A plea was filed on Monday in the Delhi High Court seeking quashing of a provision under the Income Tax law which mandates deduction of tax on the interest received on the compensation by a road accident victim.
The plea 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 filed by advocate and activist Amit Sahni said.
It said the compensation awarded by MACT established under 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," the petition said.
It added that the objective of compensation by the tribunal is to mitigate the impact of the misery due to the accident, so that the injured or the dependents do not have to face compulsions of life on account of discontinuance of the income earned by the victim.
"The insurance companies do not readily admit the claim of a person under Motor Vehicle Act and the victim has to approach the MACT and many times, it takes years and some time decades either before the tribunal or before the higher courts to finally determine the compensation payable to the victim. Therefore the Victim cannot be made liable for delayed payment of compensation," it said.
The plea, which has arrayed Ministry of Finance and Central Board of Direct Taxes as parties, said it has also made a representation to the respondents in December 2018 but no action was taken in this regard.
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