No tax on receipt of accidental death claim

Query 1]
My question is that if a housewife woman (non income person) receives or gets her husband's accidental death claim of Rs. 60 Lakh from the insurance company or by court judgment:

Whether it is taxable or not?
If not, please explain in detail and give the sections under which it is exempted in IT?
TDS is deducted. It can be refundable through IT return?
[Ashish Gupta- asg6914@rediffmail.com]

Opinion:

1.      Accidental death claim or compensation is normally awarded under the Motor vehicle Act-1988 to the victims or their family members. Many a times, interest is also paid over and above the compensation amount due to delay in settlement of the claim amount as a result of court orders.
2.      TDS provision doesn’t govern the taxability. Mere deduction of tax at source (TDS) doesn’t make the receipt taxable in the hands of receiver – DIT (International transactions) Vs. Convergys Information Management Group Inc (2013) 144 ITD 632 (Mum).
3.      To know the taxability of compensation/ accidental death claim, one needs to know whether the amount received is “Income” under the Income Tax Act-1961. The definition of “income” is given in section 2(24) of the Income Tax Act. It is not a comprehensive definition but is an inclusive definition wherein few items are mentioned which would be treated as “Income”. The definition neither includes nor excludes “Accidental death claim” or “compensation” as Income. [Compensation received for land acquisition is to be treated as an income. However, in case of accidental death claim, there is no transfer of any capital asset & hence same logic cannot be applied]. For a receipt to be taxed, it has to first qualify as an income under the tax laws. Only if it qualifies as an income, question of its taxability would arise. Taxability further depends upon whether amount received is a capital receipt or revenue receipts. Capital receipt is exempt from tax unless they are expressly covered by taxability provision whereas revenue receipts are always taxable unless and until specific exemption is provided against its taxation.
4.      Amount offered as death claim is basically compensate the sufferings of motor accident victims. It is offered as a mean to mitigate the impact of the misery on account of the accident, so that the victim or his dependents do not have to face the vagaries of life on account of discontinuance of the income earned by the victim. The compensation is thus meant as a solace to the victim or his family members for the suffering caused due to the motor accident. Such claim is to substitute the loss of potential income of the victim, and in most cases is determined as a multiple of the victim’s income.
5.      Accidental Death claim is in the nature of capital receipts & since it is not specifically included in the definition of “Income”, it may not be taxable. This view has been confirmed by the High Courts of Himachal Pradesh and Madras in recent years.
6.      Going further, whether interest received over and above death claim could be treated as “Income”. In normal course, any interest received is treated as Income u/s 2(24). However, in cases of accident claim, interest is awarded due to delay in the claim settlement for any reason whatsoever. Interest in such case is nothing but enhancement of the claim to compensate for delays in finalizing the claim. The character of the interest in motor accident cases is therefore the same as that of compensation, that is, a personal receipt to alleviate the suffering of the victims. Resultantly, the High Courts of Himachal Pradesh have taken a view that such interest on motor accident compensation is not taxable as income. It is considered as part and parcel of the claim. [In case of land acquisition, interest due to delay payment of compensation is taxable as there is specific provision under the Land Acquisition Act for payment of interest on delayed payment of compensation].
7.      To conclude, in my considered opinion, neither accidental death claim nor interest thereon under motor accident claims is taxable. Since, there is neither specific inclusion nor exclusion, litigation might arise. It would be in the interest of public at large if Central Board of Direct Taxes (CBDT) confirms it by issuing circular clarifying the non taxability of it.

Query 2]
We had purchased a flat at Nagpur for Rs 18 Lacs in FY 2009-10. Now we are planning to sell it for Rs 40 Lacs. The market value likely is Rs 32.50 Lakh. However, since we have to settle outstanding housing loan before we can get property papers and arrange transfer to purchaser, we may be taking an advance of Rs 15 Lakh during this month and balance Rs 25 Lacs after the registration is made- which may be sometime in April-May 2017, the next financial year. Please advise as to how to determine the capital gains and tax when receipt of money is spread over two financial years and whether the capital gains tax is to be paid only in 2017-18 or separately for income of Rs 15 Lakh in 2016-17 and Rs 25 Lakh in 2017-18? [jrwitthal@gmail.com]

Opinion:

Capital gain is chargeable to tax in the year in which “transfer” took place & not on the basis of receipt of sale consideration.
In your specific case, it appears that you would be merely receiving an advance amount of Rs. 15 Lakh in the FY 2016-17 whereas you would be executing the sale deed and handing over the possession of the property in FY 2017-18. So, entire amount of capital gain would be taxable in the FY 2017-18 & nothing would be taxable at the time of receipt of partial sale consideration in the FY 2015-16.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.com]

SSRPN & CoChartered Accountants

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Opinion:

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