Question – In brief my family was met with an major accident in 2010 and my pretty daughter (minor) got 70% permanent disabilities., literally we have lost everything in that accident even my well established business also.
Now the court has given my wife ( guardian and claimant of minor) accident compensation amount ( without deduction of any tax as it was recovered by the court thru attachment order because insurance people never came to deposit the amount by themselves) inclusive interest of last 7 years ( 2010 to 2017). Enhancement amount is 35 lacs and interest amount is 15 lacs. The amount was received in august 2011 in which 75% of the amount i.e. 40 Lacs has been fixed by the court in the name of disable minor for next 15 years. Court has given us one facility to take quarterly interest on F.D for her further regular medicines and major treatments which are lying in the pipeline till she is alive.
As I have applied the minor pan card to file her independent return as a nil as she is minor and my wife is house wife having very less income than exemption limit .Because as per your blog it was distinct that under section 10(10BC), the total amount inclusive interest is exempted specially in human sufferings. But I am in really need of you type of kind and godsend person who can guide me the right way because I have no more strength to take more pains in life.
The issue of taxation in case of compensation for motor accident depends on the question whether the receipt is Capital or Revenue receipt in the hand of recipient. If the person who has been given any compensation for motor accident or any accident , is permanently disabled because of accident , such receipt is considered as Capital receipt which is not taxable. Whereas , if the disablement is temporary, payment of claim in that case is taxable.
The case law related to the issue is Vinod Kumar. vs Income-Tax Officer32 ITD 254 , ITAT Chandigarh in Para 13 has held that –
“assessee in all fairness and in a bona fide manner based upon in actual happenings in life made disclosure of the amount of Rs. 34,143 received from the insurance company for temporary disablement proved by necessary documents. This amount was, on the facts of the case, capital receipt and not taxable and includible in the total income of the assessee. The Income-tax Officer, therefore, reached a correct conclusion that the amount was not includible in the total income of the assessee. His order could not be said to be erroneous as well as prejudicial to the interest of revenue within the ambit of Section 263 of the Act. We, therefore, cancel the order of the Commissioner under appeal before us.”
Therefore, compensation received due to an accident can be taxable if there is no disablement and shall be tax free if there is permanent or temporary disablement ( tax free amount will be proportionate to temporary disablement )
Taxability of Interest on Compensation
CIT v. Chiranji Lal Multanimal Rai Bahadur (P) Ltd. , in which the Hon’ble Punjab & Haryana High Court considered the facts that the interest awarded by the Court for loss suffered on account of deprivation of the property amounts to compensation and is not taxable and therefore, not assessable as income. In the case of G.D.A. v. Balbir Singh decided by the Hon’ble Supreme Court in Civil Appeal No. 7173 of 2003, vide order dt. 17th March, 2004, the Hon’ble Supreme Court held that the commission might also compensate for harassment/injury both mental and physical. It is not just interest on the amount invested but also compensation for the harassment and agony caused to the allottee.
In My Opinion Total Compensation including interest and Compensation amount not taxable but Interest on Fixed deposit will be taxable. I would also like to suggest you to approach a CA for filing of your sons IT return.
Section 10(10BC) will not help you case as this section covers only compensation recd from Government Authorities while in your case you are receiving the same from Insurance Company. Extract of section 10(10BC) is as follows :-
[(10BC) any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.
Note:Provisions for tax deduction at source (TDS) on interest on motor accident claims stipulates that no TDS is to be deducted on interest accumulated up to a sum of Rs.50,000 during one year. This provision directly implies that if interest earned is more than Rs.50,000, TDS is applicable in such cases.
Any Different Opinion or Opinion which may further improve the Article are most Welcome
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(Republished With Amendment)