2025 (8) TMI 914 - AT - Income Tax

Interest on enhanced compensation taxed as income from other sources, not long-term capital gains; s.143(3), s.154, s.57(iv)

The New Vikash Co. House Building Society Ltd. Versus ITO, Ward-2 (1), Faridabad.

The New Vikash Co. House Building Society Ltd. Versus ITO, Ward-2 (1), Faridabad. - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the interest on enhanced compensation should be assessed under the head 'income from other sources' as per section 56(2)(viii) of the Income Tax Act, 1961, instead of under 'capital gains.' Whether the assessee is entitled to claim a 50% deduction on the interest income under section 57(iv) of the Income Tax Act, 1961. Whether the Assessing Officer's failure to follow the Tribunal's earlier directions constitutes a 'mistake apparent from the record' warranting rectification under section 154 of the Income Tax Act, 1961. Whether the Commissioner of Income Tax (Appeals) was correct in rejecting the rectification application on the ground that there was no mistake apparent from the record. Whether the interest income from bank deposits is chargeable to tax without any deduction under section 57(iv). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Proper Head of Income for Interest on Enhanced Compensation Relevant legal framework and precedents: Section 56(2)(viii) of the Income Tax Act, 1961 provides that income by way of interest on enhanced compensation is taxable as income from other sources. Section 45(5) deals with compensation chargeable under capital gains. The Tribunal's earlier order categorically directed that interest on enhanced compensation be taxed under section 56(2)(viii) and not as capital gains. The Supreme Court's decision in Bangalore Club was cited to clarify the taxability of bank interest. Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer erred by treating interest on enhanced compensation as capital gains instead of income from other sources. The Tribunal emphasized that the earlier coordinate bench's directions were clear and unambiguous regarding the head of income. Key evidence and findings: The Tribunal's earlier order dated 29.06.2018 explicitly stated that interest on enhanced compensation of INR 67,04,556/- is chargeable under section 56(2)(viii). The AO's order dated 30.12.2019 assessed this interest under capital gains contrary to the Tribunal's directions. Application of law to facts: The Tribunal held that the AO's non-compliance with the earlier directions constituted an error. The interest income must be assessed under 'income from other sources' as per section 56(2)(viii). Treatment of competing arguments: The Revenue supported the AO's order, but the Tribunal found the AO's approach inconsistent with the law and the Tribunal's prior ruling. Conclusions: The interest on enhanced compensation must be assessed under section 56(2)(viii) as income from other sources, not under capital gains. Issue 2: Entitlement to 50% Deduction on Interest Income under Section 57(iv) Relevant legal framework and precedents: Section 57(iv) of the Income Tax Act, 1961 allows a deduction equal to 50% of income by way of interest on enhanced compensation under section 56(2)(viii). The Tribunal's earlier order confirmed this entitlement. Court's interpretation and reasoning: The Tribunal reiterated that the assessee is entitled to claim 50% deduction on the interest income as per section 57(iv). The AO failed to grant this deduction, which was a clear non-compliance of the Tribunal's directions. Key evidence and findings: The Tribunal's earlier order explicitly allowed the 50% deduction on interest income from enhanced compensation. The AO's order did not allow this deduction. Application of law to facts: The Tribunal directed the AO to allow the deduction of 50% of the interest income as mandated by section 57(iv). Treatment of competing arguments: The Revenue did not dispute the legal provision but supported the AO's order. The Tribunal held that ignoring the deduction was erroneous. Conclusions: The assessee is entitled to a 50% deduction on the interest income from enhanced compensation under section 57(iv). Issue 3: Whether Non-Compliance with Tribunal Directions Constitutes a Mistake Apparent from Record for Rectification under Section 154 Relevant legal framework and precedents: Section 154 of the Income Tax Act, 1961 allows rectification of mistakes apparent from the record. The Tribunal's earlier directions are binding on the AO. Court's interpretation and reasoning: The Tribunal held that the AO's failure to follow the Tribunal's clear directions on the head of income and deduction entitlement is a mistake apparent on the record. The lower authorities' refusal to rectify the order on the ground that no mistake was apparent was incorrect. Key evidence and findings: The AO assessed interest income under capital gains and denied deduction under section 57(iv), contrary to the Tribunal's directions. The CIT(A) rejected the rectification application stating absence of mistake apparent from record. Application of law to facts: The Tribunal found that the AO's conduct amounted to a mistake apparent on record, warranting rectification under section 154. The CIT(A)'s rejection of rectification was therefore erroneous. Treatment of competing arguments: The Revenue argued against rectification, but the Tribunal emphasized the binding nature of its earlier directions and the legal principle that non-compliance with such directions is a mistake apparent. Conclusions: The AO's non-compliance with Tribunal directions is a mistake apparent from record, justifying rectification under section 154. Issue 4: Validity of CIT(A)'s Order Rejecting Rectification Application Relevant legal framework and precedents: The CIT(A) can entertain rectification appeals against orders passed under section 154. The scope of rectification is limited to mistakes apparent from the record. Court's interpretation and reasoning: The Tribunal found the CIT(A)'s conclusion that the issue was not a mistake apparent on record to be erroneous. The Tribunal held that the clear directions of the coordinate bench constituted a binding precedent and failure to follow them is a mistake apparent. Key evidence and findings: The CIT(A) upheld the AO's order without allowing rectification. The Tribunal disagreed with this approach based on the earlier directions and legal provisions. Application of law to facts: The Tribunal set aside the CIT(A)'s order and directed the AO to rectify the mistake. Treatment of competing arguments: The Revenue supported the CIT(A)'s order; however, the Tribunal prioritized adherence to its earlier directions and the rectification provisions. Conclusions: The CIT(A)'s rejection of the rectification application was incorrect and is set aside. Issue 5: Taxability of Bank Interest and Deduction under Section 57(iv) Relevant legal framework and precedents: The Tribunal referred to the Supreme Court decision in Bangalore Club holding that bank interest is fully taxable without deduction under section 57(iv). Court's interpretation and reasoning: The Tribunal distinguished interest on enhanced compensation from bank interest. While interest on enhanced compensation is eligible for 50% deduction under section 57(iv), bank interest is fully taxable without such deduction. Key evidence and findings: The Tribunal's earlier order clarified that bank interest of INR 50,25,433/- is taxable without deduction, while interest on enhanced compensation is eligible for deduction. Application of law to facts: The Tribunal confirmed the tax treatment of bank interest as per the Supreme Court ruling and upheld the distinction in treatment. Treatment of competing arguments: No dispute on this principle was noted. Conclusions: Bank interest is taxable without deduction under section 57(iv), whereas interest on enhanced compensation qualifies for 50% deduction under the same provision.