2007 (9) TMI 439 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of enhanced compensation and interest received by the assessee.
2. Application of Section 45(5) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability of Enhanced Compensation and Interest Received by the Assessee
The primary issue in this case is whether the enhanced compensation and the interest thereon received by the assessee should be treated as income for the assessment year under consideration. The revenue argued that under Section 45(5) of the Income-tax Act, 1961, any amount by which the compensation or consideration is enhanced by a Court, Tribunal, or authority shall be deemed to be income chargeable under the head 'Capital gains' in the year it is received by the assessee.

The assessee had claimed exemption under Section 54B of the Act for the enhanced compensation. However, the Assessing Officer brought the enhanced compensation and the interest thereon to tax by referring to the amended provisions of Section 45(5).

Issue 2: Application of Section 45(5) of the Income-tax Act, 1961
The CIT (Appeals) had deleted the addition made by the Assessing Officer. However, the ITAT Special Bench in the case of Dy. CIT v. Padam Prakash (HUF) [2006] 10 SOT 1 (Delhi) had held that enhanced compensation is liable to be taxed in the year of receipt, while interest is to be assessed on an accrual basis from year to year. The Special Bench also noted that the interest income on enhanced compensation is not liable to tax until the dispute relating to the interest is finally settled by the Court.

The Special Bench emphasized that Section 45(5) is a complete code for the taxation of enhanced compensation, providing that such compensation is to be taxed in the year of receipt. This provision was introduced to address the difficulties faced by the revenue in tracking and taxing enhanced compensation awarded by Courts at different stages.

The Bench further clarified that the receipt of enhanced compensation, even if conditional or as per an interim order, should be taxed in the year of receipt. If the compensation is subsequently reduced, the assessment can be rectified to reflect the reduced amount.

Conclusion:
Based on the observations and the legal precedents cited, the ITAT set aside the order of the CIT (Appeals) and restored the matter to the file of the Assessing Officer. The Assessing Officer was directed to decide the taxability of the enhanced compensation and interest in line with the principles laid out by the Special Bench.

The appeal of the revenue was allowed for statistical purposes, and the Assessing Officer was instructed to provide a reasonable opportunity of being heard to the assessee before revising the assessment.