Section 145B : Taxability of certain income

Section 145B : Taxability of certain income

 Section 145B : Taxability of certain income

Section 145B of the Income Tax Act, 1961 has been inserted in the Income-tax Act to provide that—

(1)   Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received;

(2)   The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved;

(3)   Income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year;

 Text of Section 145B

^[1][145B. Taxability of certain income.

(1)  Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received.

(2)  Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.

(3)  The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.]

KEY NOTE

1.   Inserted by the Finance Act, 2018, with retrospective effect from 01.04.2017.

[1]  Interest received on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received [Section 145B(1)]

§  Taxation of interest received by an assessee on compensation or on enhanced compensation dealt with by erstwhile section 145A(b) is now moved to section 145B(1) with the same language

§  However, section 57(iv) which gives 50% deduction refers to section 56(2)(viii) which in turn continues to refer to erstwhile section 145A(b).

As per section 56(2)(viii), any income by way of interest received on compensation or on enhanced compensation, as the case may be, shall be chargeable to tax under the head ‘Income from other sources‘, and as per section 145B(1) such income shall be deemed to be the income of the year in which it is received, irrespective of the method of accounting followed by the assessee.

Deduction from such Interest [Section 57(iv)]

In the case of above interest, which is taxable under other sources, a deduction of a sum equal to 50% of such income shall be allowed under section 57(iv) even if the actual expenditure is less than the said deduction. Apart from this no other deduction shall be allowed from such an income under any other clause of section 57.

NOTE

Up to assessment year 2010-11, such interest was taxable on due basis as per Supreme Court’s decision in the case of Rama Bai v. CIT (1990) 181 ITR 400 (SC).

Interest income taxable on receipt basis irrespective of assessee’s method of accounting [Section 145B(1) and Para 8(2) of this ICDS]

The recognition criteria in para 8(1) of this ICDS shall not apply to the following items of interest income which shall be taxed on receipt basis or cash basis irrespective of assessee's system/method of accounting.

§  Interest on refund of any tax, duty or cess shall be deemed to be the income of the previous year in which such interest is received. [Para 8(2) of ICDS-IV (Revised)]

§  Section 145B(1) provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Such interest shall be taxed under the head 'Income from other sources' in the year of receipt irrespective of whether assessee follows mercantile system of accounting or cash system. Section 57(iv) allows a deduction of 50% in respect of such interest. ICDS-IV (Revised) will not apply to interest received by an assessee on compensation or on enhanced compensation since in case of conflict between ICDS and Act shall prevail.

Interest on delayed compensation on compulsorily acquired land, non-taxable; Cites Land-Acquisition Act’s overriding effect

S V Global Mill Ltd (Assessee-company) engaged in the business of real estate development, received interest on delayed payment of compensation for compulsory acquisition of land from Special Land Acquisition Officer during Assessment year 2016-17. Asssessee claimed it as exempt in its return of income in accordance with Section 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act, 2013. Assessee claimed that as per Section 96 (which overrides all provisions of Income Tax Act), any compensation or award for compulsory acquisition of land including interest if any is not liable to tax. However, Revenue made an addition of Rs. 8.59 crores taxable under section 56(2)(viii) r.w.s. 145A(b).

Aggrieved assessee appealed before CIT(A) who in turn relying upon various provisions of RFCTLARR Act 2013, including section 3(i), dealing with the term 'cost of acquisition', held that interest received falls under the definition of compensation for acquisition of land, which is specifically exempt u/s 96 of the said act and consequently it cannot be brought to tax u/s 56(2)(viii).

ITAT holds that interest received by assessee-company (Real Estate Developer) towards delayed payment of compensation for compulsory acquisition of land is exempt from income tax in accordance with Section 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act, 2013; Revenue held that interest received on delayed compensation was taxable under section 56(2)(vii) r.w.s. 145A(b) under the Income Tax Act and made consequent additions; Notes that as per Sec.96 of the RFCTLARR Act 2013, any compensation or award for compulsory acquisition of land including interest if any is not liable to tax and overrides all provisions of Income Tax relating to taxation of compensation or any award payable under the Act; Opines that “once compensation is exempt from tax by virtue of Section 96 of the said Act, then any enhanced compensation or interest payable on such enhanced compensation cannot be brought to tax as interest income, which is taxable u/s.56(2)(viii)…”; Also relies on CBDT circular 36 of 2016; As regards Revenue’s contention that the Land Acquisition Officer had deducted TDS u/s 194LA thus negating assessee’s exemption claim, ITAT clarifies that though tax was not required to be deducted consequent to clarificatory amendment brought in by Finance Act 2017, “the Special Land Acquisition Officer had deducted TDS by way of abundant caution…. But, in our view, it does not make any difference with regard to non-taxability of compensation or award including interest if any payable under the new Land Acquisition Act, 2013.” (Related Assessment year : 2016-17) – [ACIT v. SV Global Mill Ltd. (2021) 213 TTJ 232 :  61 CCH 0466 : (2022) 212 DTR 265 : [TS-58-ITAT-2021(CHNY)] (ITAT Chennai)]

 [2]  Claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved [Section 145B(2)]

§  Any claim for escalation of price in a contract or

§  export incentives

§  shall be deemed to be

§  the income of the previous year in which

§  reasonable certainty of its realisation is achieved.

Section 145B(2) inserted by Finance Act, 2018 provides that any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realization is achieved.

The mercantile system of accounting recognized in Section 145(1) considers „reasonable certainty of realisation‟ as a pre-requisite factor. 3. Understood thus, there is no difference between the mandate of section 145B(2) and mercantile system of accounting adopted under section 145(1).

Export Incentive - Reasonable certainty

Para 5 of ICDS-IV requires an Assessee to recognize income from export incentive in the year of making of the claim if there is 'reasonable certainty' of its ultimate collection. Section 145B (2) – shall be deemed to be income of the PY in which reasonable certainty of its realization is achieved

 [3]        Income referred to in section 2(24)(xviii) shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year [Section 145B(3)]

§  The income referred to in Section 2(24)(xviii)

§  shall be deemed

§  to be the income of the previous year in which it is received,

§  if not charged to income-tax in any earlier previous year.

Section 145B(3) provides that income referred to in section 2(24)(xviii) shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.

Section 2(24)(xviii) deems as income any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement by whatever name called with some exceptions. As per Section 2(24)(xviii) of the Act, all subsidies shall be considered as income of the Assessee, except the subsides mentioned in exclusion any part of Section (24)(xviii) of the Income Tax Act, 1961. Section 2(24)(xviii) of the Act, income of the Assessee shall include assistance in the form of a ‘subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called)’ received from specified authorities, unless the assistance falls in any of the exceptions given in the said section.

 §  Section 145B(3) deems incomes referred to in section 2(24)(xviii) to be income of the previous year of receipt, if the same was not charged to tax in any earlier previous year.

§  Section 145B(3) neither interferes with the method of accounting not mandates cash basis of accounting.

§  If an assessee follows accrual system of accounting and recognizes the said income in any previous year, section 145B(3) is not applicable to him.

§  In case such assessee, despite following accrual system of accounting, omits to account and offer such income to tax in the year of accrual, section 145B(3) provides for taxing the same in the year of receipt.

In order to align the recognition principles laid in various ICDS with the provisions of the Act, Section 145B of the Act is inserted vide the Finance Act, 2018. As per sub-section (3) of Section 145B of the Act, income referred to in sub-clause (xviii) of Section 2(24) of the Act shall be deemed to be the income of the previous year in which it is received, if it is not charged to income-tax in any earlier previous year. Therefore, Section 145B(3) of the Act provides that subsidy should be deemed to be the income of the previous year in which it is received, which may have not accrued.

From the combined reading of Sections 2(24)(xviii) and 145B(3) of the Act and ICDS-VII, it would be right to state that :-

§  Subsidy shall be recognised as an income of an Assessee as per Section 2(24)(xviii) of the Act, unless the same falls in the exclusion any part the Section 2(24)(xviii) of the Act.

§  As per Section 143B(3), r.w. ICDS-VII, recognitions of the subsidy as an income shall not be postponed beyond the date of receipt. Therefore, even if the subsidy has not accrued but the same is received then it shall be recognised as an income of the previous year in which it is received.

An Assessee would be recording receipt of subsidy in the books of account as per Accounting Standard-12, Accounting of Government Grants (“AS-12”, in short) or Indian Accounting Standard-20, Accounting for Governmental Grants and Disclosure of Governmental Assistance (“Ind-AS 20”, in short). Government grants available to an Assessee are considered in books of account as per AS-12, when (a) there is reasonable assurance that the Assessee will comply with the conditions attached to it and (ii) where such benefits have been earned by the Assessee and it is reasonably certain that the ultimate collection will be made. Therefore, mere receipt of governmental grant is not sufficient unlike Section 145B of the Act and ICDS-VII. AS-12 provides for postponement of governmental grant beyond the date of actual receipt where conditions attached to the grant are not fulfilled. Similar provisions are given in Ind-AS 20.

Since ICDSs are applicable only for the purpose of computation of taxable income whereas Accounting Standards are applicable for the purpose of maintenance of books of account, it should not be surprising, if recognition of subsidy by an Assessee in its books of account does not match with the recognition under the provisions of the Act.

Excise duty refund does not fall in definition of income as envisaged under section 2(24)(xviii) and, thus, amount of excise duty refund is a capital receipt not taxable under provisions of Income-tax Act

Assessee was following mercantile system of accounting and claimed excise duty refund as capital receipt and claimed exemption under section 10. Assessing Officer was of view that in view of amendment in Finance Act, 2015 and as per amended section 2(24)(xviii), any assistance in form of subsidy, grant etc. provided by Government or any authority was to be conceded as income. Exemption from excise duty does not fall in definition of income as envisaged under section 2(24)(xviii) and, thus, amount in question was not an income but a capital receipt not taxable under provisions of Act. [In favour of assessee] (Related Assessment year : 2016-17) – [PCIT v. Gravita Metal Inc. (2024) 168 taxmann.com 379 (J&K and Ladakh)]