High court asks govt to reply on tax deduction on compensation in MACT cases

The Delhi High Court on Friday sought response from the Centre on a plea seeking seting aside of its June 26 order which mandates deduction of tax on the interest accrued on compensation granted by a Motor Accident Claims Tribunal (MACT).

The petition called for court's intervention to quash section 194 A (3) (ixa) of the Income Tax Act, 1961 by holding it unconstitutional and in direct conflict with the object and spirit of Motor Vehicles Act, 1988 and MACTs set up under it to adjudicate claims of accident victims.

A division bench of Justice S Murlidhar and Justice Talwant Singh sought replies from of the Ministry of Finance and the Central Board of Direct Taxes. The next date of hearing is November 6.

Advocate and social activist Amit Sahni sought passing further directions to hold that the interest accrued upon the compensation awarded by a MACT is not taxable.

His petition said: MACTs have been set up across the country under section 165 of the Motor Vehicle Act 1988 for adjudicating upon claims for compensation in respect of accidents involving the death of, or bodily injury to, persons arising out of the use of motor vehicles, or damage to any property of a third party so arising, or both.

"The compensation awarded by a MACT 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," it said.

"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 into the definition of income. As such compensations are not specifically included, they are therefore not taxable.