Taxability of interest on enhanced compensation confirmed as income in the year of receipt under the Income-tax Act.

Interest on enhanced compensation under Section 28 of the Land Acquisition Act, 1894 was treated as taxable in the year of receipt and as outside Section 45(5) of the Income-tax Act, 1961. Applying its earlier view, the HC held that such interest is not to be equated with compensation, even though interest on original compensation may form part of compensation. The amount was therefore brought to tax under Section 56 and not under the special capital gains regime for enhanced compensation. The issue was resolved in favour of the Revenue for the assessment year in question.

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Issues: Whether interest on enhanced compensation under Section 28 of the Land Acquisition Act, 1894 is taxable in the year of receipt and is not covered by Section 45(5) of the Income-tax Act, 1961.

Analysis: The question was governed by the earlier view of the Court that interest on enhanced compensation is not to be treated as compensation, even though interest on original compensation may form part of compensation. On that basis, the amount of interest on enhanced compensation was held to be taxable under Section 56 of the Income-tax Act, 1961 and outside the scope of Section 45(5). The Court treated itself as bound by that interpretation and applied it to the assessment year in question.

Conclusion: The issue was answered in favour of the Revenue, and interest on enhanced compensation was held taxable in the year of receipt.

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