1979 (12) TMI 35 - HC - Income Tax

Summary

Issues:
Interpretation of tax liability on interest income from enhanced compensation under the Income-tax Act, 1961.

Comprehensive Analysis:

The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the taxability of interest income received by the assessee on enhanced compensation for land acquisition. The primary question was whether the entire interest amount of Rs. 43,431 was assessable in the assessment year 1970-71 or only a portion of it. The dispute arose from the differing interpretations of when the interest income accrued and became taxable.

The material facts revealed that the land belonging to the assessee was acquired by the State Government, and an enhanced compensation amount, including interest, was awarded by the court. The Income Tax Officer (ITO) contended that the right to receive interest accrued to the assessee when the enhanced compensation was awarded, making the entire interest amount taxable in the assessment year 1970-71. However, the assessee argued that the interest income accrued when possession of the land was taken and was quantified by the court decree, suggesting the need to spread the income over relevant years.

The High Court analyzed the provisions of the Land Acquisition Act, particularly sections 34 and 28, to distinguish between interest payable by the Collector and interest awarded by the court on enhanced compensation. It noted that interest under section 34 accrued from the time possession was taken, whereas interest under section 28 was contingent on court discretion and did not accrue until the court awarded it. The court disagreed with the assessee's interpretation and agreed with the revenue's position that the right to receive interest arose only upon court decree, making the entire interest income taxable in the assessment year of the decree.

In support of its decision, the High Court referenced the Supreme Court's decision in E. D. Sassoon and Co. Ltd. v. CIT, where it was held that income accrues when the right to receive it is established, not when the underlying event occurs. Drawing parallels, the court emphasized that in this case, the right to receive interest on enhanced compensation arose only upon court decree, aligning with the principle that income accrues when the right to receive it crystallizes.

Ultimately, the High Court ruled against the assessee, holding that the entire income from interest on enhanced compensation was assessable in the relevant assessment year. The decision was based on the understanding that the right to receive interest materialized only upon the court decree, regardless of the accounting method adopted by the assessee. The judgment clarified the distinction between interest accruing under different provisions of the Land Acquisition Act and affirmed the tax liability on the interest income in question.

In conclusion, the High Court answered the referred question in the negative, supporting the revenue's stance on the taxability of interest income from enhanced compensation. No costs were awarded in the case, considering the circumstances.