The verdict, delivered by a bench of Justices Sanjay Karol and N Kotiswar Singh, aims to bring consistency across courts that have so far followed different methods while assessing compensation under the Motor Vehicles Act.
What has changed?
The Supreme Court has now clearly separated salaried individuals from self-employed professionals for the purpose of income assessment.
For salaried individuals
The court said that only the ITR of the immediate previous year should generally be considered while calculating annual income.
According to the bench, salaried employees often receive promotions or salary hikes that may only appear in the latest tax return. Using older ITRs could therefore understate their actual earnings.
However, the court added that if a recent promotion or pay revision is not fully reflected in the latest ITR, supporting documents such as promotion letters and salary records can also be considered.
For self-employed persons and business owners
For business owners, freelancers and self-employed professionals, the court ruled that income should ordinarily be calculated based on the average income shown in ITRs for up to the previous three years.
The reasoning is that business income tends to fluctuate due to market conditions, growth cycles, losses or changing business performance.
The court also clarified that surrounding business circumstances, such as nature of business, growth trends, negative income, and financial statements, may be examined before finalising compensation.
Why this ruling matters
Until now, courts across India followed different approaches while determining compensation amounts. Some relied only on the latest ITR, while others averaged several years of returns, leading to inconsistent payouts.
The Supreme Court said ITRs are statutory documents and should serve as a key reference point in assessing income claims.
The ruling is expected to:
- Bring uniformity in compensation calculations
- Reduce disputes between insurance companies and claimants
- Make accident compensation cases more predictable
- Increase the importance of timely and accurate ITR filing
Impact on taxpayers and families
The judgment also highlights how crucial properly filed ITRs can become beyond taxation purposes.
For salaried employees, maintaining updated salary records and filing accurate returns could help families secure fair compensation in unfortunate events.
For self-employed individuals, regularly filing ITRs and maintaining financial statements may now carry even greater legal and financial significance, especially since courts may examine multiple years of income history.
The court also cautioned against inflated post-accident income disclosures and said the timing of ITR filing would be closely scrutinised in suspicious cases.
Case background
The ruling came in a case involving the family of a 39-year-old construction businessman who died in a motor accident.
The businessman had reported annual incomes of around ₹11.6 lakh and ₹15.06 lakh in the two assessment years preceding his death.
While the Orissa High Court had fixed his income at an average of ₹13.33 lakh, the Supreme Court considered the growth potential and nature of his construction business and revised the annual income to ₹14 lakh.
As a result, compensation to the family was increased from ₹1.87 crore to ₹1.97 crore, with interest at 6% per annum.
-With PTI inputs
