1982 (6) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest on enhanced compensation.
2. Timing of income recognition for interest on enhanced compensation.
3. Applicability of judicial precedents and statutory provisions.

Detailed Analysis:

1. Taxability of Interest on Enhanced Compensation:
The primary issue in this case was whether the interest on enhanced compensation received by the assessee should be treated as taxable income in the year it was received. The Income Tax Officer (ITO) included the interest as taxable income for the assessment year 1977-78, arguing that the interest accrued and was received in that year. The Commissioner (Appeals) disagreed, holding that the interest income should only be taxed when the compensation amount becomes final, citing precedents from the Gujarat High Court and Andhra Pradesh High Court.

2. Timing of Income Recognition for Interest on Enhanced Compensation:
The ITO's position was that the interest on enhanced compensation should be taxed in the year it was received, regardless of the pending appeal. The Commissioner (Appeals) and the assessee argued that the right to receive the interest had not accrued until the compensation amount was finally determined in the appeal. The Commissioner (Appeals) relied on judicial precedents, including the Gujarat High Court's decision in Topandas Kundanmal, which held that interest on enhanced compensation should be taxed only when the compensation amount is finally determined.

3. Applicability of Judicial Precedents and Statutory Provisions:
The Tribunal examined various judicial precedents and statutory provisions to resolve the issue. The Tribunal noted the divergence in judicial opinions on the matter. Some courts held that interest should be taxed when it accrues each year, while others held that it should be taxed only when the compensation amount is finally determined. The Tribunal referred to the Supreme Court's decision in Mrs. Khorshed Shapoor Chenai, which held that the right to compensation includes the right to receive enhanced compensation, and this right is quantified by the Civil Court.

The Tribunal also considered Section 155(7A) of the Income Tax Act, which was inserted with retrospective effect from 1-4-1974. This section implies that enhanced compensation relates back to the date of dispossession for the purpose of capital gains tax. The Tribunal concluded that interest on enhanced compensation should be taxed in the years to which it relates, but only the interest finally determined should be brought to tax.

Conclusion:
The Tribunal modified the order of the Commissioner (Appeals) and directed that only the amount of interest on enhanced compensation pertaining to the relevant previous year should be brought to tax in the assessment year 1977-78. The appeal was partly allowed, aligning with the view that interest should be taxed in the years it relates to, subject to final determination.