A case study for reference:
Assessee received enhanced compensation on its lands being acquired by Haryana Urban Development Authority (HUDA) as also interest thereon during the previous year relevant to assessment year 1999-2000.
Assessee filed its return on income for the assessment year 1999-2000 in which he did not offer the amount of enhanced compensation and the interest received thereon during the previous year relevant to the assessment year for taxation, on the plea that the amount of enhanced compensation received had not accrued to the assessee during the year of receipt as the entire amount was in dispute in appeal before the High Court which appeal stood filed by the State against the order of the Reference Court granting enhanced compensation. The amount was received by the assessee in terms of the interim order of the High Court against the assessee's furnishing security to the satisfaction of the executing court. The interest received on enhanced compensation during the previous year was also, according to the assessee, not chargeable to tax on the same plea.
The A.O. did not accept the contentions of the assessee on the ground that in terms of Section 45(5) of the Income-tax Act, enacted w.e.f . 1.4.88, the amount by which compensation or consideration stood enhanced or further enhanced by the Court, is deemed income chargeable under the head "Capital Gains" of the previous year in which the said amount came to be received. The A.O. accordingly brought to tax the amount of enhanced compensation of Rs.87 ,13,517 /- received by the assessee during the previous year relevant to the assessment year 1999-2000. Similarly, interest on enhanced compensation of Rs.1 ,47,575 /- received by the assessee during the previous year was also brought to tax in the year of receipt. The assessee filed appeal against the order of the A.O. in which he reiterated the above contention. Assessee also placed reliance on the judgment of the Supreme Court in Commissioner of Income-tax, West Bengal-II v. Hindustan Housing and Land Development Trust Ltd. - CIT (A) came to the conclusion that since the enhanced compensation received was in dispute in the pending First Appeal, both, the enhanced compensation as well as the interest thereon had not accrued to the assessee during the year of receipt as the entire amount was in dispute in First Appeal and that the assessee had received the said amount only against security furnished to the satisfaction of the executing court. At this stage, it may be mentioned that the amount of enhanced compensation sought to be taxed under Section 45(5) of the 1961 Act was Rs.87,13,517 /- whereas the interest on enhanced compensation which was also sought to be taxed was Rs.1,47,575 /-.
Aggrieved by the decision of the CIT( A), the Department moved Income-tax Appellate Tribunal which upheld the order of the CIT(A) and dismissed the appeal of the Department. Aggrieved by the decision of the Tribunal the matter was carried in appeal to the High Court under Section 260A of the 1961 Act. By the impugned judgment it has been held that the case is squarely covered by the judgment of the Supreme Court in the case of Hindustan Housing (supra). According to the High Court, when the State is in appeal against the order of enhanced compensation and interest thereon the receipt of additional compensation and interest thereon was not taxable as income as the said two items were disputed by the Government in appeal. Consequently, the Department's appeal was dismissed by the High Court.
Income Tax Department is in appeal in the Supreme Court.
The short question to be decided in this batch of civil appeals is whether ITAT was right in ordering deletion of enhanced compensation and interest thereon from the total income of the assessee on the ground that the said two items, awarded by the Reference Court, was under dispute in First Appeal before the High Court.
The Supreme Court noted that the following conditions need to be satisfied for taxing a transaction as capital gains-
(1) the subject-matter must be a capital asset,
(2) the transaction must fall in the definition of "transfer",
(3) there must be profit or loss called "Capital Gains" and
(4) that the taxpayer has claimed exemption in whole or in part by complying with legal provisions (Like Section 54F ).
Section 45(1) of the Income Tax Act speaks about capital gains arising out of "transfer" of a capital asset. The definition of the expression "transfer" is contained in Section 2(47) of the Act. It has very wide meaning. What is taxable under Section 45(1) of the 1961 Act is "profits and gains arising from a transfer of a capital asset" and the charge of income-tax on the capital gains is a charge on the income of the previous year in which the transfer took place. Capital gain(s) is an artificial income. Profit(s) arising from transfer of capital asset is made chargeable to income-tax under Section 45(1) of the Act. From the scheme of Section 45, it is clear that capital gains is not an income which accrues from day-to-day during a specific period but it arises at fixed point of time, namely, on the date of the transfer. In short, Section 45 defines capital gains, it makes them chargeable to tax and it allots the appropriate year for such charge. It also enacts a deeming provision. Section 48 lays down mode of computation of capital gains and deductions therefrom .
The question which arises for determination is - why was Section 45(5) inserted by the Finance Act, 1987, w.e.f . 1.4.88? Under Section 45(1), profits or gains arising from the transfer of a capital asset effected in the previous year is taken to be the income of the previous year in which the transfer took place and such profits are chargeable to tax under the head "Capital Gains". However, it was noticed that in cases where capital gains accrued or arose by way of compulsory acquisition, the additional compensation stood awarded in several stages by different appellate authorities which necessitated rectification of the original assessment at each stage. To provide for rectification of the assessment of the year in which capital gains was originally assessed, Section 155( 7A ) was also introduced. However, as stated above, since additional compensation under the Land Acquisition Act, 1894 was awarded in several stages multiple rectifications had to be made to the original assessment which cause great difficulty in carrying out the required rectification and in effecting the recovery of additional demand. It was also noticed that repeated rectifications of assessment on account of enhancement of compensation by different courts often resulted in mistakes in computation of tax. Therefore, with a view to remove these difficulties, the Finance Act 1987 inserted Section 45(5) to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. Accordingly, additional compensation is treated as "deemed income" in the hands of the recipient even if the actual recipient happens to be a person different from the original transferor by reason of death, etc.
For this purpose, the cost of acquisition in the hands of the receiver of the additional compensation is deemed to be nil. However, the compensation awarded in the first instance would continue to be chargeable as income under the head "Capital Gains", in the previous year in which transfer took place. At this stage, it may be noted, that, Section 45(1) stood further amended ( w.e.f . 1.4.91) so as to include reference to Section 54H and Section 45(5)(a) which, stood amended ( w.e.f . 1.4.88).
The important point to be noted is that in the case of compulsory acquisition of an asset, the capital gains in the compensation, as originally awarded, is charged to tax in the year in which the transfer by way of compulsory acquisition takes place, but additional compensation is brought to tax only in the year in which it is received.
27. In the case of Hindustan Housing (supra) certain lands belonging to the assessee-Company, which was in the business of dealing in land and which maintained its account on mercantile system, were first requisitioned and then compulsorily acquired by the State Government. The Land Acquisition Officer awarded Rs.24 ,97,249 /- as compensation. On appeal the Arbitrator made an award at Rs.30 ,10,873 /- with interest at 5% from the date of acquisition. Thereupon, the State preferred an appeal to the High Court. Pending the appeal, the State Government deposited in the Court Rs.7,36,691 /- being the additional amount payable under the award and the assessee was permitted to withdraw that additional amount on furnishing a security bond for refunding the amount in the event of the said Appeal being allowed. On receiving the amount, the assessee credited it in its suspense account on the same date. The question was : whether the additional amount of Rs.7,24,914 /- could be taxed as the income on the ground that it became payable pursuant to the award of the Arbitrator. The Tribunal held that the amount did not accrue to the assessee as its income and was, therefore, not taxable in the assessment year 1956-57. The financial year in which the additional amount came to be withdrawn ended on 31.3.56. It was held by this Court that although award was made on 29.7.1955, enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State. Therefore, there was no absolute right to receive the amount at that stage. It was held that if the Appeal was to be allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. Therefore, according to this Court, the extra amount of compensation of Rs.7 ,24,914 /- was not income arising or accruing to the assessee during the previous year relevant to the assessment year 1956-57.
The Supreme Court held that the judgment of the Court in Hindustan Housing is not applicable to the present case.
Two aspects need to be highlighted. Firstly, Section 45(5) of the 1961 Act deals with transfer(s) by way of compulsory acquisition and not by way of transfers by way of sales etc. covered by Section 45(1) of the 1961 Act. Secondly, Section 45(5) of the Act talks about enhanced compensation or consideration which in terms of L.A. Act 1894 results in payment of additional compensation.
The issue to be decided :- what is the meaning of the words "enhanced compensation/consideration" in Section 45(5)(b) of the Act? Will it cover "interest"? These questions also bring in the concept of the year of taxability.
It is true that "interest" is not compensation. It is equally true that Section 45(5) of the Act refers to compensation. But the provisions of the 1894 Act awards "interest" both as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28 unlike interest under Section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under Section 34 of the 1894 Act. So also additional amount under Section 23( 1A ) and solatium under Section 23(2) of the 1961 Act forms part of enhanced compensation under Section 45(5 )( b) of the 1961 Act. In fact, this view is reinforced by the newly inserted clause (c) in Section 45(5) by the Finance Act, 2003 w.e.f.1.4.2004 .
In such a situation, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration. For giving effect to such recomputation , the provisions of the newly inserted ( w.e.f . 1.4.2004) section 155(16) by the Finance Act, 2003 (32 of 2003), have been enacted.
The compensation under the L.A. Act, 1894, arises and is payable in multiple stages which does not happen in cases of transfers by sale etc. Hence, the legislature had to step in and say that as and when the assessee-claimant is in receipt of enhanced compensation it shall be treated as "deemed income" and taxed on receipt basis.
Since the enhanced compensation/consideration (including interest under Section 28 of the 1894 Act) becomes payable/paid under 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155(16) of the 1961 Act, later on. Hence, the year in which enhanced compensation is received is the year of taxability.
Consequently, even in cases where pending appeal, the Court/Tribunal/Authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under Section 45(5) of the 1961 Act. This is the scheme of Section 45(5) and Section 155(16) of the 1961 Act.
The Supreme Court clarified that even before the insertion of Section 45(5 )( c) and Section 155(16) w.e.f . 1.4.04, the receipt of enhanced compensation under Section 45(5)(b) was taxable in the year of receipt which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt. It is important to note that compensation, including enhanced compensation/consideration under the 1894 Act, is based on the full value of property as on date of notification under Section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under Section 23( 1A ), or Section 23(2) or under Section 28 of the 1894 Act it is on the basis that award of Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification.
Having settled the controversy going on for last two decades, the Supreme Court observed, “ we are of the view that in this batch of cases which relate back to assessment years 1991-92 and 1992-93, possibly the proceedings under the L.A. Act 1894 would have ended. In number of cases we find that proceedings under the 1894 Act have been concluded and taxes have been paid. Therefore, by this judgment we have settled the law but we direct that since matters are decade old and since we are not aware of what has happened in Land Acquisition Act proceedings in pending appeals, the recomputation on the basis of our judgment herein, particularly in the context of type of interest under Section 28 vis -a- vis interest under Section 34, additional compensation under Section 23( 1A ) and solatium under Section 23(2) of the 1894 Act, would be extremely difficult after all these years, will not be done.”
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