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Issues: (i) Whether interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation is part of compensation and therefore not taxable separately as income from other sources, and whether such amount is taxable on receipt basis; (ii) Whether the rectification made under section 154 of the Income-tax Act, 1961 could be sustained when the taxability of such interest was debatable.
Issue (i): Whether interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation is part of compensation and therefore not taxable separately as income from other sources, and whether such amount is taxable on receipt basis.
Analysis: The interest awarded under section 28 was treated as an accretion to the value of the acquired land and, unlike interest under section 34, formed part of the enhanced compensation. The governing principle taken from the Supreme Court decisions was that such amount does not assume the character of separate interest income. The Court further applied the settled rule that, to the extent taxable, the amount is to be assessed on receipt basis and not by spreading it over prior years on accrual.
Conclusion: The amount received under section 28 was held to be part of enhanced compensation and not taxable separately as income from other sources; the addition was unsustainable.
Issue (ii): Whether the rectification made under section 154 of the Income-tax Act, 1961 could be sustained when the taxability of such interest was debatable.
Analysis: The Court treated the controversy regarding taxability of interest on enhanced compensation as a debatable issue. A matter requiring interpretation of the character of the receipt and the applicable taxing provision could not be characterized as an obvious or patent error capable of rectification within the narrow scope of section 154.
Conclusion: The rectification was not sustainable because no mistake apparent from the record existed.
Final Conclusion: The additions made on account of interest on enhanced compensation were deleted, and the assessee's appeals were allowed.
Ratio Decidendi: Interest awarded under section 28 of the Land Acquisition Act, 1894 on enhanced compensation is an accretion to the value of the acquired land and partakes the character of compensation, to be assessed on receipt basis, and a debatable issue on such taxability cannot be corrected under section 154 of the Income-tax Act, 1961.
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