Your Income Tax Return (ITR) could play a crucial role not just in tax compliance, but also in determining compensation in the event of a motor accident. In a significant ruling aimed at bringing greater consistency to compensation awards, the Supreme Court has held that courts should ordinarily rely on the latest ITR to assess the income of salaried individuals, while using the average income reported in the previous three years’ ITRs for self-employed persons, whose earnings are more likely to fluctuate.
The judgment, delivered on July 1, 2026, seeks to ensure a fairer and more realistic assessment of a victim’s earning capacity while reducing inconsistencies in compensation calculations across courts.
“The Supreme Court’s direction brings much-needed consistency in motor accident compensation cases by treating ITRs as a key statutory record for income assessment,” an tax expert said. “The Court has drawn a practical distinction: for salaried individuals, the latest ITR of the immediately preceding year can generally reflect the correct annual income, while for self-employed individuals or business owners, the average income of up to the previous three years’ ITRs should ordinarily be considered because their income may fluctuate year to year,” he said.
Why is this important?
This is important because accident compensation is directly linked to the income of the deceased or injured claimant. “A salaried person’s income is usually more stable and verifiable through Form 16, salary slips and ITR, whereas business or professional income can vary due to market cycles, one-time gains, losses or seasonality. Therefore, relying only on one year’s income for a self-employed person may either overstate or understate the real earning capacity,” he said.
For taxpayers, therefore, filing ITR correctly and consistently is not only important for tax compliance, loans and visas, but can also become critical evidence in legal and compensation matters. Many self-employed individuals under-report income or avoid filing returns to reduce tax, but in unfortunate events such as accidents, the same lower reported income may reduce the compensation payable to the family.
