1986 (7) TMI 10 - SC - Income Tax

Acquisition of land - additional compensation received - additional compensation was deposited in court, when government appeal against the award - - taxability of said compensation - held that it is not taxable because it does not accrue - revenue s appeal dismissed

Summary

Issues:
1. Whether the extra amount of compensation is taxable as income during the relevant assessment year?
2. Determining the point at which income accrues to an assessee for taxation purposes.

Analysis:
The case involves a limited company dealing in land that had certain plots requisitioned and later permanently acquired by the State Government. The issue revolves around the taxation of the extra compensation amounting to Rs. 7,24,914 during the assessment year 1956-57. The dispute arose when the Income-tax Officer treated this amount as business income of the assessee, considering it to have accrued at the date of the arbitrator's award. The Appellate Tribunal, however, held that while the compensation was a trading receipt, it did not accrue as income during the relevant previous year. The High Court also ruled in favor of the assessee, leading to the appeal at the Supreme Court.

The Supreme Court delved into the legal principles governing the accrual of income for taxation purposes. Referring to past judgments, the court emphasized that income accrues when there is a debt owed by somebody, creating a right to receive profits. In this case, the court highlighted that the entire compensation amount was in dispute due to the pending appeal by the State Government. The assessee was not entitled to the deposited amount without providing security, indicating the uncertainty of receiving the sum. The court distinguished this case from others where the liability was clear and only the quantification remained. It stressed that income tax is not levied on a mere right to receive compensation; there must be a tangible obligation to pay an ascertained amount for income to accrue.

Further, the court referenced judgments by other High Courts, such as the Gujarat High Court, which reiterated that the right to enhanced compensation only arises upon final determination of the amount. Until then, there is no enforceable right to a specific sum of compensation. The court emphasized the distinction between cases where the right to payment is in dispute, as in the present case, and cases where only the quantification of the amount is pending. Ultimately, the Supreme Court upheld the High Court's decision, dismissing the appeal and affirming that the extra compensation did not accrue as income during the relevant assessment year.

In conclusion, the judgment clarifies the legal principles regarding the accrual of income for taxation purposes, emphasizing the need for a definite obligation to pay an ascertained amount for income to accrue. The case highlights the importance of final determination in cases where the right to receive payment is in dispute, reaffirming that income only accrues upon such final determination.