Enhanced compensation on compulsory acquisition taxed on receipt under section 45(5); earlier accrual-based rule no longer applies.

Enhanced compensation on compulsory acquisition is taxable under section 45(5) of the Income-tax Act in the year of receipt, because the provision deems the enhanced component to be capital gains when compensation is increased by a court, tribunal or authority. The provision also covers solatium, the 12 per cent additional amount, and interest under section 28 of the Land Acquisition Act as part of enhanced compensation. After insertion of section 45(5), the earlier rule in Hindustan Housing and Land Development Trust Ltd. no longer governs post-amendment taxation of disputed enhancement; the later Supreme Court interpretation in Ghanshyam (HUF) controls the tax treatment.

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Issues: (i) Whether enhanced compensation received on compulsory acquisition was taxable under section 45(5) of the Income-tax Act, 1961 in the year of receipt. (ii) Whether the decision in Hindustan Housing and Land Development Trust Ltd. continued to govern taxation of such enhanced compensation after insertion of section 45(5).

Issue (i): Whether enhanced compensation received on compulsory acquisition was taxable under section 45(5) of the Income-tax Act, 1961 in the year of receipt.

Analysis: Section 45(5), inserted with effect from 1 April 1988, is an overriding provision dealing with capital gains arising from compulsory acquisition where compensation is enhanced in stages by a court, tribunal or authority. The provision shifts taxation of the enhanced component to the year of receipt and treats the enhancement as deemed income chargeable under the head of capital gains. The Court applied the later authoritative interpretation that solatium, additional amount at 12 per cent, and interest under section 28 of the Land Acquisition Act, 1894, form part of enhanced compensation for this purpose.

Conclusion: Yes. The enhanced compensation was taxable under section 45(5) in the year of receipt, and the addition made by the Assessing Officer was in accordance with law.

Issue (ii): Whether the decision in Hindustan Housing and Land Development Trust Ltd. continued to govern taxation of such enhanced compensation after insertion of section 45(5).

Analysis: The Court relied on the later Supreme Court exposition in Ghanshyam (HUF), which explained that the legislative insertion of section 45(5) was intended to remove the difficulties created by repeated rectifications in cases of compulsory acquisition. In that setting, the earlier ruling in Hindustan Housing and Land Development Trust Ltd. was held to be inapplicable to the post-amendment regime.

Conclusion: No. The earlier decision ceased to apply after insertion of section 45(5).

Final Conclusion: The statutory amendment controlled the tax treatment of enhanced compensation, so the Revenue's challenge succeeded and the assessed addition was sustained.

Ratio Decidendi: In cases of compulsory acquisition, enhanced compensation is taxable under section 45(5) of the Income-tax Act, 1961 in the year of receipt, and the earlier rule against accrual-based taxation of disputed enhancement does not apply after the statutory amendment.

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