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Urvi Chirag Sheth Versus Income Tax Officer

2016 (6) TMI 255 - ITAT AHMEDABAD

Addition on account of interest awarded as a part of enhanced accident compensation - Held that:- Clearly, unless a receipt is not an income, there is no occasion for the provisions of Section 56(1) or 56(2) coming into play. Section 56 does not decide what is an income. What it holds is that if there is an income, which is not taxable under any of the heads under Section 14, i.e item A to E, it is taxable under the head ‘income from other sources’. The receipt being in the nature of income is a .....

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n under section 57(iii), given the above conclusion, is wholly irrelevant. We vacate this action of the Assessing Officer, and disapprove the CIT(A)’s action of confirming the same. Grievance of the assessee is thus upheld. - I.T.A. No.: 630/Ahd/16 - Dated:- 31-5-2016 - PRAMOD KUMAR AM AND S S GODARA JM For the Petitioner : Hiren Trivedi For the Respondent : Anita Hardasani ORDER PER PRAMOD KUMAR, AM: 1. The short point that requires our adjudication in this case is whether or not the learned CI .....

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accident, leaving her permanently disabled, what is termed by the competent authority, at ninety percent level. She claimed a compensation of ₹ 15,00,000 for this tragic loss of her physical abilities. She did eventually get it but she had to knock the doors of Hon ble Supreme Court, and it was finally on 26th April 2011 that her claim was upheld. As if this long struggle of 21 years in the judicial process was not enough, the destiny had more in store for her. It is this settlement of th .....

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rned CIT(A) has confirmed this stand by observing as follows: 4.3 I have considered the facts of the case and submission made by the appellant. The Assessing Officer is of the opinion that the case of the assessee come under the purview of Section 145A(b) r.w.s. 56(2)(viii) of the Act as the assessee has received interest on compensation of ₹ 14,94,286/-. However, the AO has allowed deduction of ₹ 7,47,143/- as per provisions of Section 57(iv) of the Act. The main contention of the a .....

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ct are not considered in these judgments. The other contentions of the appellant that the provisions of Section 56(2)(viii) of the Act deal with interest on compensation received under land requisition Act, 1994 only is also not correct. A plain reading of Section 56(2)(viii) clearly says that income by way of interest received on compensation or on enhanced compensation referred to in clause b of Section 145A shall be chargeable to income tax under the head "income from other sources" .....

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paid to her soon after the accident, was eventually paid in full after twenty one years of the tragic incident. Hon ble Supreme Court, vide judgment dated 26th April 2011, concluded that Considering all this, we grant compensation of ₹ 15 lacs (Rupees fifteen lacs) with interest at the rate of 8% on the enhanced compensation from the date of filing the claim petition before MACT (Motor Accidents Claims Tribunal) till the date of realization . The payment made to the assessee, therefore, is .....

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n question have to be regarded as capital receipts and, therefore, are not income within meaning of s. 2(24) of the Income Tax Act." [Emphasis supplied]. This clearly implies, as is the settled law, that a capital receipt, in principle, is outside the scope of 'income' chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of 'income' by way of specific provisions of the Income Tax Act .....

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e Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-a-vis the point of time when it was actually paid, or, for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the MACT, it would have been ₹ 15 lacs but since t .....

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computed, has the same character. If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. In the case of CIT Vs Oriental Insurance Co Ltd [(2012) 211 Taxman 369 (All)], Hon ble Allahabad High Court has, inter alia, held that To our opinion, the award of compensation under motor accidents claims cannot be regarded as income. The award is in the form of compensation to the legal heirs for the loss of life of their bread earner. H .....

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Income Tax Act . Essentially, this conclusion supports the school of thought that when principal transaction, i.e. accident compensation for the delayed payment of which the interest is awarded, itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction, i.e. interest for delay in payment of compensation, as well. Touching a different chord but coming to the rescue of the assessee, Hon ble Punjab & Haryana High Court, in the case of CIT Vs B Rai [(2004) .....

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of income tax . That precisely is the situation before us as well. 6. Revenue, however, does not even challenge these propositions, and, in our considered view, rightly so; it is only on the scope of provisions of Section 145A(b) and section 56(2)(viii) that they rest their case. It is, therefore, perhaps only appropriate to appreciate the scope of these provisions and take a look at the facts surrounding introduction of these provisions vide the Finance Act 2009. 7. Ironically, the statutory pr .....

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other sources , shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon ble Supreme Court, in the case of Rama Bai Vs. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to tax payers. With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an .....

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amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 and subsequent assessment years. [Clauses 26,27,56] 8. In the case of Rama Bai (supra), which is raison d'être for this amendment in law, Hon ble Supreme Court, speaking through Hon ble Justice S Ranganathan- as he then was, one of the most illustrious former Presidents of this Tribunal, had observed that the interest cannot be taken to have accrued on the date of the orde .....

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oint of time when amendment was made, not taxable earlier. Section 145A, it is important to bear in mind, deals with the method of accounting on cash or mercantile basis which again has its focus on the point of time when an income is taxable rather than taxability of income itself. When an income is not taxable, section 145A has no relevance. It is in this backdrop that we can take a look at Section 145A which is as follows: Section 145A: Method of accounting in certain cases- Notwithstanding a .....

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. The only impact it has on taxability of an income is its timing of taxability. What is not taxable is not made taxable under section 145A(b) but what is taxable under the mercantile method of accounting, i.e. on accrual basis, is made taxable on cash basis of accounting, i.e. at the point of time when interest is actually received. Nothing else needs to read into this provision, and the memorandum explaining the provision of Finance Bill 2009, as reproduced earlier, makes that amply clear. As .....

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145A . The starting point of this exercise is income, and it is only when the receipt is in the nature of an income, that the classification of income under a particular category arises. In other words, when interest received by the assessee is in the nature of income, such interest can be taxed under section 56 (2)(viii). Section 56(1) makes this aspect even more clear when it states that Income of every kind, which is not to be excluded from the total income under this Act, shall be chargeabl .....

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f there is an income, which is not taxable under any of the heads under Section 14, i.e item A to E, it is taxable under the head income from other sources . The receipt being in the nature of income is a condition precedent for Section 56 coming into play, and not vice versa. To suggest that since an item is listed under section 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse. The very approach of t .....

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