2010 (9) TMI 342 - HC - Income Tax

Capital gains Acquisition of land enhanced compensation received and no return filed Rectification cannot be made under section 155(7A) Enhanced compensation not taxable in the year of receipt or in the year of acquisition

Summary

Issues involved:
1. Taxability of enhanced compensation received by the assessee.
2. Method of accountancy adopted by the assessee.
3. Taxability of interest received by the assessee.

Detailed Analysis:

Issue 1: Taxability of Enhanced Compensation
The judgment discusses the application of Section 45 of the Income-tax Act, 1961, which pertains to the taxation of capital gains arising from the transfer of a capital asset. It is established that for capital gains tax to apply, there must be a transfer of a capital asset owned by the assessee, resulting in profits or gains accruing to the assessee. The case involves land acquired by the father of the assessee in 1972, with compensation later enhanced and received by the assessee in 1984. The judgment delves into the provisions of Section 45(5)(b) and Section 155(7A) to determine the taxability of the enhanced compensation. It is concluded that neither provision applies in this case, leading to the enhanced compensation not being exigible to tax for the assessment year 1985-86.

Issue 2: Method of Accountancy
The judgment explores the method of accounting adopted by the assessee, crucial in determining the taxability of interest received. Section 145 of the Act allows for various systems of accounting, including cash, mercantile, or hybrid systems. The judgment emphasizes that under the cash system, tax liability is based on cash receipts, while the mercantile system aligns tax liability with accrued income for the assessment year. It is highlighted that the assessee's choice of accounting method, whether cash or mercantile, significantly impacts the taxation of interest received. In this case, as the assessee did not demonstrate a history of declaring interest income on an accrual basis, it is inferred that the cash system was followed, resulting in the interest received during the assessment year 1985-86 being subject to income tax.

Issue 3: Taxability of Interest Received
The judgment distinguishes between interest awarded under different sections of the Land Acquisition Act, 1894, and the impact on tax liability. Interest under section 28 of the 1894 Act is treated as compensation and taxed accordingly. However, the taxability of interest under section 34 of the 1894 Act hinges on the method of accountancy employed by the assessee. It is underscored that the chosen accounting method, whether cash or mercantile, dictates the taxation of interest income. Consequently, the interest received during the assessment year 1985-86 is deemed taxable based on the assessee's accounting practices.

In conclusion, the judgment provides a comprehensive analysis of the issues surrounding the taxability of enhanced compensation and interest received by the assessee, elucidating the legal principles and provisions guiding the assessment.