards the liability of the insurance company to deduct TDS and whether to deposit the same with the Tribunal or with the Income-tax Department.

Legal Provisions:

Before adverting to the decision of the court, it is beneficial to take note of the applicable legal provisions.

Section 194A(3)(ixa) was inserted with effect from 1st June 2015. The effect of the amendment is: Section 194A(3) says that the provisions of sub-section (1) shall not apply viz. (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 Rs.50,000;

As per the aforesaid amendment to section 194A, the TDS has to be deducted out of the actual payment of interest on compensation. The rate of TDS is 10% if the payee had produced the PAN Card before the payment and 20% if the PAN Card had not been produced.

Section 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.

Section 56(2)(viii) income by way of interest received on compensation or on enhanced compensation referred to in sub-section (1) of section 145B.

Section 2(28A) which defines the term “interest” which 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 utilized.

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