1989 (5) TMI 38 - HC - Income Tax

Tax treatment of interest on compensation in land acquisition cases: Assess income when received by assessee

The court addressed two main issues in this case: the assessment of income from interest on compensation received by the assessee and the taxability of ... Accrual, Income Issues:1. Assessment of income from interest on compensation received by the assessee in the relevant previous year.2. Taxability of income from interest on compensation awarded by the statutorily designated authority.Detailed Analysis:Issue 1:The case involved the assessment of income from interest on compensation received by the assessee in the relevant previous year. The land owned by the assessee was acquired under the Land Acquisition Act I of 1894, and compensation was ultimately fixed by the High Court. The dispute arose regarding the assessment of interest ordered to be paid to the landholder. The Income-tax Officer assessed the interest accrued to the assessee in a different assessment year, treating the earlier assessment as a 'protective measure.' The Appellate Assistant Commissioner directed taxation on an accrual basis, which was upheld by the Tribunal following the decision of the Allahabad High Court in Addl. CIT v. Virendra Singh [1979] 118 ITR 923. The primary issue was whether the interest income should be assessed when accrued or when received by the assessee.Issue 2:The second issue revolved around the taxability of income from interest on compensation awarded by the statutorily designated authority. Various High Courts had differing views on when interest income accrued to the landholder. The Madhya Pradesh High Court held that interest accrues from the time possession of the land is taken until the compensation is paid, while the Allahabad High Court emphasized taxing the income when it accrued, regardless of maintenance of accounts. The Calcutta High Court also supported the view that interest accrues each year and is payable after possession is taken. The case highlighted the importance of maintaining accounts for assessing interest income and whether it should be taxed when accrued or received by the assessee.The judgment provided a detailed analysis of the conflicting views on the accrual of interest income in land acquisition cases. It referenced various High Court decisions to support the conclusion that in the absence of maintained accounts, interest income should be assessed when received by the assessee. The judgment clarified the tax treatment of interest on compensation in land acquisition cases, emphasizing the importance of determining when the income accrued to the landholder.