Pratima Reddy Muthu Vs ACIT (ITAT Hyderabad)
summary & heading Interim Compensation Not Income: ITAT Hyderabad Defers Taxability to Year of Final Settlement
Hyderabad ITAT ‘A’ Bench, in Pratima Reddy Muthu vs. ACIT (ITA No.1310/Hyd/2025, AY 2010-11, order dated 24.12.2025), partly allowed the assessee’s appeal involving taxability of large compensation received pursuant to civil court decrees.
The Assessee, widow and legal representative of late Shri Muthu Mohan Reddy, received 50% of decretal compensation and costs during AY 2010-11 pursuant to an interim order of the Jurisdictional High Court, while the Government’s appeals against the decrees were still pending. The AO taxed ₹10.86 crore (50% share) as income of the Assessee, which was upheld by NFAC.
The Tribunal held that the amount received under interim directions was contingent and subject to final outcome of litigation and, therefore, did not accrue as income in AY 2010-11. It noted that the disputes were ultimately settled on 07.08.2010, and the entire compensation crystallised and was actually received in FY 2010-11, making it taxable, if at all, in AY 2011-12.
The Bench further held that every receipt is not income. To the extent compensation represented reimbursement of expenses, losses, liabilities or capital receipts, the same cannot be brought to tax. Only the net compensation, after verification and deduction of allowable expenses already incurred by the deceased in the contract business, could be considered for taxation.
Accordingly, the Tribunal set aside the addition for AY 2010-11, directed that the issue be examined in AY 2011-12, and granted liberty to the AO to assess the net taxable portion, if any, after proper verification, including under section 150.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
