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Issues: (i) Whether enhanced compensation received on compulsory acquisition was taxable as capital gains in the year of receipt under section 45(5) of the Income-tax Act, 1961. (ii) Whether interest earned on repeated lending transactions was assessable as business income or as income from other sources.
Issue (i): Whether enhanced compensation received on compulsory acquisition was taxable as capital gains in the year of receipt under section 45(5) of the Income-tax Act, 1961.
Analysis: The enhanced compensation had been received during the year, but the State had appealed against the enhancement and the amount was withdrawn only against security. The statutory expression "received" in section 45(5)(b) was read in its effective sense, namely receipt free from any live risk of restitution. Where the enhancement itself remained under challenge and could still be reversed, the amount could not be treated as finally received for purposes of taxing the enhanced compensation in that year. The compensation also related only to tenancy rights, and for the relevant period those rights did not yield taxable capital gains in the manner contended by the Revenue.
Conclusion: The addition on account of enhanced compensation was rightly deleted and the issue was decided in favour of the assessee.
Issue (ii): Whether interest earned on repeated lending transactions was assessable as business income or as income from other sources.
Analysis: The record showed a regular course of money-lending transactions spread over a number of persons, firms, and companies. The absence of a money-lending licence did not by itself determine the head of income. What mattered was the continuity, frequency, and organised character of the activity, which supported the conclusion that the assessee was carrying on a business of advancing loans on interest.
Conclusion: The interest income was correctly assessed as business income and the issue was decided in favour of the assessee.
Final Conclusion: The Revenue's challenge failed on the substantive tax issues decided in the order, and the assessments were sustained only to the extent consistent with the finding that the interest receipts constituted business income.
Ratio Decidendi: Enhanced compensation is taxable under section 45(5) only when the enhanced amount is finally received in a real and effective sense, while repeated and organised money-lending transactions constitute business activity notwithstanding the absence of a lending licence.
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