Taxability of interest on enhanced compensation on receipt under cash system principles and income from other sources treatment

Interest received on enhanced compensation is taxable on receipt where the assessee follows no specific method of accounting, because the receipt is treated on cash system principles. The interest element on enhanced compensation partakes the character of compensation and is taxable under section 45(5)(b) of the Income-tax Act, 1961 in the year of receipt. Where such interest is assessed under the cash system, it also falls within section 56 as income from other sources. The stated legal position therefore confirms taxability in the year the amount is received.

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Issues: Whether interest received on enhanced compensation is taxable in the year of receipt.

Analysis: A prior decision of the same Court had held that where the assessee follows no specific method of accounting, the matter is treated on cash system principles. It was also held that interest awarded on enhanced compensation partakes the character of compensation, and under section 45(5)(b) of the Income-tax Act, 1961, such receipt is taxable in the year of receipt. Further, where the interest element received on enhanced compensation is assessed under the cash system, it falls within section 56 of the Income-tax Act, 1961 as income from other sources.

Conclusion: Interest on enhanced compensation was taxable in the hands of the assessee in the year of receipt, and the question of law was answered in favour of the Revenue.

Ratio Decidendi: Interest received on enhanced compensation is taxable in the year of receipt, and where the assessee does not maintain books by any specific method, the receipt is assessable as income from other sources under the cash system of accountancy.

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