2011 (1) TMI 612 - HC - Income Tax

Enhanced compensation and interest - The matter was considered by Hon ble Supreme Court in Commissioner of Income Tax, Faridabad Vs. Ghanshyam(HUF) 2009 -TMI - 34152 - SUPREME COURT and it was held that enhanced compensation was taxed in the year of receipt even if the proceeding has not attained finality in view of the amendment to Section 45(5) of the Act. Interest on compensation awarded by the Collector was part of compensation while interest on enhanced compensation was to be treated as income from other sources - Hence, the appeal is answered in favour of the revenue - Accordingly, the appeal is allowed

Summary

Issues:
1. Interpretation of taxability of enhanced compensation and interest received by the assessee.
2. Application of Section 45(5) of the Income Tax Act, 1961.
3. Determination of the year of taxability for enhanced compensation and interest on compensation.

Issue 1: Interpretation of taxability of enhanced compensation and interest received by the assessee:
The case involved an appeal by the revenue under Section 260A of the Income Tax Act, 1961 against an order passed by the Income Tax Appellate Tribunal. The main question was whether the enhanced compensation and interest received by the assessee should be taxed in the year of dispute or in the year of receipt. The Tribunal and CIT(A) had held that since the matter was still under dispute, the amount could not be taxed in the year of receipt. However, the Hon'ble Supreme Court in a previous case had clarified that the year of receipt is the year of taxability for enhanced compensation. The Court further explained that interest on enhanced compensation is to be treated as income from other sources. Based on this interpretation, the Court ruled in favor of the revenue, allowing the appeal.

Issue 2: Application of Section 45(5) of the Income Tax Act, 1961:
The Court considered the implications of Section 45(5) of the Income Tax Act, which deals with the taxability of enhanced compensation. It was clarified that the interest on compensation awarded by the Collector is part of the compensation and is taxable in the year of receipt. Additionally, interest on enhanced compensation is treated as income from other sources. The Court referred to a previous judgment to support this interpretation, emphasizing that the tax treatment is based on the system of accountancy followed by the assessee.

Issue 3: Determination of the year of taxability for enhanced compensation and interest on compensation:
The Court highlighted that the tax treatment of enhanced compensation and interest depends on the system of accountancy followed by the assessee. If the assessee is not maintaining books of accounts using a specific method, it is treated as a cash system of accountancy. Under this system, the interest received on the enhanced amount of compensation falls under 'income from other sources' and is taxable in the year of receipt. The Court's decision in this case was in alignment with previous judgments and the interpretation provided by the Hon'ble Supreme Court in a related case. Consequently, the appeal was allowed, ruling in favor of the revenue based on the taxability of the enhanced compensation and interest received by the assessee.