2011 (5) TMI 826 - AT - Income Tax

Compensatory non-statutory interest received in terms of the order of High Court - whether a capital receipt in nature and the authorities below should have not imposed tax on such capital receipt - whether the income determined by the AO on the basis of the return filed by the assessee can be a figure lower than the income returned by the assessee Held that - The principle for determining the taxable income of the assessee under the Income-tax Act should be within the purview of the law in force. If the taxable income determined by AO is not in accordance with such principle it is open to the assessee to contend the same before the higher authorities to follow the correct application of law to determine the actual taxable income of the assessee. Thus the lower authorities, are not expected, to say that merely because the assessee has returned income which is higher than the income determined in accordance with legal principles such returned income can be treated as lawfully assessed. An assessee is liable to pay tax only upon the taxable income. The law imposed by AO to assess the income according to law and determined the tax payable thereon but cannot assess the income of the assessee an amount which is not taxable as per law though shown by the assessee in the return. In the case of Charanjit Jawa (2004 (2) TMI 22 - PUNJAB AND HARYANA High Court) relied upon by assessee supports the views that the interest received as a result of the order of the hon ble High Court was not a statutory interest and was in the form of damage/compensation and the same was not liable to tax & thus was not taxable as a capital receipt. We also take support from the circular issued by the Central Board of Direct Taxes vide Circular No. 14 (XL-35), dated April 11, 1955 which has directed the officers not to take advantage of the ignorance of the assessee - the appeal of the assessee is allowed.

Summary

Issues:
1. Need for furnishing reasons for reopening the case
2. Taxability of compensatory non-statutory interest received
3. Claim of splitting up interest
4. Communication of reason for reopening the case
5. Authority to reduce taxable income at the appellate stage

1. Furnishing Reasons for Reopening the Case:
The assessee raised a ground of appeal regarding the need for furnishing reasons for reopening the case. The Commissioner of Income-tax (Appeals) held that there was no requirement to provide reasons despite the appellant's request. However, this issue was not pressed during the appeal.

2. Taxability of Compensatory Non-Statutory Interest Received:
The main issue revolved around the taxability of the interest of Rs. 3,29,101 received by the assessee as per the order of the Calcutta High Court. The assessee argued that this interest was compensatory in nature, akin to a capital receipt, and should not be taxed. The Assessing Officer had included this amount in the taxable income. The Commissioner of Income-tax (Appeals) upheld this decision, stating that since the assessee had declared the income in the return, it could not be reduced at the appellate stage. However, the ITAT held that the interest was non-statutory, in the form of damages/compensation, and therefore not liable to tax. They directed the Assessing Officer to treat the amount as a capital receipt, citing relevant case law and a circular from the Central Board of Direct Taxes.

3. Claim of Splitting up Interest:
The appellant also claimed for splitting up interest following a Supreme Court decision. However, this claim was not specifically addressed in the judgment.

4. Communication of Reason for Reopening the Case:
The appellant argued that since the reason for reopening the case was never communicated, the proceedings were void and bad in law. This issue was not pressed during the appeal.

5. Authority to Reduce Taxable Income at the Appellate Stage:
The ITAT clarified that the Commissioner of Income-tax (Appeals) has the authority to reduce the taxable income of the assessee at the appellate stage if the income determined by the Assessing Officer is not in accordance with legal principles. The ITAT emphasized that an assessee is liable to pay tax only on the taxable income as per law, and the Assessing Officer cannot assess an amount that is not taxable, even if declared by the assessee. The ITAT referred to relevant case law to support this position and directed the Assessing Officer to treat the interest received as a capital receipt.

In conclusion, the ITAT allowed the appeal of the assessee, directing the Assessing Officer to treat the interest received as a capital receipt and not subject it to tax.