For bringing in a consistency in the mode of calculation of a deceased's annual income for determining the motor accident compensation claims, the Supreme Court has laid down comprehensive guidelines for assessing the annual income of victims in motor accident compensation cases, drawing a clear distinction between salaried employees and self-employed persons.
A bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh held that the Income Tax Return (ITR) of the immediately preceding assessment year should ordinarily be considered for salaried individuals, whereas for self-employed persons or business owners, tribunals should ordinarily take the average income reflected in the previous three years' ITRs, subject to the surrounding circumstances of each case.
The main issue before the Court was about the method for determining the annual income of a deceased person where income tax returns were available.
Since no uniform method could be applied for salaried and self-employed individuals, the Court agreed with the suggestion made by Sr. Adv. J.R. Midha and Adv. Salil Paul, who were appointed as Amicus Curiae in the matter, to apply different considerations to salaried employees and self-employed persons.
For salaried employees, the Court observed that the latest ITR generally reflects promotions, increments, and the prevailing salary immediately before the accident. Consequently, the ITR for the immediately preceding assessment year would ordinarily provide the most accurate picture of earning capacity.
“There must be a bifurcation made between salaried individuals and self-employed individuals when it comes to assessment of annual income. In our view, for salaried individuals, only the ITR of the previous year will be sufficient for showcasing the annual income from salary. The reason for considering only the preceding year is that the financial impact of promotions is significant and may be reflected in the ITR for only that year. A situation may also arise whereby the deceased/claimant might not have completed a year in the promoted position before the accident or might not have filed ITR for such period. In such cases the Court concerned shall take reference to the promotion letter and other corroboratory financial statements.”, the Court observed.
However, the Court held that such an approach may not be appropriate for self-employed persons, whose income often fluctuates because of market conditions, business cycles, and investment patterns.
“When it comes to self-employed / individuals carrying out their own business, in our view, the average of the income specified in the ITRs of up to the previous three years is to be taken as a reference point for assessment of annual income from their business.”, the Court observed.
Further, the Court pointed out that other surrounding circumstances may also be taken into consideration while computing income.
“There may also be a scenario where only one or two ITRs have been filed. Given such scenarios and the fluctuation of income in these professions, surrounding circumstances are also to be taken into consideration.
These would include:
a) The nature of the business (including geographic location, category etc.);
b) Growth pattern of the business and impact of death on the business;
c) Potential growth of business (for instance certain businesses are capital intensive at the outset and are profitable at scale/in the future);
d) Negative income (certain businesses may require losses in the initial years, which may not reflect the true financial standing); and
e) Any other relevant factor relating to the business.”, the Court said.
Background
The batch of appeals before the Supreme Court arose out of three separate motor accident compensation claims under the Motor Vehicles Act, 1988, where the principal dispute was the proper method of assessing the annual income of deceased persons for computing compensation.
In all three cases, the deceased were self-employed individuals whose income was reflected in Income Tax Returns (ITRs). However, the Motor Accident Claims Tribunals (MACTs) and the respective High Courts adopted different methods for determining their annual income. While some relied on the latest ITR, others averaged two or more years' returns, leading to inconsistent compensation awards.
Recognising the recurring nature of the issue and the divergent approaches adopted by tribunals across the country, the Supreme Court framed the following question for determination:
“whether for assessing the annual income of a deceased person or claimant under the Motor Vehicles Act 1988, the ITRs for the previous year is appropriate or average of the past two/three years is to be taken into consideration?”
Applying the method elaborated above, the Court modified the compensation in all three appeals.
