Taxability of Compensation
The issue of taxation in case of compensation for motor accident depends on the question whether the receipt is Capital or Revenue receipt in the hand of recipient. If the person who has been given any compensation for motor accident or any accident , is permanently disabled because of accident , such receipt is considered as Capital receipt which is not taxable. Whereas , if the disablement is temporary, payment of claim in that case is taxable.
The case law related to the issue is Vinod Kumar. vs Income-Tax Officer32 ITD 254 , ITAT Chandigarh in Para 13 has held that -
“assessee in all fairness and in a bona fide manner based upon in actual happenings in life made disclosure of the amount of Rs. 34,143 received from the insurance company for temporary disablement proved by necessary documents. This amount was, on the facts of the case, capital receipt and not taxable and includible in the total income of the assessee. The Income-tax Officer, therefore, reached a correct conclusion that the amount was not includible in the total income of the assessee. His order could not be said to be erroneous as well as prejudicial to the interest of revenue within the ambit of Section 263 of the Act. We, therefore, cancel the order of the Commissioner under appeal before us.”
Therefore, compensation received due to an accident can be taxable if there is no disablement and shall be tax free if there is permanent or temporary disablement ( tax free amount will be proportionate to temporary disablement )
Taxability of Interest on Compensation
CIT v. Chiranji Lal Multanimal Rai Bahadur (P) Ltd. , in which the Hon’ble Punjab & Haryana High Court considered the facts that the interest awarded by the Court for loss suffered on account of deprivation of the property amounts to compensation and is not taxable and therefore, not assessable as income. In the case of G.D.A. v. Balbir Singh decided by the Hon’ble Supreme Court in Civil Appeal No. 7173 of 2003, vide order dt. 17th March, 2004, the Hon’ble Supreme Court held that the commission might also compensate for harassment/injury both mental and physical. It is not just interest on the amount invested but also compensation for the harassment and agony caused to the allottee.In My Opinion Total Compensation including interest and Compensation amount not taxable but Interest on Fixed deposit will be taxable. I would also like to suggest you to approach a CA for filing of your sons IT return.
Section 10(10BC) will not help you case as this section covers only compensation recd from Government Authorities while in your case you are receiving the same from Insurance Company. Extract of section 10(10BC) is as follows :-
[(10BC) any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.
Any Different Opinion or Opinion which may further improve the Article are most Welcome