2000 (4) TMI 5 - SC - Income Tax

Compensation for Balancing Charge Taxable Upon Receipt: Court Clarifies

The Supreme Court overturned the High Court's ruling and held that the compensation amount received by the assessee was taxable in the year of receipt ... Assessee was of generating and of supply of electricity - In a case where compensation amount and its receipt is admitted, which is business profit under section 41(2), it is to be taxed in the previous year of its receipt - on a proper interpretation of the provisions of the Indian Electricity Act, 1910, the Tribunal erred in holding that addition of the sum of Rs. 1,29,35,557 under section 41(2) of the Income-tax Act, 1961, in the assessment year 1965-66 was not justified Issues Involved:1. Applicability of Section 41(2) of the Income-tax Act, 1961, to the compensation received by the assessee.2. Determination of the year in which the balancing charge is taxable.3. Interpretation of the term 'moneys payable' and 'sold' under Section 41(2) and related provisions.4. Impact of pending arbitration on the taxability of compensation received.Detailed Analysis:1. Applicability of Section 41(2) of the Income-tax Act, 1961:The primary issue was whether the addition of Rs. 1,29,35,557 under Section 41(2) of the Income-tax Act, 1961, for the assessment year 1965-66 was justified. The High Court had ruled in favor of the assessee, stating that Section 41(2) could not be invoked until the final determination of the compensation amount. The Supreme Court, however, overturned this decision, stating that the compensation amount determined and paid by the authority is to be considered as 'moneys payable' under Section 41(2), making it taxable in the year of receipt.2. Determination of the Year in Which the Balancing Charge is Taxable:The Supreme Court emphasized that once compensation is determined and received, it is taxable in the year of receipt, regardless of any pending arbitration for additional compensation. The Court clarified that the balancing charge under Section 41(2) is taxable as business income in the previous year in which the 'moneys payable' became due. The Court rejected the notion that the balancing charge should be taxed only after the final determination of compensation.3. Interpretation of the Term 'Moneys Payable' and 'Sold':The Court referred to the Explanation to Section 32(1A) and Section 41(2), which defines 'moneys payable' to include any compensation moneys payable in respect of the building, machinery, plant, or furniture sold. The term 'sold' includes a compulsory acquisition under any law. The Court concluded that the compensation amount determined by the authority and received by the assessee qualifies as 'moneys payable,' making it taxable under Section 41(2).4. Impact of Pending Arbitration on the Taxability of Compensation Received:The Court held that the pendency of arbitration for additional compensation does not affect the taxability of the amount already received. The initial compensation received is taxable in the year of receipt, and any additional amount awarded later would be taxable in the year it is received. The Court rejected the High Court's view that Section 41(2) does not envisage piecemeal assessment, stating that the provision is intended to tax the compensation amount as and when it is received.Conclusion:The Supreme Court allowed the appeal, setting aside the High Court's judgment. It ruled that the Tribunal erred in holding that the addition of Rs. 1,29,35,557 under Section 41(2) in the assessment year 1965-66 was not justified. The compensation amount received by the assessee was deemed taxable in the year of receipt, irrespective of any pending arbitration for additional compensation. The parties were ordered to bear their respective costs.