Summary of this article
Supreme Court issues separate ITR guidelines for accident compensation assessment.
Salaried employees' latest ITR to ordinarily determine annual income.
Self-employed victims' income generally averaged using three years' ITRs.
The Supreme Court has laid down guidelines for using Income Tax Returns (ITRs) to determine the annual income of victims in motor accident compensation cases. The judgement has drawn a distinction between salaried employees and self-employed individuals, to reduce inconsistencies in compensation awarded by tribunals.
The bench has held that tribunals should rely on the ITR of the immediately preceding assessment year to assess the income of salaried employees. For self-employed individuals and business owners, the previous three years' ITRs can generally be considered to consider their income, subject to the facts of each case.
The judgment came while deciding a batch of appeals under the Motor Vehicles Act, 1988. The main concern was the proper method for assessing the income of deceased victims when income tax returns were available.
Approach May Differ From Case To Case
The court has stated that salaried employees usually receive promotions, annual increments, and salary revisions over time. Therefore, the latest ITR is more likely to reflect their actual earning capacity immediately before the accident took place. Where an employee, who has been promoted recently, has not yet filed an ITR showing the revised salary, tribunals may consider documents such as the promotion letter and other financial records.
The income of a self-employed individual may vary due to business conditions, availability of projects, market cycles, investments, etc. Relying only on the latest ITR may not present a complete picture of earnings in such cases. Averaging income reflected in the previous three years' ITRs would generally provide a fairer basis for calculating compensation, stated the Bench.
The judgment has also clarified that even if only one or two ITRs are available, tribunals should look at other relevant circumstances before arriving at the annual income.
Factors Beyond ITRs
The court stated that tribunals may also consider factors such as the nature and location of the business, its growth pattern, the impact of the victim's death on the business, future earning potential and cases where businesses reported losses during their initial years before becoming profitable.
The ruling arose from three appeals in which different Motor Accident Claims Tribunals and high courts had adopted varying methods to calculate the income of self-employed victims. While some relied only on the latest ITR, others averaged returns from multiple years, resulting in different compensation amounts.
