1975 (12) TMI 55 - HC - Income Tax

Summary

Issues involved: Interpretation of sections 37(3) and 38(1) of the Orissa Estates Abolition Act, 1951 regarding the accrual of interest on compensation, and determination of taxability of interest income u/s 4 and 5 of the Income-tax Act, 1961.

Interpretation of sections 37(3) and 38(1) of the Orissa Estates Abolition Act, 1951:
The case involved the question of whether interest on compensation payable to an intermediary accrued yearly from the date of estate vesting or only after quantification under Chapter 5 of the Act. The Tribunal held that interest accrues in the year it becomes due to the assessee, relying on statutory provisions. The court disagreed, stating that interest accrues only when compensation is quantified, not yearly until payment.

Taxability of interest income u/s 4 and 5 of the Income-tax Act, 1961:
The Income-tax Officer treated the entire interest received as taxable income in the year of receipt due to lack of maintained accounts. The Appellate Assistant Commissioner upheld this view for non-mercantile basis accounts. However, the Tribunal ruled in favor of the assessee, stating income accrues in the year it arises unless accounts are on a cash basis. The court disagreed, holding that interest is assessable in the year of receipt, not spread over multiple years.

Reframed Question and Court's Decision:
The court reframed the question to determine whether interest paid to the assessee should be assessed as income of the year or spread over time. The court held that total interest is assessable in the year of receipt, specifically for the assessment year 1965-66. The Tribunal's direction to examine expenses claim was upheld for further inquiry by the Income-tax Officer.

Conclusion:
The court clarified the accrual of interest on compensation under the Orissa Estates Abolition Act and the taxability of interest income under the Income-tax Act. It emphasized that interest accrues upon quantification of compensation and should be assessed in the year of receipt. The case highlights the importance of maintaining proper accounts for tax assessment purposes.