1986 (5) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Assessability of interest paid on additional compensation under Section 28 of the Land Acquisition Act, 1894.
2. Accrual basis versus receipt basis for interest income.
3. Divergence of judicial opinion on the assessability of interest on additional compensation.
4. Nature of interest under Sections 28 and 34 of the Land Acquisition Act.
5. Method of accounting and its impact on assessability.

Issue-wise Detailed Analysis:

1. Assessability of Interest Paid on Additional Compensation:
The primary issue was whether the interest paid on additional compensation under Section 28 of the Land Acquisition Act, 1894, should be assessed in the year it was awarded or received by the assessee, or if it should be assessed from year to year on an accrual basis. The court held that the interest on the additional compensation should be assessed in the year it is finally determined by the court, not on an accrual basis from the date of dispossession.

2. Accrual Basis versus Receipt Basis for Interest Income:
The court examined whether the interest income should be assessed on an accrual basis from the date of dispossession or on a receipt basis when it is finally awarded. It was concluded that the interest on additional compensation is assessable in the year when the liability to pay such interest is finally determined by the court. This view was supported by the decisions of the Andhra Pradesh, Kerala, Gujarat, and Madhya Pradesh High Courts, which held that interest on enhanced compensation accrues only when it is judicially determined.

3. Divergence of Judicial Opinion:
The court acknowledged the divergence of judicial opinion on this issue. The High Courts of Andhra Pradesh, Gujarat, Kerala, and Madhya Pradesh held that the right to additional compensation and interest accrues only when it is finally determined by the court. Conversely, the High Courts of Mysore, Madras, Allahabad, Orissa, and Delhi held that interest accrues from the date of dispossession and should be assessed year to year. The court ultimately sided with the former view, emphasizing the uncertainty and the need for judicial determination before the interest can be considered as accrued income.

4. Nature of Interest under Sections 28 and 34:
The court discussed the nature of interest under Sections 28 and 34 of the Land Acquisition Act. It was noted that interest under Section 34 accrues from year to year, but interest under Section 28, which is awarded by the court, is assessable only in the year it is finally determined. The court highlighted that interest under Section 28 is discretionary and depends on the court's judgment, whereas interest under Section 34 is mandatory and accrues from the date of dispossession.

5. Method of Accounting:
The method of accounting adopted by the assessee was also considered. Since the assessee did not maintain accounts on the mercantile system, the court held that the assessment should be made on a cash basis. Therefore, the entire amount of interest should be assessed when received, not on an accrual basis.

Conclusion:
The court concluded that the Tribunal was not right in holding that only the proportionate interest referable to the assessment year is assessable on an accrual basis. The interest on additional compensation should be assessed in the year it is finally determined by the court. The question was answered in the negative and in favor of the Revenue, with no order as to costs.