The Supreme Court of India has ruled that allowances forming part of a deceased’s salary must be included when computing compensation in motor accident claims. In a significant judgment, the Court also held that any deduction towards income tax from the compensation amount must be calculated based on the applicable tax slabs for the relevant year and not at a flat rate.
A bench comprising Justice Pamidighantam Sri Narasimha and Justice Manoj Misra delivered the verdict in an appeal, Manorma Sinha & Anr. vs. The Divisional Manager, Oriental Insurance Company Limited & Anr. The Court set aside an order of the High Court of Judicature at Patna, enhancing the compensation awarded to the appellants from Rs. 38,15,499 to Rs. 74,43,631.
Background of the Case
The case originated from a claim petition (Claim Case No. 196 of 2011) filed before the Motor Accident Claims Tribunal, Muzaffarpur, following the death of a 27-year-old engineer in a motor accident. The Tribunal calculated the compensation at Rs. 88,20,454. The deceased was an employee of the Power Grid Corporation of India, a public sector undertaking.
The Oriental Insurance Company Limited challenged the Tribunal’s award before the Patna High Court in Miscellaneous Appeal No. 804 of 2017. The High Court substantially reduced the compensation to Rs. 38,15,499. The key differences in computation were that the High Court excluded allowances from the deceased’s salary, reduced the addition for future prospects from 50% to 40%, and applied a flat 30% deduction for income tax. The claimants subsequently appealed this reduction to the Supreme Court.
Arguments Before the Supreme Court
The counsel for the appellants argued that the High Court had erred in excluding allowances and applying an incorrect flat rate for income tax deduction, which should have been based on the prevailing tax slabs.
Conversely, the respondent insurance company contended that allowances must be excluded in the computation of salary, citing the Supreme Court’s decision in Gestetner Duplicators (Pvt.) Ltd. v. Commissioner of Income Tax, West Bengal. They further argued that deducting income tax is mandatory, as held in Ranjana Prakash & others v. Divisional Manager & another.
Court’s Analysis and Findings
The Supreme Court, in its judgment authored by Justice Manoj Misra, addressed the three contentious issues: the inclusion of allowances, the rate of income tax deduction, and the percentage for future prospects.
On Inclusion of Allowances:
The Court found that the High Court had erred in excluding allowances. It relied on a series of precedents to affirm that “income” for compensation purposes has a broad connotation. The judgment noted that in National Insurance Co. Ltd. v. Indira Srivastava & Ors., it was held that a court must consider not just the “pay packet” but also “other perks which are beneficial to the members of the entire family.”
The Court further cited National Insurance Company Ltd. v. Nalini & Ors., which held that all emoluments and benefits accruing to the deceased ought to be included, “irrespective of whether they are taxable or not.” Based on this, the Supreme Court concluded that the Tribunal had correctly computed the deceased’s total monthly income at Rs. 53,367, including all allowances.
On Income Tax Deduction:
While agreeing that deduction for income tax is permissible as laid down in Ranjana Prakash (supra), the Court held that the rate of deduction cannot be arbitrary. The judgment stated, “deduction towards income tax should be at such rate which the annual income may be subjected to in the relevant year.”
The Court proceeded to calculate the annual income (Rs. 6,40,400 approximately) and applied the income tax slabs for the relevant assessment year to determine the precise tax liability as Rs. 62,080. It rejected the High Court’s flat 30% deduction.
On Future Prospects:
The Supreme Court observed that the deceased was 27 years old and held a permanent job with a public sector undertaking. Referring to the constitutional bench decision in National Insurance Company Limited v. Pranay Sethi & Ors., the Court held that the addition for future prospects must be at the rate of 50% for a deceased with a permanent job who was below 40 years of age. It, therefore, found that the High Court was not justified in reducing this to 40%.
Final Computation and Decision
Based on its analysis, the Supreme Court recalculated the just compensation. After determining the net annual income post-tax, deducting 50% towards personal expenses (as the deceased was a bachelor), adding 50% for future prospects, and applying a multiplier of 17 (as per Sarla Verma & Ors. v. Delhi Transport Corporation & Ors.), the loss of dependency was calculated at Rs. 73,73,631.
To this, the Court added Rs. 70,000 under conventional heads (Rs. 15,000 for loss of estate, Rs. 40,000 for loss of filial consortium, and Rs. 15,000 for funeral expenses) as specified in Pranay Sethi (supra).
The final compensation was determined to be Rs. 74,43,631. The Supreme Court allowed the appeal and directed the insurance company to pay the enhanced amount with interest at 6% per annum from the date of the claim petition until realization.
