Punjab and Haryana High Court rules that TDS on interest on compensation awarded to the claimant cannot be deducted by Insurance Company

Punjab and Haryana High Court rules that TDS on interest on compensation awarded to the claimant cannot be deducted by Insurance Company

It cited the ruling of the Bombay High Court to reach the decision

The Punjab and Haryana High Court has ruled that an insurance company is not required to deduct TDS on the interest on compensation awarded to the claimant till 01 June 2015. This applies, even if the interest amount exceeds Rs.50,000 per claimant in a financial year.

The single judge bench of Justice Arvind Singh Sangwan reiterated that since the Income Tax Act, 1961 was not a charging provision it did not make the interest income chargeable to tax.

The Motor Accidents Claims Tribunal (MACT) passed an award granting compensation along with interest to the claimants who met with an accident. The petitioner-insurance company, New India Assurance Company Limited, was directed to deposit the TDS deducted from the amount of interest paid on the compensation granted to the claimants.

Aggrieved by the order, the petitioner filed a revision petition before the Punjab and Haryana High Court.

The Income Tax department submitted before the court that the interest accrued on the compensation awarded by MACT was taxable. The department argued that the Madhya Pradesh High Court in the Oriental Insurance Company Limited vs Kala Bai and Ors case held that tax was payable on the interest accrued on the amount of compensation awarded under the Motor Vehicles Act, 1988. This was if the interest was not more than Rs.50,000 per claimant per financial year.

The IT Act provides that any person, not being an individual or a Hindu undivided family, who pays 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) deduct income tax. Also, on the income paid by way of interest on the compensation amount awarded by MACT, no TDS is to be deducted. Herein, the amount should not exceed Rs.50,000.

The court observed that the Bombay High Court in the Rupesh Rashmikant Shah vs Union of India case had held that the interest awarded in the motor accident claim cases from the date of the claim petition till the passing of the award, or till the date of passing of the judgment by the court (in case of an appeal), would not be eligible to tax since it did not constitute an income.

The Bombay High Court had further ruled that though in view of the amended Finance Act, 2015 w.e.f. 01 June 2015, the insurance company would be required to deduct TDS on interest income if the same exceeded Rs.50,000. However, it did not make the interest income chargeable to tax if it was not taxable since it was not a charging provision.

Thus, in the present case, the high court set aside the orders and remanded the matter back to MACT with a direction that if the interest on compensation was paid prior to 01 June 2015, the petitioner could seek a refund of the TDS paid to the revenue department.

It could file a revised Income Tax Return (ITR) and the petitioner would be required to pay the amount of the TDS to the claimants. The court, however, added that where the interest on the compensation was paid after June 2015, the petitioner would be required to pay TDS to the revenue department on securing 'Form 15-G' of Rule 29-C of the Income Tax Act/Rules.