Taxable Interest on Compensation: Apportionment Over Years Required

TNK. Govindarajulu Chetty Versus Commissioner of Income-Tax, Madras.

TNK. Govindarajulu Chetty Versus Commissioner of Income-Tax, Madras. - [1973] 87 ITR 22 Issues Involved
1. Taxability of interest received as part of compensation.
2. Apportionment of interest over assessment years.
3. Method of accounting for interest income.

Detailed Analysis

1. Taxability of Interest Received as Part of Compensation
The primary issue was whether the sum of Rs. 1,28,716, received as part of the compensation for acquired property, should be treated as taxable income or a capital receipt. The Income-tax Officer initially treated this amount as interest income, taxable under the Income-tax Act. The Appellate Assistant Commissioner upheld this view but allowed for apportionment over the relevant years. The Tribunal, however, ruled that the amount was a capital receipt, not liable to tax. The High Court, referencing the Supreme Court judgment in T.N.K. Govindarajulu Chetty v. Commissioner of Income-tax, ultimately held that the interest received was indeed taxable as income. The court stated, 'the right of the appellant to interest arose by virtue of the provisions of sections 28 and 34 of the Land Acquisition Act, 1984,' confirming that the interest was taxable income.

2. Apportionment of Interest Over Assessment Years
The second issue was the appropriate method for apportioning the interest income across the assessment years 1955-56 and 1956-57. The Tribunal initially accepted the assessee's contention that the interest should be apportioned and assessed in the respective years when it accrued. The High Court reiterated that 'the accrual of interest has to be spread over the years between the date of acquisition till it was actually paid.' The court rejected the revenue's argument that the Income-tax Officer could choose to assess the income on a receipt basis, emphasizing that 'the statute does not give such an option to the revenue to choose either the accrual basis or the receipt basis for assessing the income.'

3. Method of Accounting for Interest Income
The third issue concerned the method of accounting employed by the assessee and its relevance to the taxability of the interest income. The Tribunal found that the assessee used the mercantile method of accounting for the relevant years. The High Court upheld this finding, stating, 'the method of accounting adopted by the assessee was mercantile.' The court emphasized that 'once the income has legally accrued to the assessee, the determination or quantification of the amount does not postpone the accrual.' The court also noted that the assessee's omission to include the interest in the returns of the earlier years was immaterial, as the right to the income had already accrued.

Conclusion
The High Court concluded that the interest received by the assessee was taxable as income and should be apportioned over the relevant years based on the mercantile method of accounting. The court stated, 'the whole of the sum of Rs. 50,592 and the whole of the sum of Rs. 78,124 cannot be taxed as income in the assessment years 1955-56 and 1956-57 on receipt basis.' The reference was answered against the revenue and in favor of the assessee, with the assessee entitled to costs.