TDS on Interest from MACT Fixed Deposits: What Kerala High Court Decided in Kavya Shaji Vs Union of India
Background of the Dispute
The case of Kavya Shaji Vs Union of India before the Kerala High Court revolved around whether banks are required to deduct TDS on interest earned from fixed deposits created out of compensation awarded by a Motor Accidents Claims Tribunal (MACT).
The assessee–petitioners were the children of late K.A. Shaji, who passed away in a road accident on 01.08.2005. Seeking compensation, they, along with their mother, approached the Motor Accidents Claims Tribunal, Ernakulam by filing O.P.(MV) No.373/2006.
The Tribunal awarded compensation and directed the Insurance Company to deposit specific sums in the names of the minor petitioners. In compliance with this direction, fixed deposits were opened with the second respondent bank on 18.01.2011, as evidenced by Exts.P1 and P2.
When the petitioners attained majority and later encashed these fixed deposits in 2021 and 2022, they discovered that the bank had deducted TDS on the interest that had accrued over the years on those deposits. This deduction pertained to interest for the periods 2011 to 2021 and 2013 to 2020, respectively.
The core grievance was that the interest on these deposits, according to the petitioners, should enjoy exemption from TDS under Section 194A(3)(ix) and Section 194A(3)(ixa) of the Income Tax Act 1961, since the corpus originated from MACT compensation.
Reliefs Sought Through the Writ Petition
The petitioners approached the Kerala High Court through a writ petition, seeking primarily:
- A writ of mandamus or equivalent direction directing the respondents to refund the amounts collected as TDS, together with 12% interest until actual payment.
- Any other order or direction that the Court might deem appropriate in the circumstances.
In essence, they wanted the TDS deducted on the interest from the fixed deposits to be remitted back to them directly by the respondents through writ jurisdiction.
Statutory Framework: Section 194A(3)(ix) and Section 194A(3)(ixa)
The central legal issue turned on the interpretation of the following clauses in Section 194A(3) of the Income Tax Act 1961:
“(ix) to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal;
(ixa) to such income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees;”
These provisions carve out a specific exemption from TDS in relation to interest on compensation awarded by a Motor Accidents Claims Tribunal. The controversy was whether this exemption extends to interest earned on bank fixed deposits made out of the compensation amount, or whether it is confined to interest forming part of the Tribunal’s award itself.
Arguments Put Forth by the Petitioners
The petitioners’ stand was straightforward: