Recently, a division bench of the Bombay High Court ruled that the interest received on the fixed deposits made with the Bank on receipt of enhanced compensation under the Land Acquisition Act is subject to income tax as “Income from Other Sources” even when no final order has been delivered by the Court on the issue of compensation.
In the instant case, the government acquired the agricultural land belongs to the assesse under the Land Acquisition Act. The compensation given to the appellant was subsequently enhanced by the Court. The State appeal against the same was pending before the Bombay High Court.
While granting interim relief to the assesse, the Court permitted her to withdraw the amount of Rs.63.33 Lakhs by furnishing a bank guarantee of Rs.35 Lakhs and solvent surety for the balance to the satisfaction of the Court.
The appellant/assessee earned interest of Rs.3.40 Lakhs on the Fixed Deposit with the bank which is, in the opinion of the income tax department, is taxable as “income from other sources.”
The first appellate authority allowed the appeal by finding that no final order has been delivered with regard to the enhanced compensation and hence, no income could have been said to have accrued during the subject assessment year. It therefore, invoked the principle of restitution to hold that the interest on fixed deposit accrued would be subject to restitution under Section 144 of the Civil Procedure Code.
The decision was in the light of the decision of the Delhi High Court in Paragon Construction, wherein on identical facts, the Delhi High Court held that where amount has been received by the assessee at an interim stage subject to the condition that in case assesse failed at the final hearing he would refund the amount to the respondent along with interest at the rate prescribed in the interim order the amount earned on.
However, on departmental appeal, the ITAT concluded the matter against the assessee by stating that the decision in Paragon Construction cannot be applied to the present case.
Justices M.S Sanklecha and Manish Pitale upheld the ITAT order and observed that “there was no obligation in terms of the order allowing the appellant to withdraw the amount of Rs.63.33 lakhs, to deposit the same in fixed deposits and return it along with interest received on fixed deposit to the State in case it loses in the appeal filed by the State before the High Court. Therefore, the interest if awarded at the final hearing would not necessarily be related to the interest earned on the fixed deposit in the absence of any such direction being made in the interim order.”
The bench therefore, held that the interest on interim compensation received pending final disposal by the High Court is income if there is no direction given by the Court.
“The source of funds to earn income cannot determine the taxability of the income. The income earned would be chargeable to tax irrespective of the source of the funds from which the income has been earned”, it said.
“The fact that the assessee may have to return the compensation and interest on the principle of restitution as provided under S. 144 of the Civil Procedure Code is not relevant because restitution is not a certainty,” the bench added.
“In the present case it is an accepted position that the right to receive the interest from the fixed deposits already accrued to the appellant-assessee. In such circumstances, the interest on the fixed deposit would be chargeable to tax, as sought to be done by the Assessing Officer under the head income from other sources.”
Read the full text of the Judgment below.