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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: (i) Whether enhanced compensation received on abolition of jagir was taxable as capital gains under section 45(5)(b) of the Income-tax Act, 1961 and whether the absence of cost of acquisition or the plea of agricultural income excluded taxability; (ii) Whether interest on the compensation was taxable wholly in the year of receipt or had to be spread over the relevant years.
Issue (i): Whether enhanced compensation received on abolition of jagir was taxable as capital gains under section 45(5)(b) of the Income-tax Act, 1961 and whether the absence of cost of acquisition or the plea of agricultural income excluded taxability.
Analysis: The enhanced amount arose from compulsory acquisition by operation of law and fell within the special scheme of section 45(5)(b), which overrides section 45(1). The provision deems the enhanced compensation to be income chargeable under the head "Capital gains" in the year of receipt and expressly provides that the cost of acquisition and cost of improvement shall be taken as nil. The argument based on absence of cost of acquisition could not defeat the charging provision. The plea that the amount represented agricultural income also failed, as the factual finding was that the lands were waste lands and there was no reliable evidence of agricultural operations. The additional amount granted by the tribunal was only an enhancement of compensation for the same acquired asset and did not amount to a fresh transfer.
Conclusion: The enhanced compensation was taxable under section 45(5)(b) and was not exempt as agricultural income.
Issue (ii): Whether interest on the compensation was taxable wholly in the year of receipt or had to be spread over the relevant years.
Analysis: Interest on enhanced compensation accrues from year to year and does not constitute a single receipt attributable only to the year of actual payment. It had to be allocated over the period for which it accrued, and assessment in one year alone was not justified.
Conclusion: The interest amount could not be taxed wholly in the year of receipt and had to be spread over the relevant years.
Final Conclusion: The principal amount of enhanced compensation remained taxable as capital gains under the special deeming provision, but the interest component was liable to be apportioned over the years of accrual, resulting in a partial success for the assessee.
Ratio Decidendi: Section 45(5)(b) constitutes a self-contained charging provision for enhanced or further enhanced compensation on compulsory acquisition, and interest on such compensation accrues from year to year for assessment in the periods of accrual.
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