2016 (5) TMI 686 - AT - Income Tax

Taxability of interest on compensation awarded by the MACT - revenue or capital receipt - Held that - Relying upon the decision of the Hon ble Punjab & Haryana High Court in Drawing and Disbursing Officer Versus Income Tax Officer 2011 (3) TMI 1671 - PUNJAB AND HARYANA HIGH COURT we hold that interest component in compensation awarded by MACT is part of compensation and has to be treated as capital receipt and not income till the assessee received the amount in pursuance of award. The interest earned by the assessee on the amount of compensation after its receipt will be taxed in accordance with law. In view of the aforesaid facts we restore the issue back to the file of AO to rework the income in accordance with the aforesaid decision of Hon ble P&H High Court and decide the issue.

Summary

Issues Involved:
1. Deduction on interest on compensation.
2. Taxability of interest on compensation on accrual basis versus receipt basis.
3. Applicability of CBDT Circular No. 21 of 2015 regarding low tax effect.

Issue-wise Detailed Analysis:

1. Deduction on Interest on Compensation:
The Revenue's appeal was based on the contention that the CIT(A) erred in allowing a 50% deduction on the addition of Rs. 28,06,488 towards interest on compensation received, citing an amendment in Section 57 of the Act effective from 1st April 2010. The Tribunal noted that the tax effect was below Rs. 10 lakhs, making the appeal non-maintainable as per CBDT Circular No. 21 of 2015. Consequently, the Revenue's appeal was dismissed without expressing an opinion on the merits of the case.

2. Taxability of Interest on Compensation on Accrual Basis Versus Receipt Basis:
The assessee argued that the interest on compensation should be taxed on an accrual basis, not on a receipt basis, as the provisions of Section 145A(b) became operative from 01.04.2010. The CIT(A) had allowed partial relief by directing a 50% deduction from the interest on compensation received. The Tribunal referenced the case of Smt. Sharda Pareek vs. ACIT and the Hon'ble Punjab & Haryana High Court's decision in Drawing and Disbursing Officer vs. ITO, concluding that the interest component in compensation awarded by MACT should be treated as a capital receipt and not income until the claimant received the amount in pursuance of the award. The Tribunal restored the issue to the AO to rework the income in accordance with the decision of the Hon'ble P&H High Court.

3. Applicability of CBDT Circular No. 21 of 2015 Regarding Low Tax Effect:
The Tribunal noted that as per the CBDT Circular No. 21 of 2015, no Department appeals should be filed if the tax effect is less than Rs. 10 lakhs. Since the tax effect in the present case was below this threshold, the Tribunal dismissed the Revenue's appeal on account of low tax effect.

Conclusion:
The Tribunal dismissed the Revenue's appeal due to low tax effect and restored the issue of taxability of interest on compensation to the AO for reworking the income as per the Hon'ble Punjab & Haryana High Court's decision. The assessee's cross-objection was allowed for statistical purposes.