Receipt basis taxation of interest on enhanced compensation upheld where mercantile accounting was not established.

Interest on delayed payment of enhanced land acquisition compensation was taxable on receipt basis where the assessee was not shown to be following the mercantile system of accounting. Section 145 of the Income-tax Act, as applicable after the Finance Act, 1995, permits computation only under the cash or mercantile system regularly employed by the assessee. Because the assessee received the full interest in 1996, had not earlier accrued the balance on mercantile basis, and failed to prove regular mercantile accounting, spreading over on accrual basis was rejected. The interest was treated as income from other sources and taxed in assessment year 1997-98.

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Issues: Whether interest received on delayed payment of enhanced compensation for the land acquisition period was taxable in the assessment year 1997-98 when the assessee was not shown to be following the mercantile system of accounting.

Analysis: Section 145 of the Income-tax Act, 1961, as applicable after the Finance Act, 1995, permits computation of income only under the cash or mercantile system regularly employed by the assessee. The earlier line of authorities on spreading over of interest income applied where the assessee was following mercantile accounting. On the facts, the assessee had received the entire interest on 29.9.1996, had not shown the balance amount on accrual basis in earlier years, and had not established that the mercantile system was being followed. In that situation, the receipt was treated as income from other sources and became taxable on actual receipt. The later decision in Ghanshyam was also applied to hold that interest of the relevant kind is taxable when received.

Conclusion: The interest was taxable in assessment year 1997-98, and the assessee's plea for spreading over on accrual basis was rejected.

Final Conclusion: The appeal succeeded, the Tribunal's view was set aside, and the taxability of the interest receipt in the year of receipt was upheld.

Ratio Decidendi: Where the assessee is not shown to be following the mercantile system of accounting, interest received on delayed payment of enhanced compensation is taxable on receipt basis in the year of actual receipt.

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