Is the compensation received due to an accident taxable? Dinesh Sharma, Ambala
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 Officer.32 ITD 254 , Tribunal held that
" 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 )