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Issues: (i) Whether enhanced compensation received under the Land Acquisition Act, 1894 was taxable in the year of receipt under Section 45(5)(b) of the Income-tax Act, 1961. (ii) Whether interest received on enhanced compensation was taxable in the year of receipt and, if so, under which head of income.
Issue (i): Whether enhanced compensation received under the Land Acquisition Act, 1894 was taxable in the year of receipt under Section 45(5)(b) of the Income-tax Act, 1961.
Analysis: Section 45(5)(b) is an overriding provision inserted to tax enhanced compensation on receipt basis. Enhanced compensation is deemed income in the previous year in which it is received, even if the compensation is still subject to dispute or conditional withdrawal. The principle was held to govern the taxability of enhanced compensation under the 1894 Act.
Conclusion: Enhanced compensation was taxable in the year of receipt, in favour of the Revenue.
Issue (ii): Whether interest received on enhanced compensation was taxable in the year of receipt and, if so, under which head of income.
Analysis: The Court distinguished between interest forming part of compensation and interest for delay in payment. Interest under Section 28 of the Land Acquisition Act, 1894, paid on enhanced compensation, was treated as income from other sources. The incidence of tax depended on the method of accounting; where no specific system of accountancy was maintained, the cash system was applied, and the amount became taxable on actual receipt. The later legislative provisions reinforced taxation on receipt basis.
Conclusion: Interest on enhanced compensation was taxable in the year of receipt as income from other sources, in favour of the Revenue.
Final Conclusion: The appeal succeeded because both the enhanced compensation and the interest component were held taxable on receipt basis, and the Tribunal's order was set aside.
Ratio Decidendi: Enhanced compensation under Section 45(5)(b) of the Income-tax Act, 1961 is taxable on receipt, and interest on enhanced compensation under Section 28 of the Land Acquisition Act, 1894 is taxable as income from other sources in the year of receipt.
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