Income Tax 2025

Appearance

Taxability of certain income. ​

278(1) ​

The interest received by an assessee on any compensation or on enhanced compensation, shall be deemed to be the income of the tax year in which it is received, irrespective of anything to the contrary contained in section 276.

278(2) ​

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

278(3) ​

The income referred to in section 2(49)(w) shall be treated as the income of the tax year in which it is received, if not charged to income-tax in any earlier tax year.

Explanation

Section Summary: ​

This section clarifies the tax treatment of specific types of income, ensuring that they are taxed in the appropriate tax year. It addresses three scenarios:

  1. Interest received on compensation or enhanced compensation.
  2. Claims for price escalation in contracts or export incentives.
  3. Income referred to in section 2(49)(w) of the Income Tax Act.

The purpose is to provide clear guidelines on when such income should be recognized for tax purposes, ensuring consistency and compliance.

Key Changes: ​

  1. Interest on Compensation or Enhanced Compensation (278(1)):

    • Previously, the timing of taxation for such interest might have been ambiguous. Now, it is explicitly deemed as income in the year it is received, overriding any conflicting provisions in section 276.

  2. Price Escalation Claims or Export Incentives (278(2)):

    • Earlier, the taxability of such claims might have been uncertain. The new law specifies that these are taxable in the year when there is reasonable certainty of their realization.

  3. Income under Section 2(49)(w) (278(3)):

    • This provision ensures that any income falling under section 2(49)(w) is taxed in the year it is received, if it hasn’t been taxed earlier.

Practical Implications: ​

  1. For Taxpayers Receiving Compensation Interest:

    • Taxpayers must report interest on compensation or enhanced compensation in the year they receive it, regardless of when the compensation was awarded.

  2. For Businesses with Price Escalation Claims or Export Incentives:

    • Businesses must assess when there is reasonable certainty of realizing such claims or incentives and report them as income in that year. This may require careful evaluation of contractual terms or government policies.

  3. For Income under Section 2(49)(w):

    • Taxpayers must ensure that any income falling under this category is reported in the year of receipt if it hasn’t been taxed earlier.

Critical Concepts: ​

  1. Reasonable Certainty of Realization (278(2)):

    • This refers to the point when it becomes reasonably certain that the claim or incentive will be realized. It depends on the specific facts of the case, such as contractual terms or government approvals.

  2. Section 2(49)(w):

    • This refers to specific types of income defined elsewhere in the Income Tax Act. Taxpayers must refer to this section to determine if their income falls under this category.

  3. Overriding Section 276:

    • Section 278(1) explicitly overrides any conflicting provisions in section 276, ensuring that interest on compensation is taxed in the year of receipt.

Compliance Steps: ​

  1. For Interest on Compensation:

    • Maintain records of the receipt of interest on compensation or enhanced compensation.
    • Report the interest as income in the tax year it is received.

  2. For Price Escalation Claims or Export Incentives:

    • Evaluate contractual terms or government policies to determine when reasonable certainty of realization is achieved.
    • Report the income in the tax year when such certainty is established.

  3. For Income under Section 2(49)(w):

    • Identify if the income falls under this category.
    • Report it in the tax year of receipt if it hasn’t been taxed earlier.

Examples: ​

  1. Interest on Compensation:

    • A taxpayer receives ₹1 lakh as interest on enhanced compensation in March 2024. Under section 278(1), this ₹1 lakh must be reported as income for the tax year 2023-24, even if the compensation was awarded in 2022.

  2. Price Escalation Claim:

    • A construction company files a claim for price escalation in 2023 but only receives confirmation of its approval in 2024. The income from this claim must be reported in 2024-25, as that is when reasonable certainty of realization is achieved.

  3. Income under Section 2(49)(w):

    • A taxpayer receives ₹50,000 in 2024 under a category defined in section 2(49)(w). If this amount was not taxed earlier, it must be reported as income for the tax year 2024-25.

This section ensures clarity and consistency in the taxation of specific types of income, reducing ambiguity and aiding compliance.