In a significant ruling aimed at bringing greater uniformity to motor accident compensation awards, the Supreme Court has framed clear principles on how Income Tax Returns (ITRs) should be used while determining the annual income of deceased victims.
A Bench comprising Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh drew a distinction between salaried employees and self-employed individuals, holding that different methods are necessary because of the nature of their earnings.
For salaried employees, the Court ruled that the Income Tax Return for the assessment year immediately preceding the accident should ordinarily serve as the benchmark for calculating annual income. According to the Bench, the latest return is the most reliable reflection of a person’s earnings since it captures salary revisions, promotions and other recent financial developments.
The Court noted that promotions often have a substantial impact on income and may only be reflected in the most recent tax return. In situations where an employee had recently been promoted but had not yet filed an ITR reflecting the higher salary, tribunals may rely on supporting documents such as promotion orders and other financial records to determine actual earning capacity.
The Bench, however, adopted a different approach for self-employed individuals and business owners, observing that their income frequently fluctuates due to market conditions, business cycles and investment patterns. It therefore held that tribunals should ordinarily consider the average income disclosed in the previous three years’ Income Tax Returns while assessing compensation.
The Court clarified that this three-year average is intended to provide a fairer picture of earnings by smoothing out annual variations that are common in business and professional income.
Recognising that not every claimant may have three years of tax returns available, the Bench said tribunals must examine the surrounding circumstances before arriving at a final figure. Factors that may be considered include the nature and location of the business, its growth trajectory, the effect of the deceased’s death on its operations, future earning potential, losses incurred during the initial stages of the business and any other relevant circumstances affecting income.
The judgment arose from a batch of appeals involving compensation claims under the Motor Vehicles Act, 1988. In each case, the deceased was self-employed and had filed Income Tax Returns, but the Motor Accident Claims Tribunals and the respective High Courts had adopted different methods for assessing annual income. Some relied solely on the latest return, while others calculated an average using returns from multiple years, resulting in varying compensation awards.
Observing that such inconsistency had led to uncertainty in compensation calculations, the Supreme Court accepted the broad framework suggested by the amici curiae assisting the Court and laid down uniform guidelines for future cases.
With this ruling, the Court has provided a structured approach for tribunals across the country, seeking to ensure that compensation in motor accident claims is assessed on a more consistent and equitable basis while taking into account the differing financial realities of salaried employees and self-employed individuals.