Plea says receipts of compensation are non-taxable under the Income Tax Act. (Representational)

The Delhi High Court has sought the response of Central Board of Direct Taxes (CBDT) on a plea seeking quashing of the provision mandating tax deduction on the interest received on compensation by a road accident victim.

A bench of Justices S Muralidhar and Talwant Singh asked the authorities to give their replies to the plea and listed the matter for further hearing on November 6.

The petition filed by advocate and social activist Amit Sahni sought setting aside of CBDT's June 26 order by which it was held that the income tax levied upon the interest accrued upon compensation granted by the Motor Accident Claims Tribunal (MACT) is fair and reasonable.

The CBDT has passed the order while dismissing his representation on the issue and had held that such interest falls in the category of income.

Mr Sahni had earlier also approached the high court with this prayer and the court had asked the Finance Ministry and CBDT to consider his representation and decide the issue. He filed the fresh plea after dismissal of his representation by the authorities.

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," it said.

It said the compensation awarded by the Motor Accident Claims Tribunal established under the 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 the 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 said it has also made a representation to the authorities in December 2018 but no action was taken in this regard.