CIT vs. Govindbhai Manaiya [(2014) 367 ITR 498 (SC)]
Capital Gains – Interest on the enhanced compensation u/s. 28 of 1894 Act is to be taxed in the year in which it is received.
The respondents were 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 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 along with interest was awarded. 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 an “association of persons” (AoP). The second question was regarding the taxability of the interest on the 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.
The Assessing Officer passed an assessment order by treating their status as that of an AOP. The Assessing Officer also refused to spread the interest income over the years and treated it as taxable in the year of receipt.
The High Court held that these persons were to be given the status of “individual” and assessed accordingly and not as an AOP and that the interest income was to be spread over from the year of dispossession of land, that is 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.
The Revenue approached the Supreme Court challenging the decision of the High Court.
The Supreme Court observed that the admitted facts were that the property in question which was acquired by the Government, came to the respondents on inheritance from their father, i.e., by the operation of law. Furthermore, even the income which was earned in the form of interest was not because of any business venture of the three assesses but it was the result of the act of the Government in compulsorily acquiring the said land. In these circumstances, according to the Supreme Court, the case was squarely covered by the ratio of the judgment laid down in Meera and Co. [(1997) 224 ITR 635 (SC)] inasmuch as it was not a case where any “association of persons” was formed by volition of the parties for the purpose of generation of income. This basic test to determine the status of AOP was absent in the present case.
In so far as the second question was concerned, the Supreme Court held that it was also covered by its another judgment in CIT vs. Ghanshyam (HUF) reported in [(2009) 315 ITR 1 (SC)] albeit, in favour of the Revenue, in which it was held that whereas interest u/s. 34 was not treated as a part of income subject to tax, the interest earned u/s. 28, which was on the enhanced compensation, was 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 the enhanced compensation u/s. 28 of the 1894 Act was taxable, the court dealt with the other aspect, namely, the year of tax and answered this question by holding that it had to be taxed on receipt basis, which meant that it would be taxed in the year in which it is received.
