1976 (3) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the assessment year for taxability of compensation and interest.
2. Nature of the compensation received (business income or capital gains).
3. Timing of the accrual of the right to receive enhanced compensation.
4. Taxability of interest on the compensation amount.

Issue-wise Detailed Analysis:

1. Determination of the assessment year for taxability of compensation and interest:
The primary issue was whether the amounts received by the assessee during the year of account relevant to the assessment year 1964-65 were taxable in that assessment year. The Tribunal held that the assessee had received the amount during the year of account relevant to the assessment year 1964-65, but the High Court disagreed. The High Court clarified that the right to receive the enhanced compensation did not accrue until it was judicially determined by the final court. The High Court opined that there is no liability in presenti to pay enhanced compensation until it is judicially determined by the final court, and thus, no enforceable right to a particular amount of compensation arises until then.

2. Nature of the compensation received (business income or capital gains):
The Tribunal did not determine whether the compensation received was business income or capital gains. The High Court noted that the Tribunal should have determined the nature of the receipt, whether it was business income or capital gains, and how and when the amount of interest on the compensation was to be taxed. The High Court directed the income-tax authorities to determine the nature of the receipt, having regard to the relevant facts and circumstances.

3. Timing of the accrual of the right to receive enhanced compensation:
The High Court emphasized that the right to receive enhanced compensation accrues only when it is judicially determined. The court referred to the Supreme Court's decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-Tax [1966] 59 ITR 767 (SC), which stated that a debt owed within the meaning of section 2(m) of the Wealth-tax Act can be defined as a liability to pay in presenti or in futuro an ascertainable sum of money. The High Court concluded that the right to income in the nature of compensation would arise or accrue only upon the final determination of the amount of compensation by the court.

4. Taxability of interest on the compensation amount:
The High Court addressed the issue of when the right to interest accrues or arises on the amount of compensation awarded to an assessee. The court noted the differing views of various High Courts on this issue. The Andhra Pradesh High Court in Commissioner of Income-tax v. Smt. Sankari Manickyamma [1976] 105 ITR 172 (AP) held that the entire amount of interest on the compensation, though relatable to more than one year, would be deemed to have accrued in the year in which it is awarded and taxable as such. However, the Mysore High Court in Commissioner of Income-tax v. V. Sampangiramaiah [1968] 69 ITR 159 and other High Courts opined that the interest accrues in the respective years during which the compensation remains unpaid. The High Court in the present case agreed with the Andhra Pradesh High Court's view, stating that the right to interest accrues or arises when the compensation is finally adjudicated upon by the courts.

Conclusion:
The High Court answered the referred question in the negative, in favor of the assessee and against the revenue. The income-tax authorities were directed to determine the nature of the receipt and the timing of the accrual of the right to compensation and interest based on the relevant facts and circumstances. The Commissioner was ordered to pay the costs to the assessee.