The Delhi High Court on Friday sought the response of the Central Board of Direct Taxes (CBDT) on a PIL seeking to quash the provision mandating tax deduction on the interest received on compensation by a road accident victim.
A bench of Justice S Muralidhar and Justice Talwant Singh also issued a notice to the Ministry of Finance, asking for its stand on the plea, and listed the matter for further hearing on November 6.
The court was hearing a PIL filed by advocate-activist Amit Sahni, who sought setting aside of CBDT’s June 26 order by which it was held that the income tax levied upon the interest accrued upon compensation granted by the MACT is fair and reasonable.
The CBDT had passed the order while dismissing his representation on the issue and had held that such interest falls in the category of income.
Sahni, in his petition, stated that the receipts of compensation are non-taxable under the Income-tax Act and therefore, the interest under the motor accident claims should not be made taxable.
“But the insurance companies deduct TDS on the interest accrued upon the compensation awarded by the Motor Accident Claims Tribunal (MACT) in view of section … of the Income Tax Act, 1961,” the plea alleged.
It said the compensation awarded by the MACT established under the Motor Vehicle Act, 1988, is meant to substitute the loss of potential income of the victim, and in most cases, is in fact determined as a multiple of the victim’s income.
“Under tax laws, it is well settled that if a receipt is meant to substitute a source of income, it is a capital receipt. Capital receipts are generally not taxable as income unless they are specifically roped in into the definition of income as such compensations is not specifically included, they are therefore not taxable,” it said.