1982 (5) TMI 12 - HC - Income Tax

Court clarifies tax treatment of interest on compensation award, allocates over relevant years

The court held that the interest amounting to Rs. 1,55,628 did not arise under the Indian Electricity Act read with the Punjab Electricity Act but ... Accrual, Electric Supply Undertaking, Income Issues Involved:1. Accrual of income in the context of interest payable on compensation in acquisition cases.2. Nature of the interest received (capital or casual receipt).3. Allocation of interest over multiple years versus single year taxation.Detailed Analysis:1. Accrual of Income:The primary issue was whether the right to receive interest amounting to Rs. 1,55,628 arose under the Indian Electricity Act read with the Punjab Electricity Act, 1939, or emanated from the award given by the umpire. The court held that the right to receive interest did not arise under the Indian Electricity Act read with the Punjab Electricity Act, 1939, but emanated from the award given by the umpire. The judgment emphasized that the award became enforceable only when it was made a rule of the court, and until then, it had no effective value. The court stated, 'We are, therefore, of opinion that the assessee did not get an enforceable right (which is what is material for purposes of accrual) until the award had been made a rule of the court.'2. Nature of the Interest Received:The assessee contended that the interest sum represented a capital receipt or, alternatively, a casual receipt not assessable to tax. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected this claim, holding that the interest was an income receipt liable to tax. The Tribunal upheld this view, and the court affirmed that the interest was taxable as income. The court noted, 'The ITO did not accept the claim of the assessee. He was of opinion that the interest did not represent a capital or a casual receipt but was an item of income receipt which was liable to tax.'3. Allocation of Interest Over Multiple Years:The court had to decide whether the entire interest of Rs. 1,55,628 was liable to be taxed in the assessment year 1963-64 or if it should be allocated over the years to which it related. The Tribunal had a difference of opinion on this issue. The Accountant Member believed that the right to receive interest accrued from year to year over a period of eight years from the date of acquisition. In contrast, the Judicial Member held that the entire interest accrued only on the date of the award and was rightly assessed in the assessment year in question. The Vice-President agreed with the Judicial Member. The court concluded that the right to receive compensation and interest must be said to have accrued with reference to the date of dispossession, not when the award was made a rule of the court. The court stated, 'We are of opinion, having regard to the various pronouncements which have been dealt with earlier, that there can be no doubt that right accrued in the assessee to receive compensation on the date of dispossession and that the compensation amounts or the interest payable thereon must be said to have accrued with reference to that date of dispossession.'Conclusion:The court answered the second question in the negative, holding that the Appellate Tribunal was not justified in law in holding that the entire interest of Rs. 1,55,628 was liable to be taxed in the assessment year 1963-64. The court also held that the interest amounting to Rs. 1,55,628 arose under the Indian Electricity Act read with the Punjab Electricity Act and not from the award given by the umpire. The reference was disposed of with no order as to costs.