Accrual basis taxation of compensation interest applies before the receipt-based rule for enhanced land acquisition compensation.

Interest on enhanced compensation from compulsory acquisition was treated as taxable on accrual basis for periods before section 145A of the Income-tax Act became operative, because the legal position then required year-wise taxation of interest on delayed or enhanced compensation. The deeming rule taxing such interest on receipt basis applied only prospectively from assessment year 2010-11. On the facts recorded, the assessee had apportioned the interest to the relevant years and discharged the corresponding tax burden, and no defect was shown in that allocation or in the supporting material. The addition was therefore directed to be deleted.

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Issues: Whether interest on enhanced compensation from compulsory acquisition was taxable in the hands of the assessee for the year of receipt, and whether the addition sustained by the lower authorities was liable to be deleted.

Analysis: The interest was found to relate to the acquired land owned by five persons, as reflected in the High Court order, and the material on record showed the interest period to run from the date of notification under section 4 of the Land Acquisition Act, 1894 until deposit of the awarded amount. The legal position prior to the amendment by section 145A of the Income-tax Act, 1961 was governed by the principle that interest on delayed or enhanced compensation accrues year by year, and the amendment deeming taxability on receipt basis applied only from assessment year 2010-11. On the facts, the assessee had apportioned and discharged the tax burden on the interest attributable to the relevant years, and no defect was established in the allocation or in the supporting record.

Conclusion: The addition was directed to be deleted and the assessee succeeded on the substantive taxability issue.

Ratio Decidendi: Interest on enhanced compensation is taxable on accrual basis for periods prior to the operation of section 145A of the Income-tax Act, 1961, and the deeming rule of receipt-based taxation applies only prospectively from the amendment's effective date.

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