The Supreme Court has established a comprehensive framework for calculating income of people killed or injured in motor accidents, ruling that Income Tax returns (ITRs) should be the reference point while determining compensation under the Motor Vehicles Act. According to reports from Business Standard, the court emphasized that while there cannot be a fixed formula for calculating annual income in every accident compensation case, courts must follow a consistent approach depending on whether the victim was a salaried employee or self-employed. The judgment aims to reduce inconsistencies in compensation decisions across different courts, where conflicting approaches often resulted in different compensation amounts for similar cases. As per the latest Supreme Court judgment, the ruling came while deciding an appeal filed by the family of Manoranjan Pandey, who lost his life in a road accident in Odisha in May 2018, demonstrating the practical application of these guidelines.
For salaried individuals, the Supreme Court stated that the ITR filed for the immediately preceding financial year should ordinarily be considered to establish annual income, as reported by Press Trust of India. A bench of justices Sanjay Karol and N Kotiswar Singh observed that salary income is usually more stable compared with business earnings, and the latest available tax return provides a reasonable basis for calculation. The court noted that salary changes due to promotions or revisions could significantly impact income and may not always appear in older tax records. However, if a person had received a promotion or salary revision shortly before the accident and the change was not reflected in the latest ITR, courts can consider supporting documents such as promotion letters or other financial records. The Supreme Court clarified that courts may also consider promotion letters, salary records, financial statements and other supporting evidence depending on the circumstances, ensuring that compensation reflects the person's actual earning capacity at the time of the accident.
For self-employed individuals and business owners, the Supreme Court said the average income reflected in up to the previous three years' Income Tax Returns should ordinarily be taken as the reference point, as reported by Press Trust of India. The court highlighted that business income can fluctuate due to several factors unlike fixed salary income, and factors such as the nature of the business, growth pattern, the impact of the person's death on business operations, future growth potential and other relevant circumstances should be considered. The Supreme Court noted that business income often fluctuates due to market conditions, investments and business cycles, making averaging multiple years' income a fairer assessment method. For example, a business owner may report higher or lower income in different years due to market conditions, expansion, losses or other commercial factors, making relying only on one year's return inadequate. Courts should also examine the nature of the business, geographical location, growth trajectory, future expansion prospects, capital investments and other relevant commercial factors before arriving at a fair assessment.
The Supreme Court also cautioned courts against mechanically accepting income figures shown in tax returns, particularly in cases where there may be concerns about sudden changes in reported earnings, according to Press Trust of India. The bench observed that the date of filing ITRs could also become relevant in some cases, as there could be situations where inflated income is shown after death or injury. However, the court stated that if higher income figures are supported by proper financial statements and evidence, they may also be considered while calculating compensation. The Supreme Court emphasized that courts should not follow a rigid or mechanical formula while assessing compensation, noting that different courts were following inconsistent approaches while calculating compensation under the Motor Vehicles Act. The court also cautioned against blindly accepting Income Tax Returns filed after the death or injury of a claimant, stating that such returns may occasionally show inflated income and should be examined carefully with supporting financial statements and corroborative evidence.
The ruling came while hearing appeals filed by families of victims who lost their lives in motor accidents, with the Supreme Court delivering uniform guidelines for determining the income of deceased victims in motor accident compensation cases. According to Press Trust of India, the court found that the Orissa High Court had erred by mechanically averaging two Income Tax Returns without considering the deceased's growing construction business. The apex court reassessed the deceased's annual income at ₹14 lakh and enhanced the compensation payable to the family to ₹1,97,81,505, compared to ₹1,87,75,150 awarded by the High Court. The Supreme Court's objective is to restore, as far as possible, the financial security of the dependants of a deceased victim, with the court observing that while no monetary amount can truly compensate for the loss of a loved one, compensation must always remain fair, reasonable and neither arbitrary nor inadequate. The ruling provides a clearer method for courts to assess income, which could directly influence how accident compensation claims are decided in future cases across the country. The court has directed its registry to circulate the guidelines to all Motor Accident Claims Tribunals and high courts across the country to ensure uniform application in pending and future matters.
