2010 (12) TMI 705 - HC - Income Tax

Enhanced compensation - 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 in The Commissioner of Income Tax Faridabad v. Bir Singh (HUF)Ballabgarh (2010 -TMI - 205309 - PUNJAB & HARYANA HIGH COURT) as 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 - Answered in favour of the revenue.

Summary

Issues:
Taxability of interest on enhanced compensation in the year of receipt.

Analysis:
The High Court was tasked with determining whether the interest on enhanced compensation is taxable in the hands of the assessee in the year of receipt. The Court referred to a previous judgment in a similar matter, where it was concluded that income from business or profession and income from other sources are ascertained based on the accounting system followed by the assessee. If the assessee does not maintain specific accounting records, it is treated as a cash system of accountancy. The interest awarded by the Collector under Section 34, having the nature of compensation, is taxable in the year of receipt as per Section 45(5)(b) of the Act. Under a cash system of accountancy, the interest received on an enhanced amount of compensation falls under 'income from other sources' and is taxable under Section 56 in the year of receipt.

Therefore, based on the precedent set in the previous judgment and the interpretation of relevant sections of the Act, the High Court allowed the appeal and answered the question of law in favor of the revenue and against the assessee. The decision clarified that interest on enhanced compensation is indeed taxable in the year of receipt, following the principles of the accounting system adopted by the assessee and the specific provisions of the Income Tax Act.