1990 (7) TMI 36 - HC - Income Tax

Court rules interest on compensation taxable in year received. Importance of interest disclosure for tax exemption upheld.

Commissioner Of Income-Tax Versus DV. Rama Rao

The court ruled in favor of the Revenue, stating that the Tribunal's direction to tax the interest received on compensation under the Land Acquisition Act ... Income Issues:Interpretation of tax liability on interest received with compensation under the Land Acquisition Act - Application of cash basis vs. accrual basis for tax assessment.Analysis:The case involved a Hindu undivided family that was assessed for income tax on a cash basis. The dispute arose from interest received on compensation awarded under the Land Acquisition Act, where the assessee claimed exemption from tax based on previous court decisions. The Assessing Officer demanded tax on the interest received due to non-disclosure of accrued interest in past returns. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the tax liability, citing precedents like CIT v. Raja S. N. Bhanja Deo. The Tribunal directed the reassessment of the interest amount in the relevant assessment years, contrary to the assessee's claim.The judgment discussed the principles of cash system and mercantile system for income tax assessment. It emphasized that the choice of method lies with the assessee, but once adopted, it cannot be changed during assessment for tax benefits. The court highlighted the importance of disclosing accrued interest when claiming tax exemption, especially if the assessee is already paying tax. The decision in Joyanarayan Panigrahi's case was distinguished as it involved a different tax liability scenario compared to the present case.The court referred to the decision in CIT v. Raja S. N. Bhanja Deo, emphasizing that interest accrues only when compensation is quantified. The Gujarat High Court's ruling in Topandas Kundanmal v. CIT was also cited to support the view that an assessee does not have a vested right to interest on claimed compensation until awarded by the court. Ultimately, the court held that the assessee, paying tax on a cash basis, is liable to pay tax on interest received during the year, rejecting the Tribunal's direction to spread the tax liability over assessment years.In conclusion, the judgment ruled in favor of the Revenue, stating that the Tribunal's direction to tax the interest received on compensation under the Land Acquisition Act in different assessment years was not justified. The absence of the assessee led to no order on costs. Judge J. M. Mahapatra concurred with the decision.