2010 (8) TMI 96 - HC - Income Tax

Interest on enhanced compensation- Assessee received interest on enhanced compensation Rs. 14,72,006/- on 29.9.1996 pertaining to the period 20.3.1989 to 19.9.1995 on delayed payment of enhanced compensation and declared income of Rs.2,41,312/- and Rs.1,20,656/- on accrual basis for the assessment years 1995-96 and 1996-97, respectively. The department charged the whole amount of interest as income in the year of receipt. Case was decided in favour of the department by Hon ble high court.

Summary

Issues Involved:
1. Taxability of interest received on enhanced compensation.
2. Applicability of accounting methods (cash vs. mercantile system).
3. Relevance of precedents and Supreme Court judgments.

Detailed Analysis:

1. Taxability of Interest Received on Enhanced Compensation:
The primary issue in this appeal is whether the interest received by the assessee on 29.9.1996, relating to the period from 20.3.1989 to 19.9.1995, on delayed payment of enhanced compensation, should be taxed in the assessment year 1997-98. The Assessing Officer held that since the assessee was not maintaining any accounts, the interest income had to be taxed in the year of receipt due to the absence of a mercantile system of accounting being followed. The CIT (A) upheld this view, distinguishing the judgments cited by the assessee, which applied only when the mercantile system was followed. The Tribunal, however, ruled in favor of the assessee, stating that the interest income should be spread over on an accrual basis, irrespective of the accounting system followed.

2. Applicability of Accounting Methods (Cash vs. Mercantile System):
Section 145 of the Income Tax Act, as amended by the Finance Act 1995 effective from 1.4.1997, mandates that income must be computed either on a cash or mercantile system of accounting. The Central Government may notify accounting standards to be followed. The Tribunal's reliance on precedents where the mercantile system was followed was misplaced, as the assessee in this case followed the cash system. Under the cash system, income is taxed based on cash receipts during the year, whereas under the mercantile system, it is taxed based on accrual.

3. Relevance of Precedents and Supreme Court Judgments:
The Tribunal relied on several precedents, including the Supreme Court judgments in CIT v. TNK Govindarajulu Chetty, Rama Bai v. CIT, Krishna Rao v. CIT, and Bikram Singh v. Land Acquisition Collector. These cases dealt with the taxability of interest on enhanced compensation under the mercantile system. However, the Supreme Court in CIT v. Ghanshyam clarified that enhanced compensation under the Land Acquisition Act is deemed income and taxed on receipt basis, notwithstanding disputes or conditional withdrawals. The interest under Section 28 of the Land Acquisition Act forms part of the compensation and is taxable in the year of receipt, whereas interest under Section 34 is also income but of a different nature.

Conclusion:
The assessee received total interest of Rs.14,72,006/- on 29.9.1996, relating to the period from 20.3.1989 to 19.9.1995. The assessee disclosed interest income for the assessment years 1995-96 and 1996-97 but not for the earlier years, indicating a cash system of accounting. Consequently, the interest received on 29.9.1996 falls under Section 34 of the Land Acquisition Act and is taxable in the year of receipt, i.e., the assessment year 1997-98. The Tribunal's reliance on precedents applicable to the mercantile system was incorrect. The substantial question of law is answered in favor of the revenue, and the Tribunal's order is set aside. The appeal is allowed.