1984 (1) TMI 5 - HC - Income Tax

Summary

Issues Involved
1. Taxability of interest income on enhanced compensation.
2. Basis of assessment: accrual vs. receipt.
3. Classification of interest income: capital receipt vs. revenue receipt.
4. Applicability of Section 145 of the Income-tax Act, 1961.
5. Distinction between trader and non-trader for tax purposes.

Detailed Analysis

1. Taxability of Interest Income on Enhanced Compensation
The primary issue addressed is whether the entire interest income received by the assessee on enhanced compensation can be assessed to tax on a receipt basis or if only the proportionate interest referable to the assessment years 1969-70 and 1970-71 can be brought to tax. The assessee received Rs. 33,000 and Rs. 15,799 as interest on enhanced compensation for the assessment years 1969-70 and 1970-71, respectively. The Income-tax Officer assessed these amounts on a receipt basis, but the Appellate Assistant Commissioner and the Tribunal held that the interest should be assessed on an accrual basis.

2. Basis of Assessment: Accrual vs. Receipt
The Tribunal held that interest on enhanced compensation accrues year after year after the dispossession of the land under the Land Acquisition Act, and therefore, only the proportionate interest referable to the assessment years 1969-70 and 1970-71 can be brought to tax on an accrual basis. This view was supported by decisions in CIT v. V Sampangiramaiah and CIT v. Dr. Sham Lal Narula. The Tribunal's decision was challenged by the Revenue, which argued that since no regular system of accounting was followed by the assessee, the best method to assess the interest income was on a receipt basis.

3. Classification of Interest Income: Capital Receipt vs. Revenue Receipt
The assessee initially contended that the interest income was a capital receipt and thus not taxable. However, both the Income-tax Officer and the Appellate Assistant Commissioner rejected this contention, holding that the interest income is a revenue receipt and taxable as such. This view was supported by the Supreme Court decision in T N K Govindarajulu Chetty's case.

4. Applicability of Section 145 of the Income-tax Act, 1961
Section 145 deals with the method of accounting. Sub-section (1) states that income chargeable under the head "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. Sub-section (2) allows the Income-tax Officer to make an assessment if no method of accounting has been regularly employed. Since the assessee did not follow any method of accounting, the Income-tax Officer was free to choose his own basis and manner of assessment. The Tribunal's decision to assess the interest on an accrual basis was questioned, but the court held that the interest income should be assessed on an accrual basis due to the statutory liability under Section 34 of the Land Acquisition Act.

5. Distinction Between Trader and Non-Trader for Tax Purposes
The court discussed the distinction between traders and non-traders concerning the method of accounting. In cases where no method of accounting is regularly employed, the method of computation depends on whether the assessee is a trader or a non-trader. The court cited various cases, including Mewar Industries Ltd. v. CIT and Whitworth Park Coal Co. Ltd. v. IRC, which established that non-traders are generally assessed on a receipt basis. However, the court held that this principle does not apply to interest income arising from statutory liability, as in the present case.

Conclusion
The court concluded that the interest income on enhanced compensation should be assessed on an accrual basis, as the payment of interest is a statutory liability under Section 34 of the Land Acquisition Act. The Tribunal's decision to assess the interest income on an accrual basis was upheld, and the question referred was answered in the affirmative and against the Revenue.