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TMI Blog2010 (10) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... either additional compensation nor interest accrued or received thereon can be taxed unless it attains finality from the High Court in spite of the fact that the additional compensation as well as the interest has actually been received by the assessee? 2. Briefly stated the facts of the case necessary for adjudication as narrated in the appeal are that the respondentassessee received some amount of enhanced compensation in respect of the land acquired under the Land Acquisition Act, 1894 (for short "the 1894 Act"). It was claimed that the said amount and the interest accrued thereon were not taxable as the amount so received was not final and was still in dispute, and the same had been ordered to be paid on furnishing a security. The plea of the assessee was not accepted by the assessing officer on the ground that the amount by which the quantum of compensation was enhanced or would be enhanced in future by the court shall be deemed to be the income, chargeable under the head 'capital gains' of the previous year in which such amount was received. 3. The assessee filed appeal before the Commissioner of Income Tax (Appeals), [hereinafter referred to as "CIT(A)"]. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted as an overriding provision. It was held that the enhanced compensation under the 1894 Act arises and is payable at multiple stages and, therefore, compensation is treated as "deemed income" at the time when it is received and taxed on receipt basis. This is notwithstanding the cases where enhanced compensation may be in dispute in pending appeal and claimant had been permitted to withdraw the amount conditionally. It was further held that interest on enhanced value of the land which forms part of compensation is exigible to tax in the year of receipt. However, it was observed that interest on account of delayed payment of enhanced compensation is also income but its nature is different. The said judgment while interpreting Section 45(5)(b) of the Act dealt with the taxability of enhanced compensation and interest under the 1894 Act which partakes the character of compensation alone. 10. The question that now remains for consideration in this appeal is, whether the interest on enhanced compensation received by the assessee is exigible to tax in the year of receipt or at the time when the lis regarding compensation for the acquired land attains finality. 11. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning in the absence of any particular definition to fall within the scope of income. 17. Now, examining the exigibility of income tax to the amount received as interest on enhanced compensation, inevitably reference has to be made to the method of accountancy followed by the assessee. 18. Income is assessed on the basis of either actual receipt of interest received on enhanced compensation during pendency of appeal in higher court or on the basis of amount accrued during the year. The former is called cash system whereas latter is termed as mercantile system. Under cash system, the income is exigible to tax only on the basis of actual receipt irrespective of the fact, whether the same had arisen or not whereas mercantile system envisages accrual or arising of income or deemed to accrue or arise during the year in question. 19. Section 145 of the Act provides for method of accountancy being followed by an assessee. The income arises either on receipt basis or on accrual basis and income is deemed to accrue or arise to a person without its actual accrual or receipt. Under the aforesaid provision, the income chargeable under the head "profit and gains of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of payment of such excess into Court. Provided that the award of the Court may also direct that where such excess or any part thereof is paid into Court after the date or expiry of a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of such excess or part thereof which has not been paid into Court before the date of such expiry. 34. Payment of interest - When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited: Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date or expiry of the said period of one year on the amount of compensation or part thereof which has not been paid or deposited before the date of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d compensation directed by the Court is not. Even though there is little confusion in reference to the relevant sections but as per discussion, it is clear that interest directed by the Collector partakes the character of compensation and forms part thereof under Section 34 of the Act whereas the interest ordered by the Court falls under Section 28 of the Act. 26. To conclude, from the above it emerges:- (a) that 'income from Business or profession' and 'income from other sources' are ascertained on the basis of system of accountancy followed by the assessee; (b) where assessee is not maintaining books of accounts by adopting any specific method, it shall be treated to be cash system of accountancy; (c) the interest under Section 34 to be awarded by the Collector partakes the character of compensation and is taxable in the year of receipt in view of Section 45(5)(b) of the Act; and (d) under cash system of accountancy, the element of interest awarded by the Court received on enhanced amount of compensation under Section 28 of the 1894 Act falls for taxation under Section 56 as 'income from other sources' in the year of receipt. 27. The interpretation afor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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