Case: Commr.Of Income Tax,Rajkot Vs. Govindbhai Mamaiya

2. The respondents are three brothers. Their father died leaving the land admeasuring 17 acres and 11 gunthas to the three brothers and two other persons who relinquished their rights in favour of the three brothers. A part of this bequeathed land was acquired by the State Government and compensation was paid for it. On appeal, the compensation amount was enhanced and additional compensation alongwith interest was awarded.3. The respondents filed their return of income for each assessment years claiming the status of individual. Two questions arose for consideration before the Assessing Officer. One was as to whether these three brothers could file separate returns claiming the status of the individual or they were to be treated as Association of Persons (AoP). Second question was regarding the taxability of the interest on enhanced compensation and this interest which was received in a particular year was to be assessed in the year of receipt or it could be spread over the period of time.4. Without going into the detail as to how this question traversed and decided by one forum to other, suffice it is to state that the Assessing Officer had passed the assessment order by treating their status as that of a AoP. The Assessing Officer had also refused to spread the interest income over the years and treated it as taxable in the year of receipt. Ultimately, the High Court has decided that these persons are to be given the status of individual and assessed accordingly and not as AoP and that the interest income is to be spread over from the year of dispossession of land, that is the assessment yeartill the year of actual payment which was received in the assessment yearapplying the principles of accrual of income. It is in this backdrop that the Revenue has approached this Court challenging the decision of the High Court.

Court's reasoning:
8. It is clear from the above that whereas interest under Section 34 is not treated as a part of income subject to tax, the interest earned under Section 28, 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 under Section 28 of 1894 Act is taxable, the Court dealt with the other aspect namely, the year of tax and answered this question 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.Insofar as the second question is concerned, that is also covered by another judgment of this Court in Commissioner of Income Tax, Faridabad vs. Ghanshyam (HUF) reported in (2009) 8 SCC 412 , albeit, in favour of the Revenue. In that case, the court drew distinction between theearned under Section 28 of the Land Acquisition Act and thewhich is under Section 34 of the said Act. The Court clarified that whereas compensation given to the assessee of the land acquired would be income, the enhanced compensation/consideration becomes income by virtue of Section 45(5)(b) of the Income Tax Act. The question was whether it will coverand if so, what would be the year of taxability. The position in this respect is explained in paras 49 and 50 of the judgment which make the followingAs discussed hereinabove, Sectionprovides for additional amount. It takes care of the increase in the value at the rate of 12% per annum. Similarly, under Section 23(2) of the 1894 Act there is a provision for solatium which also represents part of the enhanced compensation.Similarly, Section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under Sectionand solatium under Section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under Section 18 of the 1894 Act. It depends upon the claim, unlike interest under section 34 which depends on undue delay in making the award.50. It is true thatis not compensation. It is equally true that Section 45(5) of the 1961 Act refers to compensation. But as discussed hereinabove, we have to go by the provisions of the 1894 Act which awardsboth as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28 unlike interest under Section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under Section 34 of the 1894 Act. So also additional amount under Section 23and solatium under Section 23(2) of the 1961 Act forms part of enhanced compensation under Section 45(5)(b) of the 1961