2010 (10) TMI 581 - HC - Income Tax

Capital gain - Compulsory acquisition of land - Method of accounting - whether the interest on enhanced compensation received by the assessee is exigible to tax in the year of receipt or at the time when the lis regarding compensation for the acquired land attains finality - In order to constitute income the receipt must come as a return from a definite source which is of the character of income according to the ordinary meaning of that word - Under cash system the income is exigible to tax only on the basis of actual receipt irrespective of the fact whether the same had arisen or not whereas mercantile system envisages accrual or arising of income or deemed to accrue or arise during the year in question - it is clear that interest directed by the Collector partakes the character of compensation and forms part thereof under Section 34 of the Act whereas the interest ordered by the Court falls under Section 28 of the Act - Appeal is allowed

Issues Involved:
1. Applicability of ratio from CIT Vs. Hindustan Housing & Land Development Trust Limited post insertion of Section 45(5) of the Income Tax Act.
2. Taxability of additional compensation and interest before finality from the High Court.

Issue-Wise Detailed Analysis:

1. Applicability of ratio from CIT Vs. Hindustan Housing & Land Development Trust Limited post insertion of Section 45(5) of the Income Tax Act:

The Revenue challenged the Tribunal's decision, which applied the ratio from CIT Vs. Hindustan Housing & Land Development Trust Limited, arguing that Section 45(5) of the Income Tax Act, inserted by the Finance Act, 1987, w.e.f. 1.4.1988, specifically mandates that enhanced compensation is chargeable under the head "capital gains" in the year of receipt. The Supreme Court, in Ghanshyam (HUF)'s case, clarified that enhanced compensation under the Land Acquisition Act, 1894, is deemed income and taxed on receipt basis, regardless of whether the compensation is in dispute. This ruling overrides the Tribunal's application of the earlier case law, affirming that enhanced compensation is taxable in the year of receipt, as per Section 45(5)(b).

2. Taxability of additional compensation and interest before finality from the High Court:

The core issue was whether additional compensation and interest received by the assessee are taxable before the finality of the litigation. The Tribunal held that neither additional compensation nor interest could be taxed until the High Court's decision. However, the Supreme Court in Ghanshyam (HUF)'s case distinguished between interest under Sections 28 and 34 of the Land Acquisition Act, 1894. Interest under Section 34, awarded by the Collector, is part of compensation and taxable as "capital gains" in the year of receipt. In contrast, interest under Section 28, awarded by the Court, is taxable as "income from other sources" under Section 56 of the Income Tax Act, also in the year of receipt. This distinction was pivotal in determining the taxability of interest received on enhanced compensation.

Detailed Analysis of Relevant Sections and Case Law:

Section 2(24) and Definition of Income:

Section 2(24) of the Income Tax Act provides an inclusive definition of "income," encompassing various categories. The Act's charging provision, Section 4, taxes the total income of the previous year. Section 5 specifies that income includes amounts that accrue, arise, or are received during the year. The method of accountancy (cash or mercantile) followed by the assessee, as per Section 145, determines the timing of income recognition.

Interest on Enhanced Compensation:

Interest on enhanced compensation under Section 28 of the Land Acquisition Act is discretionary and awarded by the Court for excess compensation. It is taxable as "income from other sources" under Section 56. Interest under Section 34, awarded by the Collector for delayed payment, is part of compensation and taxable as "capital gains" under Section 45(5)(b). The Supreme Court's interpretation in Ghanshyam (HUF)'s case clarified these distinctions, influencing the tax treatment of such receipts.

Legislative Amendments:

The Finance (No.2) Act, 2009, incorporated Sections 145A(b) and 56(1)(viii), effective from 1.4.2010, mandating that interest on enhanced compensation is taxable in the year of receipt, irrespective of the accountancy method. This legislative change aligns with the judicial interpretation, ensuring consistent tax treatment.

Conclusion:

The High Court concluded that enhanced compensation and interest received by the assessee are taxable in the year of receipt, as per Section 45(5)(b) and Section 56 of the Income Tax Act, respectively. The Tribunal's reliance on the earlier case law was overridden by the Supreme Court's ruling in Ghanshyam (HUF)'s case. The appeal was allowed, affirming the Revenue's position, with no costs awarded.

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