High Court issues notice to Centre for interest payable in accident claims

The Bombay High court has issued notice to the attorney general seeking the Centre’s response on a petition challenging tax on interest paid on compensation to accident victims. The direction by a bench of justices Abhay Oka and Anil Menon came on a petition by Opera House resident Rupesh Shah (47), filed through his father, challenging the constitutional validity of amendments to the Income Tax Act by which interest paid on compensation is taxed. Rupesh was hit by a car on October 18, 1978 at Kemps Corner. He suffered brain stem injury which left him a quadriplegic with neurological problems. Nearly 36 years later, he received a compensation of nearly Rs 40 lakh with 9% interest. But the insurer deducted 10% TDS on the interest of Rs.1.18 crore accumulated since 1979. Since the interest amount fell in the tax slab for income above Rs 10 lakh, he had to pay overall 30% on it. Besides, a further 12% surcharge and 3% education cess was imposed since the amount exceeded Rs 1 crore. He totally paid nearly Rs 38 lakh. His petition, filed by advocate Avinash Gokhale, says, “Tax is deducted on the income of a person and, therefore, the interest accrued on compensation cannot be termed as income and cannot be subjected to tax, when compensation itself is tax-free.” It detailed the family’s plight in caring for their son. It said the accident took place when Rupesh was eight and “since then he is mentally and physically disabled and even today his mental and intellectual age is that of an 11-year-old…” The petition said Rupesh’s claim was filed in 1979 in the Motor Accidents Claim Tribunal, Mumbai, against the owner of the car, Elegant Industries Ltd, and its insurer, Oriental Insurance Company Ltd. In March 1990, MACT awarded him Rs 4.12 lakh compensation with 6% interest. He appealed in the high court. In 2014, the HC awarded him nearly Rs 40 lakh with 9% interest from the date of filing claim. In 2015, the SC dismissed appeals by Elegant and Oriental and even by Rupesh for enhanced amount. After filing the present petition, Rupesh’s father filed revised returns and claimed refund of Rs 38 lakh. In May 2017, the amount was refunded. But on August 14, 2017, Rupesh received a notice that his returns for 2016-17 would require complete scrutiny. On December 8, senior advocate Jehangir Mistri, appearing as amicus curiae, said MACT has powers to determine compensation and interest payable on it. “The question is whether this interest is subject to tax and, if so, in what manner,” he said. Posting the hearing for January 12, 2018, the judges said the issue has to be finally decided as it will come up in many cases.”Considering the peculiar facts of the case, this petition deserves to be disposed of out of turn,” said the judges.

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