Whether interest received on account of enhanced compensation of acquired property by State is liable for taxation in year of receipt- YES: SC

THE issue before the Bench is - Whether interest received on account of enhanced compensation of acquired property is liable for taxation in the year of receipt.And the answer is YES.

Facts of the case

The assessees are individuals. They had inherited a land property from their father. Subsequently, a part of the said land was acquired by the State Govt. and they were accordingly paid compensation. The amount of compensation was however enhanced and additional compensation was awarded to them along with interest. Thereafter, the assessees filed their return claiming themselves to be "individual". However, the AO passed the assessment order by treating them as

"Association of Persons" (AoP). The AO also refused to spread the interest income over the years and treated it as taxable in the year of receipt. Ultimately, the High Court had decided that these persons were to be given the status of 'individual' and assessed accordingly and not as AoP and that the interest income was to be spread over from the year of dispossession of land, that was the assessment year 1987-88 till the year of actual payment which was received in the assessment year 1999-2000 applying the principles of accrual of income. It was in this backdrop that the Revenue approached the Apex Court challenging the decision of the High Court.

Before the Bench, the Revenue conceded the point that the issue of treatment of the assessees as 'individual' was no more res integra.

Having heard the parties, the Supreme Court held that,

++ it is not disputed that the property in question which was acquiredby the Govt., came to the assessee on inheritance from their father. Furthermore, even the income which is earned in the form of interest is not because of any business venture of the three assessees but it is the result of the act of the Govt. in compulsorily acquiring the said land. In these circumstances, the case is squarely covered by the ratio of the judgment laid down in case of Meera and Company, Ludhiana vs. CIT, Punjab, J & K and Chandigarh, Patiala, inasmuch as it is not a case where any "AoP" was formed by violation of the parties for the purpose of generation of income. This basic test to determine the status of AoP is absent in the present case. Therefore, we are of the view that the assessees will be treated as "individual";

++ it is therefore clear that whereas interest u/s 34 of Land Acquisition Act (LAA) is not treated as a part of income subject to tax, the interest earned u/s 28, LAA, which is on enhanced compensation, is treated as a accretion to the value and therefore, part of the enhanced compensation or consideration making it exigible to tax. After holding that interest on enhanced compensation u/s 28 is taxable, the other aspect to be considered is the year of tax. This question can be answered by holding that it has to be tested on receipt basis, which means it would be taxed in the year in which it is received, and spread over of this interest on accrual basis is not permissible. Therefore, we upheld the disallowance of speared over of interest;

++ we allow these appeals in part and set aside that portion of the impugned judgment of the High Court whereby spread over of the interest received under section 28 of the 1894 Act, on the enhanced income is allowed with the direction that it would be taxed in the year in which such interest on enhanced compensation was received.