Compensation paid to accident victims and interest for delayed payment is not liable to income-tax - T. N. Pandey - Article published in Business Advisor, dated August 10, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVI Part 3 August 10, 2016 3 Business Advisor
Compensation paid to accident victims
and interest for delayed payment is not
liable to income-tax
T. N. Pandey
Income Tax Act, 1961 (Act) provides for taxation of
incomes but, strangely enough, it does not contain a
comprehensive definition of income, which is liable to
tax. It contains an inclusive definition of this term in
section 2(24), which caters to certain categories of
receipts, which even though may not constitute income
as these are understood in common parlance and
understanding such as deemed dividends, voluntary
contributions received by Trusts, etc. Besides these, the
term also includes receipts, which are embraced in this term, because of its
general and natural meaning.
2. General meaning of income
There has been considerable litigation in regard to the meaning of the word
‗income‘ (other than those mentioned in sections 2(24), 28, 41 & 57, where
too, there had been differences in views). In the later discussion, some
aspects of income are being considered.
2.1 Authority for taxing income
Entry 82 of List I of the Seventh Schedule to the Constitution empowers
Parliament to levy ―taxes on income other than agricultural income‖. Entries
in the Lists in the Seventh Schedule to the Constitution are not to be read
in a narrow or restricted sense – Bhagwan Dass Jain v. UOI (1981) 5
Taxman 7 (SC). It, therefore, follows that in addition to receipts mentioned in
section 2(24) [which, as stated earlier, does not define the term ‗income‘ but
There has been considerable litigation in regard to the
meaning of the word ‗income‘…

2. Volume XVI Part 3 August 10, 2016 4 Business Advisor
merely describes the various receipts as income], any other receipt is
taxable under the Act, if it comes within the general and natural meaning of
the term ‗income‘.
2.2 Dictionary meaning of ‗income‘
According to the Shorter Oxford English Dictionary, ‗income‘ means ‗that,
which comes in as the periodical product of one‘s work, business, lands, or
investments (commonly expressed in terms of money); annual or periodical
receipts accruing to a person or a corporation.
2.3 How the term has been judicially explained?
In CIT v. Shaw Wallace & Co., 6 ITC 178 (PC), Sir George Lowndes defined
‗income‘ as follows:-
„Income connotes a periodical monetary return „coming in‟ with some sort of
regularity, or expected regularity from definite sources. The source is not
necessarily one which is expected to be continuously productive, but it must
be one whose object is the production of a definite return, excluding anything
in the nature of a mere windfall.‟
Anything which can be properly described as income is taxable under the
Act, unless expressly exempted – Gopal Saran Narain Singh v. CIT (1935) 3
ITR 237 (PC). Income may not necessarily be recurring in nature, though it
is generally of that character – Kamakshya Narain Singh of Ramgarh v. CI/t
(1943) 11 ITR 513 (PC).
3. Essential features of income
[i] Generally, income visualises a regular source from which it emanates [CIT
v. Shaw Wallace & Co. (supra)].
[ii] Form of receipt
Income may be received in cash or kind. When income is received in kind,
its valuation is to be made according to the rules prescribed in the I.T.
Rules. If, however, there is no prescribed rule, valuation thereof is made on
the basis of market value.
[iii] Receipt and accrual of income
Income can be taxed on receipt or accrual basis on the fact whether the
method of accounting followed is cash or mercantile.
[iv] Even illegal incomes are taxable

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The I.T. law does not make any distinction between income accrued or
arisen from a legal source and income tainted with illegality. By bringing the
profits of an illegal business to tax, the State does not condone it or take
part in crime, nor does it become a party to the illegality. The assessee
might be prosecuted for the offence and yet be taxed upon profits arising
out of its commission – Mann v. Nash (1932) 1 KB 752.
[v] Reimbursement of expenses does not result in income
Mere relief or reimbursement of expenses is not treated as income. For
instance, reimbursement of actual travelling expenses for official purposes
to an employee is not an income. Similarly, when the assessee is relieved of
his obligation of a certain sum to a party by an order of court, the amount
so relieved cannot be treated as income of the assessee.
[vi] Income diverted at source is not taxable
Income which is diverted at source is not taxable either on receipt or accrual
basis.
[vii] Surplus arising on mutuality principle
Surplus arising consequent to mutuality is not taxable. This is based on the
principle that a man cannot make a taxable profit out of a transaction with
himself [CIT v. Bankipur Club Ltd. (1981) 6 Taxman 47 (Pat)].
[viii] Income received in instalments or in lump sum
Income does not become non-taxable because it is received in instalments.
Similarly, because a receipt is of capital nature, it cannot avoid taxation.
[ix] Same income cannot be assessed twice
Income cannot be doubly taxed, i.e. taxed twice. But a person can be taxed
twice in his individual capacity as also as a Karta of HUF in respect of
incomes received in different capacities.
[x] Income includes loss also
While income and profits and gains represent ‗plus income‘ losses represent
‗minus income‘ – CIT v. Karamchand Premchand Ltd. (1960) 40 ITR 106 (SC).
In CIT v. Harprasad & Co. (P) Ltd. (1975) 99 ITR 118, the SC held that loss is
a negative income and, in calculation of total income of an assessee, both
negative and positive income should be taken into account.
3. There are various other aspects of income, which, obviously, cannot be
covered in this short discussion. In the background of the discussion

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earlier, the problem mentioned in the title can be examined. This issue came
in for the consideration of the A-Bench of the ITAT, Ahmedabad, in the case
Urvi Chirag Sheth v. ITO, Ward-5(2)(3), Ahmedabad (2016) 159 ITD 1999/70
taxmann.com 33 (Ahd. Trib). The facts of the case and the Tribunal‘s
decision are considered in the later paragraphs.
4. Facts
The assessee before the ITAT was the unfortunate victim of a motor
accident. On 18.05.1990, she was travelling in a car which met with a
serious accident, leaving her permanently disabled, what is termed by the
competent authority at 90% level. She claimed a compensation of Rs 15
lakh for this tragic loss of her physical abilities. She did eventually get it but
she had to knock the doors of Hon‘ble SC and it was finally on 26.04.2011
that her claim was upheld. As if this long struggle of 21 years in the judicial
process was not enough, the destiny had more in store for her. It is this
settlement of the accident compensation claim that has led to a new round
of litigation – this time about taxability of a component of compensation, i.e.
interest component. Mercifully, there is no and there cannot be any dispute
about the fact that the compensation for disability cannot be subject to tax,
but the stand of the AO was that interest component on compensation
awarded by Hon‘ble SC is taxable as it is covered u/s 145A(b), r.w.s. 56(viii)
of the Act.
4.1 CIT‘s order
The CIT(A) confirmed the stand of the AO by observing as follows:-
“I have considered the facts of the case and submission made by the
appellant. The AO is of the opinion that the case of the assessee come under
the purview of section 145A(b), r.w.s. 56(viii) of the Act, as the assessee has
received interest on compensation of Rs 14,94,286/-. However, the AO has
disallowed deduction of Rs 7,47,143/- as per provisions of section 57(iv) of
the Act. The main contention of the appellant is that the interest, which is
received by any person under any statute is taxable under the Act, however,
if the interest is awarded by courts of higher authorities as part of fair and
equitable compensation is not taxable in the hands of the assessee, as the
same is capital receipt. The appellant has relied upon certain judgments but
these judgments are based on different facts, these are not much help to the
assessee. The provisions of section 56(2)(viii), r.w.s. 145A(b) of the Act are not
considered in these judgments. The other contentions of the appellant that the
provisions of section 56(2) (viii) of the Act deal with interest on compensation
received under land requisition Act, 1994 only is also not correct. A plain
reading of section 56(2)(viii) clearly says that income by way of interest

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received on compensation or on enhanced compensation referred to in clause
(b) of section 145A shall be chargeable to income tax under the head „income
from other sources‟. The AO has rightly made the addition; therefore, the
addition is confirmed. Thus, these grounds of appeal are dismissed.”
5. The Tribunal‘s order
The two aspects that needed consideration in the case were –
[a] Whether compensation received is taxable
In this issue, there was no controversy because it was agreed that the
payment made to the assessee is in the nature of compensation for the loss
of mobility and physical damages.
[b] The other issue related to the taxation of interest for 21 years delay in
making the payment for compensation. As stated earlier, the AO taxed the
amount of interest and the CIT(A) confirmed his order against which, the
assessee filed appeal before the Tribunal. The Tribunal has allowed the
assessee‘s appeal, inter-alia, observing as under:-
[b-i] The nature of interest is also of the nature of compensation as interest
cannot have a standalone character of income unless the interest itself is a
kind of statutory interest at the prescribed rate of interest. Before the
Tribunal, it was a situation in which the interest is awarded by the SC in its
complete and somewhat unfettered discretion. An interest of this nature is
essentially a compensation in the sense it accounts for a fall in value of
money itself at the point of time when compensation became payable vis-à-
vis the point of time when it was actually paid, or, for the shrinkage of, what
can be termed as a measuring rod of value of compensation. If the money
was given on the date of presenting the claim before the Motor Accident
Claims Tribunal, it would have been principal sum but since there is an
inordinate, though partial, delay in payment of this amount, interest
payment is to factor for fall in value of money in the meantime. The
transaction thus remains the same, i.e. compensation for disability and the
interest rate on rather notional basis is taken into account to compute the
present value of the compensation, which was lawfully due to the assessee
in a somewhat distant past.
[b-ii] When principal transaction, i.e. accident compensation for the delayed
payment of which the interest is awarded, itself is outside the ambit of
taxation, similar fate must follow for the subsidiary transaction, i.e. interest
for delay in payment of compensation.

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[b-iii] The Hon‘ble P&H HC in the case of CIT v. B. Rai (2003) 264 ITR 617/
(2004) 134 Taxman 643, draws a line of demarcation between the interest
granted under the statutory provisions and interest granted under
discretion of the court, and holds that the latter is outside the scope of
‗income‘, which can be brought to tax under the I.T. Act, 1961. As their
Lordships stated in so many words, ‗where interest….is to be paid is in the
discretion of the court, as in the present case, the said interest would not
amount to ‗income‘ for the purposes of income-tax. That precisely is the
situation before us as well.
[c] The Tribunal has given some other reasons also for giving relief such as
rationale behind sections 145A(b) and section 56(2)(viii) relied on by the I.T.
Dept., why such reliance does not support the I.T. Dept.‘s case but it is not
necessary to discuss these aspects as that will make this write-up unduly
long. The grounds given earlier by themselves give full justification for non-
taxability of the interest relating to delayed payment of compensation.
[d] The parting observations of the Tribunal are, however, quite revealing
and show how justice delayed is justice denied. Paragraph 10 of the
Tribunal‘s order reads as under:-
“As we part with the matter, we must say that as fellow citizens, we are
deeply anguished to take note of the long journey that the assessee had to
undertake to get her dues and then to fight this unjust income-tax demand on
her. In order to ensure that others do not have to tread the arduous path, at
least with respect to the tax demand and to bring an element of certainty, we
would suggest that the CBDT may as well take a conscious call on issuing
appropriate administrative instructions in this regard and ensuring that what
was brought as a measure of relief to the taxpayers is not used by the field
officers as a source of taxation. Such a step certainly cannot mitigate the pain
of an accident victim but it can probably help in ensuring that hardships of
the accident victim are not further compounded and that is the least that a
responsive tax administration like the one we fortunately have at present, can
do. We must also place on record the fact that despite smallness of amount
involved, the learned representatives have rendered valuable assistance in
this case and that we deeply appreciate their assistance.”
[e] In view of the position, as discussed earlier, the Tribunal has allowed the
assessor‘s appeal.
The CBDT, it is hoped, will take required steps to avoid such situations in
future.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes.)