On 02.06.2016 the High Court of Madras has come out with a landmark judgment in a Revision Petition being titled as ‘The Managing Director, Tamil Nadu State Transport Corporation (Salem) Ltd. v. Chinnadurai’ filed under Article 227 of the Constitution of India. The High Court while interpreting the word ‘compensation’ awarded under the Motor Vehicles Act in reference to the term ‘income’ as defined under the Income Tax Act, 1961, observed and held that
“…the compensation cannot be categorized or even described as income, as it has already been stated that the intention of the legislature in awarding compensation to the victims of motor accident cases is to restitute them and rehabilitate them.”
While making the above observation, the Court also considered the judgment passed by the High Court of Himachal Pradesh in the case of ‘Court on its motion v. H.P. State Coopertaive Bank Ltd. & Ors.’ 2014 SCC Online HP 4273, wherein it had taken suo moto cognizance in respect of a Circular dated 14.10.2011 issued by the Income Tax Department which had ordered deduction of Income Tax on the ‘award amount and the interest accrued in the deposits’ made under the order of the Court in Motor Accident cases. The Court while quashing the said circular had held that:
“…. the Motor Vehicle Act has undergone a sea change and the purpose of granting compensation under the Motor Vehicles Act is to ameliorate the sufferings of the victims so that they may be saved from social evils and starvation and that victims get some sort of help as early as possible. It is just to save them from sufferings, agony and to rehabilitate them.”
The Madras High Court also analyzed the corresponding law prevailing in countries like Australia, UK, USA and observed that:
“…. the matters where a person has suffered an injury or there has been a loss of life and a compensation has been paid in lieu of that, then it has been held by the Courts that there cannot be any Tax deductions on such compensation. The underlying basis behind this is that a person who suffers a loss cannot be asked to part with the solatium he receives since it is the only remedy he has been provided with by the law.”
Accordingly, the Court held that compensation awarded or the interest accruing therein from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term ‘income’ as defined under the Income Tax Act, 1961.
Although the said judgment is open for appeal by the aggrieved party, as the statutory period for the same has not elapsed yet, the reasoning behind the said judgment appears to be well founded as the same safeguards the interests of the victims who are already at the receiving end having suffered physically by way of loss or danger to life, in addition to financial loss and mental agony.