Spread interest over to relevant financial years before deducting TDS – High Court to Insurance Company

JUDGMENT

1. Heard Mr. Nanavati, learned advocate for the petitioner insurance company, Mr. Bhatt, learned advocate for income tax authority, and Mr. V.C. Mehta, learned advocate, for Mr. Mehul S. Shah, learned advocate for the respondent workman.

2. This petition is taken out by the insurance company.

3. In present petition, the petitioner insurance company has prayed, inter alia, that:—

4. The petitioner insurance company is aggrieved by the order directing it to pay/deposit Rs.15,793/- which amount it had deducted towards TDS from the amount payable and paid to the original claimant so as to comply the award dated 21.02.2008 passed by the Commissioner in Claim Application filed by the claimant.

5. So far as factual background is concerned, it has emerged that the original claimant Mr. Falaji Gopalji Vaghela @ Bhupatsinh had filed claim application before the Workmen’s Compensation Commissioner under the provisions of Workmen’s Compensation Act. The said claimant filed the claim application against his employer i.e. present respondent No.2 Mr. Chhotabhai Ayar. The said claim application was registered as Compensation Application No.292 of 1996. The learned Commissioner adjudicated the said application and decided the same vide judgment dated 21.2.2008 and directed the employer and insurance company to pay Rs.1,08,455/- towards compensation with interest at the rate of 9% from the date of accident till the date of actual payment and realization. Accordingly, the insurance company was obliged to pay the said amount.

5.1 While depositing the amount as per the said order, the insurance company appears to have deducted Rs.15,793/- by way of/towards TDS. The balance amount was deposited by the insurance company on 6.6.2008.

5.2 Subsequently, original claimant filed application before the Commissioner with the grievance that the said amount of Rs.15,793/- could not have been deducted and he is entitled for full amount and interest as awarded by the judgment dated 21.02.2008 and the said Rs.15,793/- must be refunded to him.

5.3 The Commissioner considered the said grievance and vide order dated 23.9.2008 directed the insurance company to pay/refund the said amount Rs.15,793/- to the claimant.

6. Feeling aggrieved by the said direction, the insurance company has taken out present petition.

7. Mr. Nanavati, learned advocate for the petitioner insurance company, submitted that by the decree dated 21.2.2008 in Workmen’s Compensation Claim Application, the Commissioner also awarded interest at 9% from the date of accident. He submitted that the compensation amount was determined at Rs.1,08,455/- by the said judgment and the balance amount which came to be deposited represents interest.

7.1 Mr. Nanavati, learned advocate for Insurance Company submitted that the interest awarded by Workmen’s Compensation Commissioner tantamount to the claimant’s “income” under the provisions of Income Tax Act.

7.2 So as to support his submission, Mr. Nanavati, learned advocate for the Insurance Company relied on Section 194A of Income Tax Act. The said provision reads thus:

‘SECTION 194A: Interest other than “interest on securities”

[Provided that in respect of the income credited or paid in respect of –

[***] the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the cooperative society or the public company or the cooperative society or the public company, as the case may be;]

[Explanation.-For the purposes of clauses (i), (vii) and (viia) “time deposits” means deposits (excluding recurring deposits) repayable on the expiry of fixed periods.]

[***] Omitted by The Finance Act, 2006, [No.21 of 2006], Section 40, dated 18th April, 2006.

[(4) The person responsible for making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deduced under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.]

Explanation.-[Omitted by the Finance Act, 1992, w.e.f 1.6.1992]

A copy of the receipt is annexed herewith and marked as Annexure-B and copy of Form 16-A certificate of TDS is annexed herewith and marked as Annexure-C respectively.’

7.3 He further submitted that in view of the said provision the Insurance Company was advised to deduct Tax (payable in respect of “interest income”) and deposit the said amount with Income Tax Authority and consequently the Insurance Company merely complied statutory requirement and, therefore, the learned Commissioner is not justified in directing the Insurance Company to pay/deposit the said amount. On the said ground. Mr. Nanavati opposed the judgment and submitted that the impugned direction may be set aside.

8. Mr. Vijay Patel for Ms. Mauna M. Bhatt, learned advocate for Income Tax Department submitted that the petitioner Insurance Company has demanded refund of the amount paid/deposited by it towards TDS, however, there is no provision under the Act for refund. He further submitted that for re-claiming said amount the claimant shall have to file Return with the Income Tax Authority and reclaim the amount paid by Insurance Company.

9. Learned advocate for original claimant submitted that the claimant is not assessee and he does not have/earn taxable income and, therefore, claimant would not be able to file return and reclaim the amount deposited by the Insurance Company after deducting it from compensation amount payable to him as per decree dated 21.02.2008 passed by Workmen’s Compensation Commissioner. He also submitted that even otherwise for the act or mistake of insurance Company why should the claimant undergo such procedure. On the said grounds learned advocate for claimant supported and justified the direction by Workmen’s Compensation Commissioner.

10. I have considered rival submissions and also considered material available on record.

11. Facts are not in dispute.

12. It has emerged from the record that in view of the direction passed by the Workmen’s Compensation Commissioner vide judgment dated 21.02.2008, the claimant was entitled for Rs. 1,08,455/- towards compensation.

13. As per the said judgment, the Insurance Company was also liable to pay Rs. 1,53,938/- towards interest.

14. Consequently, total amount payable to the claimant would be Rs. 2,63,393/-.

14.1 However, Insurance Company deposited Rs. 2,46,600/- after deducting, by way of TDS Rs.15,793/-. The said deduction gave rise to the subsequent application by the claimant wherein impugned order came to be passed.

15. Before proceeding further, it is relevant to take into account below quoted observation from the decision by the Division Bench of this Court in case of Hansagauri Prafulchandra Ladhani v. Oriental Insurance Co. Ltd. 2007 GLH (2) 291. By the said decision, this Court issued following instructions and directions to the Motor Accident Claims Tribunal:

6. It was, therefore, directed that in the facts and the circumstances of this case, since the Insurance Company had deducted tax on compensation under Section 194(3)(ix) of the Act by treating the entire interest amount as one lump sum amount, after giving the claimants the details of the amounts of interest spread over the relevant financial years and the break-up amongst several claimants, the insurance company shall, within one month from the date of receipt of a certified copy of the order, furnish to the claimants the certificate indicating the interest amounts computed for each year and with the breakup of the interest amounts payable to each claimant in each of those years as per the apportionment made in the order. However, it was held that thereafter, it will be open to the claimants to make applications/representations before the appropriate income-tax authority which shall decide the same within six months from the date of receipt of the applications/representations.”

16. Learned advocate for Income-Tax Authority submitted that Insurance Company should have taken into account the direction and guidelines for spread over of the interest amount for the relevant period i.e. from the date of accident till the date of decree and if such spread over was taken into account then the amount would have been less than 50,000/- and consequently there would not be any need to deduct any amount towards tax at source.

16.1 He also submitted that Insurance Company appears to have deducted 20% from the total principal amount and that is also not in consonance with the provision under Income Tax Act and consequently there is no illegality in the order by the Commissioner which directs the Insurance Company to deposit/pay the amount deducted from compensation/interest payable to claimant pursuance to the decree dated 21.02.2008.

16.2 He also clarified that the submissions by Insurance Company that at the relevant time the exemption was restricted to Rs.5,000/- and not Rs.50,000/- is also inaccurate in as much as the provision was amended in 2003 and the limit of exemption was enhanced to Rs.50,000/- since 2003.

16.3 Learned advocate for Income Tax Authority further clarified that since there is no provision for refund to the claimant, the only course open for the claimant would be to file Income Tax return and reclaim the amount deducted and deposited by the Insurance Company with Income Tax Department.

17. From above mentioned facts and submissions by learned advocates it has emerged that either under misconception or on erroneous reading of the provision or under mistaken belief the Insurance Company deducted Rs.15,793/- from the amount payable towards compensation and interest pursuant to the decree by Workmen’s Compensation Commissioner.

17.1 The interest amount awarded by learned Commissioner was required to be spread over in respect of the period from the date of accident till the date of judgment. If the said procedure had been followed then the amount payable towards interest would not invite the obligation to deduct tax at source. However, the Insurance Company failed to follow the said procedure as explained in above mentioned decision by Hon’ble Division Bench. Instead the petitioner considered entire income of Rs.1,53,938/- as interest of the claimant for accounting year of 2008 and consequently it deducted Rs.15,793/-, from the amount payable to the claimant and deposit it with the Income Tax Department.

18. The above discussion has also brought out the fact that in entire transaction there is no fault of the claimant and therefore claimant cannot be penalised for action and mistake of the Insurance Company.

18.1 The poor workman, who is not even assessee and whose income at the relevant time was not taxable, cannot be made to undergo entire process of filing return and reclaim the amount.

19. Therefore, there is no justification to interfere with and disturb the order passed by the Commissioner. The learned Commissioner has passed the impugned order after taking into account the direction and guidelines issued by Division Bench of this Court in Hansagauri Prafulchandra Ladhani (supra) and, therefore also there is no justification to interfere with the said direction. Under the circumstances, the petition should fail and should be rejected. Therefore, following order is passed:

20. In this context, it is clarified that since interim relief is vacated, even otherwise, the Insurance Company would be obliged to comply the direction passed by learned Commissioner vide Order dated 23.09.2008.