Supreme Court Clarifies Latest ITR May Apply to Salaried Persons, but Business Owners’ Income Requires Wider Assessment While Determining Accident Compensation
Supreme Court Lays Down Guidelines for Using Income Tax Returns to Assess Income in Motor Accident Compensation Claims
Facts
On 29 May 2018, Manoranjan Pandey, aged 39 years, was travelling from Behrampur to Bhubaneswar in his vehicle when a truck bearing registration No. AP-05TD-2112, allegedly driven rashly and negligently, collided with his vehicle near Kaliabali Chakka on the National Highway. He sustained serious injuries and died during treatment.
An FIR was registered at Chamakhandi Police Station under Sections 279, 337, 338 and 304-A of the Indian Penal Code.
The deceased’s legal representatives filed a claim petition under Section 166 of the Motor Vehicles Act, 1988, seeking compensation of ₹2.25 crore. They contended that the deceased ran a construction business, earned approximately ₹15 lakh annually and was the sole breadwinner of the family.
The Motor Accident Claims Tribunal, Behrampur, assessed his annual income at ₹15 lakh based on the Income Tax Return for Assessment Year 2018–19. After adding future prospects, deducting personal expenses and applying the multiplier, the Tribunal awarded ₹2,27,00,064 with interest at 6% per annum from the date of the claim petition.
The insurance company appealed before the Orissa High Court. The High Court averaged the deceased’s income disclosed in two Income Tax Returns and reduced his annual income to ₹13,33,226. It also applied a multiplier of 15 and reduced the compensation to ₹1,87,75,150.
The claimant-appellants approached the Supreme Court, primarily challenging the method used to assess the deceased’s annual income.
Issues
- Whether the income of a deceased or injured claimant under the Motor Vehicles Act should be assessed on the basis of the Income Tax Return for the immediately preceding year.
- Whether the average income disclosed in the Income Tax Returns of the previous two or three years should ordinarily be considered.
- Whether different principles should apply to salaried persons and self-employed persons or business owners.
- Whether Income Tax Returns filed after the accident or death can be relied upon while calculating compensation.
- What factors should be considered where business income fluctuates or does not accurately reflect the person’s earning potential.
Petitioner’s Arguments
The claimant-appellants contended that the High Court had incorrectly reduced the deceased’s annual income by mechanically averaging the two Income Tax Returns on record.
They argued that the most recent Income Tax Return reflected an annual income exceeding ₹15 lakh and represented the deceased’s financial position immediately before the accident.
The deceased was running a construction business, and his income had shown an upward trend. Therefore, the nature and growth of the business ought to have been considered instead of relying only on a mathematical average.
The appellants submitted that the compensation awarded by the High Court was inadequate and did not satisfy the statutory requirement of awarding just and fair compensation.
Respondent’s Arguments
The insurance company supported the High Court’s approach of considering more than one Income Tax Return.
It contended that relying exclusively upon the most recent return could result in an inaccurate or inflated assessment, particularly where the deceased was self-employed and his income fluctuated from year to year.
The insurer maintained that averaging the previous returns provided a more balanced and reliable assessment of the deceased’s annual income.
It also challenged the Tribunal’s application of the multiplier and the manner in which the original compensation had been calculated.
Analysis of the Law
The Supreme Court reiterated that the purpose of compensation under the Motor Vehicles Act is to award an amount that is just, fair and reasonable.
Compensation cannot truly replace the loss of life or companionship. It is a financial approximation intended to reduce the economic hardship caused to the dependants. The determination of compensation is not an exact science and necessarily involves estimation based upon the particular facts of each case.
The Court held that Income Tax Returns are statutory documents and constitute an important reference point for determining income. However, no rigid or universal formula can be applied in every case.
The Court drew a clear distinction between salaried persons and self-employed persons.
Salaried persons
For a salaried person, the Income Tax Return for the immediately preceding year would ordinarily be sufficient to determine annual salary.
The latest return is particularly relevant because:
- a promotion or salary increase may be reflected only in the most recent year;
- the employee may not have completed an entire year after promotion; and
- the return for the promoted salary period may not yet have been filed.
Where necessary, courts may also consider the promotion letter, salary slips, bank statements and other corroborative financial records.
Self-employed persons and business owners
For a self-employed person or an individual carrying on business, the average income shown in Income Tax Returns for up to the previous three years should ordinarily be used as a reference point.
However, the average cannot be applied mechanically. Courts must also examine:
- the nature and geographical location of the business;
- the business category and market conditions;
- the historical growth pattern;
- the effect of the person’s death upon the business;
- the future earning potential of the business;
- whether the business required heavy initial investment;
- whether early losses were commercially normal; and
- any other relevant surrounding circumstance.
Where only one or two returns are available, the court must assess the available returns along with the surrounding evidence.
Returns filed after death or injury
The date of filing the Income Tax Return is also relevant. A return filed after the death or accident may contain inflated income figures intended to increase compensation.
Such a return should therefore be examined carefully and corroborated through:
- balance sheets;
- books of accounts;
- bank records;
- business statements;
- tax records; and
- other contemporaneous financial documents.
A return filed after the death or injury is not automatically inadmissible. It may be considered where the figures are adequately supported by independent financial material.
Precedent Analysis
V. Pathmavathi v. Bharti AXA General Insurance Co. Ltd.
The Supreme Court reiterated that money cannot truly compensate for the death of a family member. The statutory exercise is intended to ease the financial burden on the dependants, and the compensation must neither be arbitrary nor unduly conservative.
Reshma Kumari v. Madan Mohan
A three-judge Bench held that compensation under Sections 166 and 168 of the Motor Vehicles Act should, as far as possible, place the dependants in the financial position they would have occupied had the deceased lived his normal lifespan.
At the same time, compensation should not place the claimants in a better financial position than they would otherwise have enjoyed.
Anant v. Pratap
The Court held that the object of compensation under the Motor Vehicles Act is to fully and adequately restore the aggrieved persons, as far as money can, to the position existing before the accident.
ICICI Lombard General Insurance Co. Ltd. v. Ajay Kumar Mohanty
The Court had considered the average income reflected in the Income Tax Returns of the preceding three years while assessing the claimant’s income.
The Supreme Court clarified that such averaging is particularly relevant to self-employed persons and business owners, whose income may fluctuate.
National Insurance Co. Ltd. v. Pranay Sethi
The Court applied the principles governing future prospects, deduction towards personal expenses and compensation under conventional heads.
Since the deceased was 39 years old and self-employed, 40% was added towards future prospects. A one-third deduction was made towards personal expenses, and a multiplier of 15 was applied.
United India Insurance Co. Ltd. v. Satinder Kaur
The Court relied upon this decision for awarding consortium to the eligible dependants.
Rajwati alias Rajjo v. United India Insurance Co. Ltd.
This decision was also relied upon in determining the amount payable towards consortium and the conventional heads.
Court’s Reasoning
The deceased’s Income Tax Returns disclosed the following annual incomes:
- Assessment Year 2017–18: ₹11,59,882
- Assessment Year 2018–19: ₹15,06,571
The High Court averaged the two returns and assessed the annual income at ₹13,33,226. However, it did not examine the nature of the deceased’s construction business, its growth pattern or the surrounding commercial circumstances.
The Supreme Court held that a purely mathematical average was insufficient. Since the deceased was carrying on a construction business and his income reflected substantial growth, the business circumstances had to be considered.
To ensure just and fair compensation, the Court fixed the deceased’s annual income at ₹14 lakh.
The compensation was recalculated by:
- adding 40% towards future prospects;
- deducting one-third towards personal expenses;
- applying a multiplier of 15;
- awarding compensation for loss of estate;
- awarding funeral expenses; and
- awarding consortium to three dependants.
The Court determined the total compensation at ₹1,97,81,505, as against:
- ₹2,27,00,064 awarded by the Tribunal; and
- ₹1,87,75,150 awarded by the High Court.
Interest on the enhanced amount was directed to be paid at the rate awarded by the Tribunal.
The amount was directed to be remitted directly into the bank accounts of the claimant-appellants within four weeks after the account details were supplied.
Conclusion
The Supreme Court held that no inflexible formula can govern the use of Income Tax Returns in motor accident compensation cases.
For salaried individuals, the immediately preceding year’s return will ordinarily provide the appropriate basis for determining income.
For self-employed persons and business owners, the average income disclosed in Income Tax Returns for up to the previous three years may be used as a reference point. However, courts must also consider the nature, growth pattern, earning potential and surrounding circumstances of the business.
Income Tax Returns filed after the accident or death may be considered only after examining whether the income figures are supported by contemporaneous financial evidence.
Applying these principles, the Court fixed the deceased’s annual income at ₹14 lakh and enhanced the compensation awarded by the High Court to ₹1,97,81,505.
Case: Rashmirekha Tripathy and Another v. Branch Manager (Legal Claims), Sriram General Insurance Company Limited and Others
Court: Supreme Court of India
Case Number: 2026 INSC 661; Civil Appeal arising out of SLP (C) No. 27220 of 2024
Judge: Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh
Date: 1 July 2026
Result: Appeal allowed; compensation enhanced from ₹1,87,75,150 to ₹1,97,81,505, with interest on the enhanced amount.
