Insurance companies, while settling third party insurance claims, cannot deduct tax at source (TDS) on the interest earned on the compensation amount, ruled Bombay high court. A division bench of justice Sharad Bobde and justice SJ Kathawalla, in an interim order, directed the New India Assurance Company not to deduct tax from the amount of interest to be paid over a compensation granted to a widow, her two children and her mother-in-law.
The court was hearing an application filed by Geeta Shah, her two children and her mother-in-law. Geeta moved the court early this month, after the insurance company, that had settled her third party claim following her husband’s death in a road accident, had asked her to submit her PAN card, so that they can deduct tax at source from the interest earned on the compensation amount.
“We see no reason why the amount that is to be withdrawn by the applicants should not be taken as year to year income. Accordingly, we direct the company that the amount (of compensation) shall be deposited without deduction of tax at source,” observed the court.
Representing Geeta, advocate MB Kotak argued that his clients’ annual income does not exceed Rs50,000. “Two of the claimants are minors. There money will remain with the tribunal till they attain maturity. If the interest is divided between all four claimants, the amount will never exceed Rs50,000,” argued Kotak.
As per the Central government rules, an insurance company has to deduct tax at source if the income on interest exceeds Rs50,000.
“The company is just following rules. There has to be a specific order from this court, so that I can ask my client not to deduct the TDS,” advocate Bhakti Barve, representing the insurance company told the court.
The judges also agreed with the petitioner’s argument that they are not liable to pay Income Tax and so the TDS not be deducted.
Geeta lost her husband Prakash in April, 2001. In January, a Motor Accidental Claims Tribunal granted the family a compensation of Rs15.61 lakh and an interest of Rs9.25 lakh. As the interest income per year exceed the limit of Rs50,000, the company wanted to deduct the TDS.