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Issues involved: Interpretation of taxability of interest received as compensation for loss suffered on account of deprivation of property u/s 28 and 34 of the Land Acquisition Act, 1894, vs. interest received u/s 34 of the Civil Procedure Code.
Summary: The High Court judgment addressed the tax treatment of interest received by the assessee as compensation for loss suffered due to the forfeiture of a security deposit. The assessee had initially deposited Rs. 34,250 with the Central Government for a wheat supply contract, which was later forfeited leading to a civil suit. The High Court decreed the suit, ordering the return of the security deposit with interest at 3% per annum. The assessee received Rs. 13,871 as interest and included it in the income for the relevant assessment year. The Income-tax Officer treated the interest as income from other sources, leading to an appeal. The Commissioner of Income-tax raised the question of whether the Income-tax Appellate Tribunal erred in deleting the addition of Rs. 13,871. The Supreme Court precedent in T. N. K. Govindaraju Chetty v. CIT was cited, emphasizing that interest received as compensation for deprivation of property is taxable. However, the court differentiated cases where interest is awarded under a statute or contract from cases where it is awarded by the court for loss suffered, deeming it as compensation and not taxable. The court analyzed the nature of interest awarded under sections 28 and 34 of the Land Acquisition Act, 1894, and under section 34 of the Civil Procedure Code. It concluded that the interest received by the assessee was compensation for wrongful deprivation of the security deposit and should not be included in the income. The court clarified that the interest was not an ex gratia payment but a discretionary award by the court. Therefore, the amount of interest received was considered a casual receipt and not taxable for the relevant assessment year. In conclusion, the court ruled in favor of the assessee, holding that the interest received was by way of compensation and should not be included in the income, with costs quantified at Rs. 500.
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