1. Facts of the Case
Mr. A, an ordinary resident of Telangana, was travelling as a passenger on a TSRTC (Telangana State Road Transport Corporation) bus. During the journey, the bus was involved in an accident, causing Mr. A to sustain temporary physical injuries. As a result of the accident, TSRTC awarded Mr. A a lump sum compensation of ₹10,000 for the injury and inconvenience caused.
The core question here is the taxability of the ₹10,000 received by Mr. A. Is it considered a revenue receipt, which is taxable under the Income Tax Act, 1961, or a capital receipt, which is usually non-taxable unless specifically included under the Act?
2. Issues in the Case
The case raises two important questions:
- Whether the compensation of ₹10,000 paid by TSRTC to Mr. A for temporary physical disability constitutes a “capital receipt” or “revenue receipt”?
- If it is a capital receipt, is it taxable under any specific provisions of the Income Tax Act, 1961?
These issues are crucial to determine whether the amount should be included in the total income of Mr. A for the relevant assessment year.
3. Legal Principles and Supporting Judgements
To resolve the issues, we need to analyze:
A. Distinction Between Capital and Revenue Receipts
- A capital receipt is generally connected to the loss or impairment of a capital asset, or compensation for injury/loss to the person or structure of the taxpayer. These are generally not taxable unless specifically included (e.g., capital gains under Section 45).
- A revenue receipt is linked to the recurring operations of a taxpayer, such as salary, rent, or profits from business, and is taxable under various heads of income.
B. Relevant Judicial Precedents
- Ghanshyam (HUF) v. CIT (2009) 315 ITR 1 (SC)
The Supreme Court held that compensation received for death or injury under the Motor Vehicles Act is a capital receipt and not chargeable to tax under the Income Tax Act. - K.C. Agarwal v. CIT (1985) 156 ITR 763 (All.)
The Allahabad High Court ruled that an amount received by an assessee for injuries sustained in a road accident is a capital receipt because it compensates for the loss of earning capacity, and not for regular income. - CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
Compensation received for loss of a source of income was held to be a capital receipt, reinforcing the principle that if the source or means of income is affected, the payment is not taxable.
C. Income Tax Act, 1961 Provisions
- Section 2(24) defines “income” broadly, but compensation for personal injury or damage to life is not included unless it represents reimbursement of income lost (e.g., compensation for loss of salary or professional fees).
- There is no express provision in the Act that taxes compensation for personal physical injury, unless related to employment or business income.
4. Possible Judgement
Considering the facts of the case and the legal principles involved, it is evident that the amount of ₹10,000 paid by TSRTC to Mr. A is in the nature of compensation for personal injury. It was granted to offset the temporary physical suffering and loss of bodily function and not as compensation for income loss or business interruption.
Therefore, the amount is:
- Non-recurring in nature
- Compensatory and not substitutive of any taxable income
- Given not in the course of business, profession, or employment
Thus, the ₹10,000 is a capital receipt, and not liable to tax under the provisions of the Income Tax Act, 1961.
Final Observation:
Unless the compensation is directly linked to loss of business profits, salary, or other taxable income, the courts have consistently maintained that compensation for personal injury or disability is outside the scope of taxable income. Hence, Mr. A is not required to include the ₹10,000 as part of his total income for the relevant assessment year.
