2014 (9) TMI 587 - SC - Income Tax

Income from inherit property - Status of three brothers - Individual status or Association of persons (AOP) - the property in question which was acquired by the Government, came to the respondents on inheritance from their father i.e. by the operation of law. - interest income due to compulsorily acquiring the said land - Held that - the case is squarely covered by the ratio of the judgment laid down in Meera & Company 1997 (3) TMI 6 - SUPREME Court inasmuch as it is not a case where any Association of Persons was formed by volition of the parties for the purpose of generation of income. This basic test to determine the status of AoP is absent in the present case. - Decided against the revenue. Spread of interest over the years - taxability of the interest on enhanced compensation - Held that - This issue is covered by judgment of this Court in Commissioner of Income Tax, Faridabad vs. Ghanshyam (HUF) 2009 (7) TMI 12 - SUPREME COURT , albeit, in favour of the Revenue. In that case, the court drew distinction between the interest earned under Section 28 of the Land Acquisition Act and the interest which is under Section 34 of the said Act. The Court clarified that whereas compensation given to the assessee of the land acquired would be income , the enhanced compensation/consideration becomes income by virtue of Section 45(5)(b) of the Income Tax Act. - it would be taxed in the year in which it is received. It would mean that converse position i.e. spread over of this interest on accrual basis is not permissible. - Decided in favor of revenue.

Summary

Issues:
1. Whether three brothers can file separate returns as individuals or should be treated as an Association of Persons (AoP)?
2. Taxability of interest on enhanced compensation - whether to be assessed in the year of receipt or spread over time.

Analysis:
1. The case involves three brothers who inherited land from their father, part of which was acquired by the State Government. The brothers filed returns as individuals, but the Assessing Officer treated them as an AoP. The High Court ruled in favor of the brothers, granting them individual status for tax assessment. The Supreme Court cited precedent (Meera & Company case) defining AoP as an association formed for income generation, which was not the case here as the income was a result of government action, not a joint venture. Therefore, the brothers were correctly assessed as individuals.

2. Regarding the taxability of interest on enhanced compensation, the Supreme Court referred to the Commissioner of Income Tax vs. Ghanshyam case. The Court differentiated between interest under different sections of the Land Acquisition Act, stating that interest under Section 28 is part of enhanced compensation and taxable. The Court ruled that such interest should be taxed in the year of receipt, not spread over time. The judgment clarified that the receipt of enhanced compensation is taxable in the year of receipt, even if received pending appeal. Therefore, the Court set aside the High Court's decision to spread the interest over time and directed that it should be taxed in the year of receipt.

In conclusion, the Supreme Court allowed the appeals in part, confirming the individual status of the brothers for tax assessment and directing the interest on enhanced compensation to be taxed in the year of receipt.