2.4  Query

Taxability of compensation awarded by Motor Car Accident Tribunal and interest thereon.

1.A Motor Car Accident Tribunal awarded compensation and interest thereon from the date of filing the suit till date of realisation. The award stated that the total amount of compensation and interest has to be invested in fixed deposits with any of the nationalised banks for 7 years. No loan/advance etc. can be taken during the period of 7 years against such fixed deposits. The interest on fixed deposits is also to be released on due dates of fixed deposits after 7 years.

2. In the above context, the querist has referred the following issues for the opinion of the Expert Advisory Committee:

(i) Whether the amount receivable as above is taxable from income-tax point of view?

(ii) Whether income-tax is payable in the assessment year relevant to the year in which award is received?

            (iii)            Whether compensation or interest thereon or both are capital receipts?

(iv) If the amount is taxable, then whether interest income is taxable on year to year basis or in one year?

(v) Whether deferment of payment of tax is possible for 7 years since till then funds are not available to meet the tax liability?

(vi) Whether interest on the fixed deposits would be income on year to year basis or on receipt after 7 years?

(vii) If two fixed deposits are made so that on one fixed deposit interest is released periodically, then will the taxability differ?

(viii) If award is announced but option to keep money in fixed deposit is not exercised, then whether taxability will differ?

(ix) Whether fixed deposits would be treated as wealth although no right there-against is there for 7 years?

                                                                      Opinion                               January 23, 1990

1.The Committee notes that Motor Car Accident Tribunal awards compensation for the loss of life or injury to a person. Therefore, in view of the Committee, the compensation received is a capital receipt and is not taxable under Income-tax Act.

2.The Committee is of the view, that the interest on the said compensation is not a capital  receipt because it represents the profit which the assessee could have made if he had used the money or represents the loss which he suffered because he could not use the money.

3.The Committee notes paras 3.3 and 3.9 of the ‘Guidance Note on Accrual Basis of Accounting’, issued by the Research Committee of the Institute of Chartered Accountants of India, which recommend, inter alia:

“3.3 An essential criterion for the recognition of revenue is that the consideration receivable from the sale of goods, the rendering of services or from the use by others of resources of the enterprise is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

3.9 The use of resources of the enterprise by others yielding interest, royalties and dividends is recognised when no significant uncertainty as to measurability or collectability exists…..”

Presuming that the interest on compensation awarded by the Tribunal is discretionary in nature and not mandatory, the Committee is of the view that uncertainty with regard to the measurability and collectability of the interest on compensation is removed at the time when order is made by the Tribunal. The Committee is of the view that interest on compensation accrues at the time when compensation is determined. Where the assessee is following mercantile system of accounting regularly, the said interest will be taxable in the year in which the order of the Tribunal is made. Where the assessee is following cash system of accounting regularly, the said interest will be taxable after seven years, i.e., at the time when he receives it.

4.The Committee is also of the view that the interest on fixed deposit with bank accrues to the assessee every year even though the same can be received after the expiry of seven years. Therefore, if the assessee is following mercantile system of accounting regularly, the interest on fixed deposit will be taxable every year. In case the assessee is following cash system of accounting regularly, the said interest will be taxable after the expiry of seven years, i.e., at the time when he receives it.

5.The Committee is of the view that books of account have to be maintained in case where the assessee is following mercantile system of accounting.

6.The Committee is of the following opinion in respect of the issues raised by the querist in para 2 of the query:

(i) The amount of compensation is a capital receipt and is thus non-taxable. Interest on compensation and interest on fixed deposit are taxable.

(ii) Income-tax is payable in the assessment year relevant to the year in which award is made in respect of the interest on compensation and interest on fixed deposit accrued during the relevant previous year, if the assessee is following mercantile system of accounting regularly. However, if the assessee is following cash system of accounting regularly, the interest on compensation and interest on fixed deposit will be taxed after the expiry of seven years, i.e., when the assessee receives it.

            (iii)            Compensation is a capital receipt and not the interest thereon.

(iv) Interest on compensation is taxable in the year in which the order of the Tribunal is made, if the assessee is following mercantile system of accounting regularly. If, however, the assessee is following cash system of accounting regularly, the same will be taxable after the expiry of seven years as mentioned above.

(v) Deferment of payment of tax is possible only if the assessee has been following cash system of accounting regularly.

(vi) Interest on fixed deposit will be taxable on a year to year basis, if the assessee is following mercantile system of accounting regularly. However, if the assessee is following cash basis of accounting regularly, the same will be taxable after the expiry of 7 years, i.e., at the time when he receives it.

            (vii)      In view of the facts of the query, this issue is not relevant.

            (viii)      In view of the facts of query, this issue is not relevant.

(ix) Fixed deposits along with the accrued interest will have to be treated as wealth as the same are covered by the definition of asset as defined under section 2(e) of the Wealth Tax Act, 1957.

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