SC sets motor accident compensation rules: ITR may decide payment

Bench differentiates between salaried and self-employed victims, bringing clarity to how courts should assess income while deciding compensation claims.

The Supreme Court has set a framework for calculating the income of people killed or injured in motor accidents, ruling that Income Tax returns (ITRs) should be the reference point while determining compensation under the Motor Vehicles Act.

 

The court said on Wednesday that while there cannot be a fixed formula for calculating annual income in every accident compensation case, courts must follow a consistent approach depending on whether the victim was a salaried employee or self-employed.

 

The judgment is significant for accident victims and their families because compensation amounts are directly linked to the income assessment of the deceased or injured person. Differences in how courts interpreted income records had earlier resulted in varying compensation awards.

 

How will income be calculated for salaried employees?

The Supreme Court said that for salaried individuals, the ITR filed for the previous year should be enough to establish annual income, Press Trust of India (PTI) reported.

 

A bench of justices Sanjay Karol and N Kotiswar Singh observed that salary income is usually more stable compared with business earnings, and the latest available tax return provides a reasonable basis for calculation.

 

The court noted that salary changes due to promotions or revisions could significantly impact income and may not always appear in older tax records.

 

However, if a person had received a promotion or salary revision shortly before the accident and the change was not reflected in the latest ITR, courts can consider supporting documents such as promotion letters or other financial records.

 

This approach aims to ensure that compensation reflects the person’s actual earning capacity at the time of the accident rather than relying only on outdated income figures.

 

Different approach for self-employed people and business owners

For self-employed individuals and business owners, the Supreme Court said income should generally be assessed by looking at the average income disclosed in ITRs for up to the previous three years.

 

PTI reported that the court highlighted that business income can fluctuate due to several factors, unlike fixed salary income.

 

The court said factors such as the nature of the business, growth pattern, the impact of the person’s death on business operations, future growth potential and other relevant circumstances should also be considered while deciding compensation.

 

For example, a business owner may report higher or lower income in different years due to market conditions, expansion, losses or other commercial factors. Therefore, relying only on one year’s return may not always present a fair picture. 

 

Courts must consider unusual changes in income

The Supreme Court also cautioned courts against mechanically accepting income figures shown in tax returns, particularly in cases where there may be concerns about sudden changes in reported earnings.

 

PTI reported that the bench observed that the date of filing ITRs could also become relevant in some cases, as there could be situations where inflated income is shown after death or injury.

 

However, the court said that if higher income figures are supported by proper financial statements and evidence, they may also be considered while calculating compensation.

 

Why the ruling matters for accident compensation claims

The Supreme Court’s guidelines attempt to reduce inconsistencies in compensation decisions across different courts.

 

Earlier, some courts relied only on the latest ITR, while others considered average income from multiple years. The conflicting approaches often resulted in different compensation amounts for similar cases.

 

The court’s latest ruling provides a clearer distinction:

Salaried employees: Previous year’s ITR will generally determine annual income.

 

Self-employed individuals/business owners: Average income from up to three years of ITRs will generally be considered.

 

Other evidence: Supporting financial documents and surrounding circumstances can be considered where required.

 

Compensation increased in the case before SC

The ruling came while hearing an appeal filed by the family of Rashmirekha Tripathy, whose husband, a construction businessman, died in an accident.

 

According to PTI, the deceased had reported annual incomes of around Rs 11.6 lakh and Rs 15.06 lakh in the two assessment years before his death.

 

The Orissa High Court had calculated the average income at about Rs 13.33 lakh. However, the Supreme Court considered the nature and growth potential of the construction business and fixed the annual income at Rs 14 lakh.

 

As a result, the compensation awarded to the family was increased from Rs 1.87 crore granted by the high court to Rs 1.97 crore, with interest continuing at 6 per cent per annum.

 

The ruling provides a clearer method for courts to assess income, which could directly influence how accident compensation claims are decided in future cases.

 

With inputs from PTI