2011 (1) TMI 558 - HC - Income Tax

Appeal to High Court - whether the interest on enhanced compensation is taxable in the hands of the assessee in the year of receipt - the similar issue came up for consideration before this Court (The Commissioner of Income Tax Faridabad v. Bir Singh (HUF) Ballabgarh) (2010 -TMI - 205309 - PUNJAB (b) where assessee is not maintaining books of accounts by adopting any specific method it shall be treated to be cash system of accountancy; (c) the interest under Section 34 to be awarded by the Collector partakes the characters of compensation and is taxable in the year of receipt in view of Section 45(5)(b) of the Act; and (d) under cash system of accountancy the element of interest awarded by the Court received on enhanced amount of compensation under Section 28 of the1894 Act falls for taxation under Section 56 as income from other sources in the year of receipt - answered in favour of the revenue

Summary

Issues:
1. Taxability of interest on enhanced compensation in the year of receipt.
2. Applicability of sections 45(5)(c) & 155(16) with retrospective effect for A.Y. 2003-04.

Analysis:

Issue 1: Taxability of interest on enhanced compensation
The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chandigarh Bench. The key question was whether the interest on enhancement compensation received by the assessee should be assessed in the year of receipt or when the matter is finally settled. The tribunal had dismissed the appeal of the revenue, leading to the current appeal. The High Court considered the case law and concluded that under the cash system of accountancy, interest on enhanced compensation falls under 'income from other sources' and is taxable in the year of receipt. The Court referred to a previous judgment to support this conclusion. Consequently, the first question was answered in favor of the revenue.

Issue 2: Applicability of sections 45(5)(c) & 155(16)
The second question regarding the applicability of sections 45(5)(c) & 155(16) with retrospective effect for the assessment year 2003-04 was deemed academic after resolving the first issue in favor of the revenue. The Court did not delve into this issue further, as it was no longer relevant to the decision at hand.

In summary, the High Court held that interest on enhanced compensation is taxable in the year of receipt under the cash system of accountancy. The appeal by the revenue was allowed, and the matter was disposed of accordingly.