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Issues: Whether enhanced compensation received on compulsory acquisition, together with interest on such enhanced compensation, is taxable under section 45(5) of the Income-tax Act, 1961 in the year of receipt notwithstanding that the amount was disputed in appeal, and whether the earlier rule in Hindustan Housing continues to govern such cases.
Analysis: Section 45(5) was introduced as an overriding provision to deal with compulsory acquisition cases where compensation is enhanced in stages. Under that provision, the compensation originally awarded is taxed in the year of first receipt, and the further enhanced amount is deemed income chargeable under the head "Capital gains" in the previous year in which it is received. The scheme of the provision shows that the right to tax does not depend on the finality of the dispute in appeal; receipt is the taxing event, subject to later recomputation if the amount is reduced. On the land acquisition side, additional amount under section 23(1A) and solatium under section 23(2) form part of compensation, and interest under section 28 is an accretion to the enhanced value and therefore falls within enhanced compensation. Interest under section 34, by contrast, is for delayed payment and stands on a different footing.
Conclusion: Enhanced compensation received under section 45(5) is taxable in the year of receipt even if the amount is under appeal, and interest under section 28 of the Land Acquisition Act, 1894 is also includible as part of enhanced compensation. The rule in Hindustan Housing does not apply to this statutory scheme.
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