Supreme Court Issues Guidelines For Assessing Income In Motor Accident Claims; Says Average Of 3 Years' ITR For Self-Employed & Last Year's ITR For Salaried

"When it comes to self-employed individuals carrying out their own business, 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." Supreme Court, in a significant judgment dated July 1, 2026, has established clear guidelines for the assessment of a deceased person’s annual income using Income Tax Returns (ITRs) for determining compensation under the Motor Vehicles Act, 1988.

A bench comprising Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh held that while for salaried individuals, the ITR of the preceding year is sufficient, a three-year average should generally be adopted for self-employed persons to account for business fluctuations.

The Court observed that the objective behind the claim process is to grant ‘just and fair compensation’ that adequately restores the aggrieved to the position they occupied prior to the accident. While ITRs serve as statutory documents and important reference points, the bench emphasized that there can be no "hard and fast formula" that applies universally across different employment categories.

The Court was dealing with a batch of appeals, led by the case of Rashmirekha Tripathy, concerning the death of individuals involved in business or self-employment. In the lead case, the deceased was running a construction business, and disputes arose between the Motor Accident Claims Tribunal (MACT) and the High Court regarding whether to rely on a single year's ITR or an average of multiple years to calculate the loss of dependency.

The primary question before the Court was whether, for assessing the annual income of a deceased person under the Motor Vehicles Act, it is appropriate to consider the ITR of the previous year only, or if an average of the past two to three years must be taken. The Court also examined the relevance of other factors such as business growth patterns and the timing of ITR filings.

No Hard And Fast Formula For Computing Income

The Court noted that ITRs are prima facie evidence of income but may not always reflect the true financial standing of a deceased individual. Factors such as the nature of the business and the growth pattern must be considered to ensure the compensation is neither arbitrary nor niggardly.

The bench reiterated that determination of compensation is not an exact science and involves an assessment based on estimation and conjectures. It observed that while money cannot truly compensate for the loss of a loved one, the element of fairness in the determined amount is the "ultimate guiding factor."

"The purpose of award of compensation... is to place the distressed dependents of the victim of a fatal road accident, if the victim had been the sole bread earner, in almost the same position financially if he lived his natural span of life."

Distinction Between Salaried And Self-Employed Individuals

A crucial aspect of the ruling is the bifurcation created between salaried and self-employed individuals. The Court found force in the submissions of the Amicus Curiae that business income patterns vary significantly from fixed salaries, requiring a different evidentiary standard for income assessment.

For salaried individuals, the Court held that only the ITR of the previous year will be sufficient for showcasing annual income. The reason for this is that the financial impact of promotions and annual increments is significant and is most accurately reflected in the immediate preceding year's filing.

Assessment Of Income For Self-Employed Persons

When dealing with self-employed individuals or those running their own business, the Court held that the average income specified in the ITRs of up to the previous three years should be taken as the reference point. This approach mitigates the risk of relying on a single year that might have seen an unusual peak or dip in profits.

The bench further identified several surrounding circumstances to be considered in business cases, including the geographic location and category of business, growth patterns, and potential future profitability. It noted that certain capital-intensive businesses might show negative income in initial years, which should not be misconstrued as a lack of earning capacity.

"Given such scenarios and the fluctuation of income in these professions, surrounding circumstances are also to be taken into consideration."

Impact Of Post-Death ITR Filings

The Court expressed caution regarding ITRs filed after the date of death or injury, noting that there may be scenarios where income is "inflated" to secure higher compensation. In such circumstances, the bench held that the surrounding factors of the business become more relevant and must be supported by corroborated financial statements.

In the case of Smt. Rekha v. Dinesh Porwal, where ITRs were filed after the death of a grocery store owner, the Court chose to fix a reasonable annual income based on the nature of the profession rather than relying solely on the potentially enhanced figures in the post-death returns.

Final Directions and Orders

In Rashmirekha Tripathy, the Court enhanced the annual income to Rs. 14,00,000 and awarded a total compensation of Rs. 1,97,81,505. In the case of the deceased insurance agent (Rajani v. Mukesh), the Court assessed the average of three years and enhanced the compensation to Rs. 87,09,282. For the grocery store owner, the compensation was fixed at Rs. 60,79,550.

The Court directed that the enhanced amounts be remitted directly into the bank accounts of the claimant-appellants within four weeks. The bench also clarified that interest on the enhanced amounts would be paid at the rates originally awarded by the respective Tribunals.

This judgment provides much-needed clarity for Tribunals and High Courts across India, ensuring a uniform approach to income assessment. By distinguishing between the stability of salary and the volatility of business income, the Supreme Court has balanced the need for statutory evidence with the ground realities of the Indian economy.

Date of Decision: July 1, 2026