2017 (8) TMI 379 - HC - Income Tax

Accrual of interest income on FD s - compensation and interest was not final, but pending the decision of the High Court - Correct Appreciation of judgment of Paragon Construction (I) Private Limited .vrs. C.I.T. (2004 (9) TMI 39 - DELHI High Court) - Held that - In the present facts although the interim order allowed the assessee to withdraw the amount of ₹ 63.33 lakhs, there was no stipulation in the interim order that in case the appellant loses, she was obliged to return the amount to the State along with interest. Therefore, the facts in the present case are completely distinguishable from the decision of the Delhi High Court in Paragon Construction (2004 (9) TMI 39 - DELHI High Court). The requirement of returning the amount along with interest thereon by a subsequent order of the Court is uncertain. Therefore, such an uncertain event cannot by itself divest the accrual of interest income on the fixed deposit in subject assessment year in the hands of the appellant-assessee. The interest if awarded at the final hearing would not necessarily be related to the interest earned on the fixed deposit in the absence of any such direction being made in the interim order. Thus the impugned order of the Tribunal has correctly held that the decision of the Delhi High Court in Paragon Construction (supra) would have no application in view of the above distinction to the present facts. In the present case it is an accepted position that the right to receive the interest from the fixed deposits already accrued to the appellant-assessee. In such circumstances, the interest on the fixed deposit would be chargeable to tax, as sought to be done by the Assessing Officer under the head income from other sources. Principle of the restitution as provided under Section 144 of the Civil Procedure Code applicability - Held that - An application for restitution may or may not be made by the successful party. In any event even if application is made, the benefit which the assessee would have gained out of benefit/income out of the amount of ₹ 63.33 lakhs would be net of tax. In those circumstances, the requirement for the appellant to pay to the State would be only the net amount received by her after payment of taxes due. Thus we find no merit in the submission that no tax is payable on the income earned on the fixed deposits as the same could be subject to proceedings of restitution under Section 144 of the Code of Civil Procedure. Appeal decided in favour of revenue.

Summary

Issues Involved:
1. Taxability of interest earned on fixed deposits made from interim compensation received in land acquisition proceedings.
2. Applicability of the Delhi High Court's judgment in Paragon Construction (I) Private Limited vs. C.I.T. to the present case.
3. Principle of restitution under Section 144 of the Civil Procedure Code.

Detailed Analysis:

1. Taxability of Interest Earned on Fixed Deposits:
The primary issue is whether the interest earned on fixed deposits, made from interim compensation received in land acquisition proceedings, is taxable as income from other sources. The appellant argued that the interest should not be taxed until the final determination of compensation by the High Court, as the compensation and interest thereon were not final. The Tribunal, however, held that the interest earned on fixed deposits is taxable as income from other sources, distinguishing it from the compensation received in land acquisition proceedings. The Tribunal's decision was based on the fact that the appellant was free to use the interim compensation as she deemed fit, and the fixed deposits were made in her capacity as an individual, not as a trustee appointed by the Court. Therefore, the interest earned on these deposits is not linked to the compensation proceedings and is taxable in the year it accrues.

2. Applicability of the Delhi High Court's Judgment in Paragon Construction:
The appellant contended that the case was covered by the Delhi High Court's decision in Paragon Construction, where it was held that interest earned on amounts received at an interim stage, subject to refund with interest if the assessee loses, should not be taxed until the final determination. However, the Tribunal distinguished this case, noting that in Paragon Construction, the interim order explicitly required the refund of the amount with interest if the assessee lost. In the present case, the interim order allowing the appellant to withdraw the amount of ?63.33 lakhs did not contain any such stipulation. Hence, the Tribunal correctly held that the decision in Paragon Construction was not applicable to the present facts.

3. Principle of Restitution under Section 144 of the Civil Procedure Code:
The appellant also argued that under the principle of restitution, she would be obliged to return the amount along with all benefits obtained, including interest on fixed deposits, to the successful party. The Tribunal rejected this argument, stating that Section 144 of the Civil Procedure Code would only be triggered if the successful party made an application for restitution, which is not a certainty. Even if such an application were made, the appellant would only need to return the net amount received after paying taxes. Therefore, the principle of restitution does not exempt the interest earned on fixed deposits from being taxed.

Conclusion:
The High Court concluded that the Tribunal had correctly distinguished the Delhi High Court's decision in Paragon Construction and upheld the taxability of the interest earned on fixed deposits as income from other sources. The substantial questions of law were answered in favor of the Revenue, and the appeals were dismissed.