Urvi Chirag Sheth vs. ITO (ITAT Ahmedabad)

DATE: May 31, 2016 (Date of pronouncement)
DATE: July 4, 2016 (Date of publication)
AY: 2012-13
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S. 56(2)(vii)/ 145A: Interest awarded on compensation for personal disability does not have the character of "income" and cannot be taxed. CBDT requested to issue instructions to mitigate hardship of accident victims

The assessee is an unfortunate victim of a motor accident. On 18th May 1990, she was travelling in a car, which met a serious accident, leaving her permanently disabled, hat is termed by the competent authority, at ninety percent level. 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. As if this long struggle of 21 years in the judicial process was not enough, the destiny had more in store for her. It is this settlement of the accident compensation claim that has led to a new round of litigation- this time about taxability of a component of compensation, i.e. interest component. Mercifully, there is no, and there cannot be, any dispute about the fact that the compensation for disability cannot be subject to tax, but the stand of the Assessing Officer is 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. In appeal, learned CIT(A) has confirmed this stand. On appeal by the assessee HELD allowing the appeal:

(i) Section 145A starts with a non obstante clause which restricts the scope of Section 145 dealing with the method of accounting. It is not a charging provision. The only impact it has on taxability of an income is its timing of taxability. What is not taxable is not made taxable under section 145A(b) but what is taxable under the mercantile method of accounting, i.e. on accrual basis, is made taxable on cash basis of accounting, i.e. at the point of time when interest is actually received. Nothing else needs to read into this provision, and the memorandum explaining the provision of Finance Bill 2009, as reproduced earlier, makes that amply clear. As for the provisions of Section 56(2)(viii), it is only an enabling provision, as unambiguously made clear in the above memorandum as well, to bring interest income to tax in the year of receipt rather than in the year of accrual. Section 56(2)(viii) provides that……”incomes, shall be chargeable to income tax under the head ‘income from other sources’, namely ….(viii) income by way of interest received on compensation or enhanced compensation referred to in clause (b) of Section 145A”. The starting point of this exercise is income, and it is only when the receipt is in the nature of an income, that the classification of income under a particular category arises. In other words, when interest received by the assessee is in the nature of income, such interest can be taxed under section 56 (2)(viii). Section 56(1) makes this aspect even more clear when it states that “Income of every kind, which is not to be excluded from the total income under this Act, shall be chargeable to income tax under the head “income from other sources”, if it is not chargeable to income tax under any of the heads specified in Section 14, items A to E”, and then, in the subsequent provision, i.e. Section 56(2), proceeds to set out an illustrative, rather than exhaustive list of, such “incomes”. Clearly, unless a receipt is not an income, there is no occasion for the provisions of Section 56(1) or 56(2) coming into play. Section 56 does not decide what is an income. What it holds is that if there is an income, which is not taxable under any of the heads under Section 14, i.e item A to E, it is taxable under the head ‘income from other sources’. The receipt being in the nature of income is a condition precedent for Section 56 coming into play, and not vice versa. To suggest that since an item is listed under section 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse. The very approach of the authorities below is devoid of legally sustainable merits. The authorities below were thus completely in error in bringing the interest awarded by Hon’ble Supreme Court to tax. The question of deduction under section 57(iii), given the above conclusion, is wholly irrelevant. We vacate this action of the Assessing Officer, and disapprove the CIT(A)’s action of confirming the same. Grievance of the assessee is thus upheld.

(ii) As we part with the matter, we must say that, as fellow citizens, we are deeply anguished to take note of the long journey that the assessee had to undertake to get her dues and then to fight this unjust income tax demand on her. In order to ensure that others do not have to tread the same arduous path- at least with respect to the tax demand, and to bring an element of certainty, we would suggest that the Central Board of Direct Taxes may as well take a conscious call on issuing appropriate administrative instructions in this regard and ensuring that what was brought as a measure of relief to the taxpayers is not used, by the field officers, as a source of taxation. Such a step certainly cannot mitigate the pain of an accident victim but it can probably help in ensuring that hardships of the accident victim are not further compounded, and that’s the least that a responsive tax administration, like the one we fortunately have at present, can do.

See Also Tamil Nadu State Transport Corporation (Salem) Ltd vs. Chinnadurai (Madras High Court)

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