Association of Persons and receipt-based tax on enhanced compensation interest under the Income-tax Act clarified.

Inherited land held by co-heirs did not create an Association of Persons, because the essential element of voluntary combination for a common income-producing purpose was absent; the co-heirs were therefore taxable as individuals. Interest under section 28 of the Land Acquisition Act, 1894 was treated as part of enhanced compensation and, under section 45(5) of the Income-tax Act, 1961, was taxable on receipt basis in the year received, not on an accrual spread-over basis. Interest under section 34 was noted to stand on a different footing.

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Issues: (i) Whether the three co-heirs of inherited land were assessable as an Association of Persons or as individuals; (ii) Whether interest on enhanced compensation under section 28 of the Land Acquisition Act, 1894 was taxable in the year of receipt or could be spread over on accrual basis.

Issue (i): Whether the three co-heirs of inherited land were assessable as an Association of Persons or as individuals.

Analysis: The status of Association of Persons requires persons to join voluntarily in a common purpose or common action for the object of producing income, profits or gains. Where property devolves by inheritance and income arises not from any joint business venture or voluntary combination, the essential element of volition is absent. The income in question arose from compulsory acquisition of inherited land and did not result from any collective enterprise formed by the recipients.

Conclusion: The co-heirs were not assessable as an Association of Persons and were taxable as individuals.

Issue (ii): Whether interest on enhanced compensation under section 28 of the Land Acquisition Act, 1894 was taxable in the year of receipt or could be spread over on accrual basis.

Analysis: Interest under section 28 is treated as an accretion to the value of the acquired land and forms part of enhanced compensation. Under section 45(5) of the Income-tax Act, 1961, enhanced compensation is taxable on receipt basis, and the scheme of sections 45(5)(b), 45(5)(c) and 155(16) does not permit spreading the amount over on accrual basis. Interest under section 34 stands on a different footing and is not part of such enhanced compensation.

Conclusion: Interest under section 28 was taxable in the year of receipt and could not be spread over on accrual basis.

Final Conclusion: The Revenue succeeded only on the question of taxability timing of interest on enhanced compensation, while the assessee's individual status was upheld.

Ratio Decidendi: An inherited property does not give rise to an Association of Persons unless the co-owners voluntarily combine for a common income-producing purpose, and interest forming part of enhanced compensation under section 28 of the Land Acquisition Act, 1894 is taxable on receipt basis under section 45(5) of the Income-tax Act, 1961.

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