1991 (4) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received as capital gains.
2. Taxability of interest received as income.
3. Assessment year for taxability of interest.

Summary:

Issue 1: Taxability of Compensation Received as Capital Gains

The primary issue was whether the compensation of Rs. 2,52,000 received by the assessee from the Central Government could be treated as capital gains. The court examined whether the right to get the deed of conveyance executed under the 1945 contract constituted a capital asset. The court concluded that the right was extinguished at least by September 20, 1961, when the court refused specific performance of the agreement. The court held that the amount received was not for the transfer of a capital asset but as damages for breach of contract. Thus, the amount of Rs. 2,52,000 was not taxable as capital gains for the assessment year 1970-71.

Issue 2: Taxability of Interest Received as Income

The second issue was whether the sum of Rs. 1,56,030 received as per the consent decree dated June 11, 1969, was liable to be taxed as income. The court noted that the consent decree clearly mentioned that the amount represented interest from January 30, 1959, to the date of the consent decree on the amount of damages. The court, relying on the Supreme Court decision in Dr. Shamlal Narula v. CIT [1964] 53 ITR 151, held that interest on compensation is a revenue receipt and not a capital receipt. Therefore, the amount of Rs. 1,56,030 was taxable as income.

Issue 3: Assessment Year for Taxability of Interest

The third issue was whether the interest amount was taxable for the assessment year 1970-71. The court referred to the Supreme Court decisions in CIT v. T.N.K. Govindarajulu Chetty [1987] 165 ITR 231 and Rama Bai v. CIT [1990] 181 ITR 400, which held that interest in the case of an assessee following the mercantile system of accountancy must be taken to have accrued from year to year. Consequently, only the interest pertaining to the period from April 1, 1969, to the date of the consent decree was taxable as the income of the previous year.

Conclusion:

The court concluded that the compensation amount of Rs. 2,52,000 was not taxable as capital gains, while the interest amount of Rs. 1,56,030 was taxable as income. However, only the interest accrued from April 1, 1969, to the date of the consent decree was taxable for the assessment year 1970-71. There was no order as to costs.