Capital Gain on Compulsory Acquisition

JUDGMENT The judgment of the court was delivered by R.V. RAVEENDRAN J. - This appeal under section 260A of the Income-tax Act, 1961 ("the Act" for short), by the Revenue is against the order of the Income-tax Appellate Tribunal, Bangalore Bench, in I.T.A. No.439/Bang of 1998 relating to the assessment year 1994-95. The respondent's land measuring two acres 14 guntas in Gadag-Betgeri was acquired under notification dated April 24,1977, for extension of market yard. The Land Acquisition Officer made an award at the rate of 75 paise per sq. ft. in regard to the acquired land. The respondent sought increase in compensation. The reference court increased the compensation to Rs. 8.50 per sq. ft. The judgment and award of the reference court was challenged in MFA No.837 of 1987 before this court. This court by judgment dated October 7, 1992, determined the market price at Rs. 7 per sq. ft. plus solatium and interest. The judgment of this court was challenged by the Land Acquisition Officer before the Supreme Court in C.A. No. 12884 of 1996. In terms of the interim orders of this court and the Supreme Court, the respondent received four sums of Rs. 2 lakhs each on April 1,1993, June 13,1993, July 14,1993 and November 30,1993, by furnishing security to the satisfaction of the reference court. Ultimately, the Supreme Court, by order dated September 23,1996, set aside the orders of this court and the reference court and remanded the matter to the reference court for fresh determination of the market value with the following directions: "The cases are remitted to the civil court for decision afresh after giving an opportunity to the parties to adduce evidence afresh and then decide the market value according to law. Pending these appeals since the respondents have withdrawn the amount as per the interim direction passed by this court, the same may not be disturbed and the amount withdrawn will be adjusted when the award was passed by the reference court." The Assessing Officer by order dated March 4,1997, passed in regard to the assessment year 1994-95, brought the said amount to tax under section 45(5)(b) of the Act holding that the amounts received by the assessee were deemed to be income of the year in which the amounts were received. The appeal filed by the respondent was dismissed by the Commissioner of Income-tax (Appeals), Hubli, by order dated March 23,1998. On a further appeal by the respondent, the Income-tax Appellate Tribunal, Bangalore Bench, in No. I.T.A. 439 Bang of 1998, passed an order dated July 31,2003, allowing the appeal and holding that the amounts received by the respondent-assessee were not liable to tax in her hands during the period relevant to the assessment year 1994-95 as the receipt of the said amount had a condition attached to it and an absolute right thereto had not accrued to the assessee. Feeling aggrieved, the Revenue has come up in this appeal. On the contentions urged, the following questions of law arise for consideration: "(i) Whether the Tribunal was correct in holding that the amount received by the assessee does not fall within the ambit of section 45(5)(b) of the Act? (ii) Whether the Tribunal was correct in applying the principle laid down in CIT v. A.B.V. Gowda [1986] 157 ITR 697 (Karn) in spite of the provisions of section 45(5)(b)? (iii) Whether the Tribunal was correct in holding that the words 'received' and 'deemed' used in section 45(5)(b) will not apply to receipt of amounts in pursuance of the interim orders?" Section 45 deals with capital gains. Sub-section (1) of section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. Sub-section (5) of section 45 which is relevant provides thus: "45. (5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law . . . and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely: - (a) the capital gain computed with reference to the compensation awarded in the first instance. . . shall be chargeable as income under the head 'Capital gains' of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received; and (b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such amount is received by the assessee." The Assessing Officer treated the sum of Rs.8 lakhs received by the respondent as interim payment, as enhanced compensation. The Tribunal has rightly held that the amount received by the respondent is not enhanced compensation. As the Supreme Court set aside the award of the reference court and judgment of this court in appeal and remanded the matter to the reference court for fresh determination, the question whether the assessee is entitled to enhanced compensation and if so the quantum thereof, is yet to be determined. The sum of Rs.8 lakhs was received by the assessee, not as enhanced compensation, but as payments in pursuance of the interim orders of this court and the Supreme Court, by furnishing security to the satisfaction of the court, pending determination of the additional compensation. Only when the reference court determines the compensation and such determination becomes final, the amount received in pursuance of the interim order will be appropriated against the compensation finally determined and will become income chargeable under the head "Capital gains". On the other hand, if the enhanced compensation to be determined is less than the sum of Rs.8 lakhs received by the respondent in pursuance of the interim orders, the respondent will have to refund the excess amount received by her. If for any reason, the reference court determines the compensation at the same rate determined by the Land Acquisition Officer (though improbable but theoretically possible), the entire sum of Rs.8 lakhs will have to be refunded by the respondent. Therefore, the mere fact that some amounts have been received by furnishing security, in pursuance of the interim orders, pending final determination, will not make the amounts received by the respondent, "compensation" or "consideration" that can be subjected to tax under section 45(5)(b). The Tribunal considered this aspect in detail, with reference to section 45(5)(b). The Tribunal held that the word "received" in the context of section 45(5)(b) refers only to such receipts which an assessee receives in pursuance of a vested right or enforceable decree/award. A conditional receipt of money subject to the final decision cannot be said to have been received by an assessee in his own right. The Tribunal next considered whether in view of the use of the word "deemed" in section 45(5)(b), the amounts received in pursuance of the interim orders, would become "income". The Tribunal held that having regard to the time spent for adjudication and settlement of the final compensation in land acquisition matters due to procedural delays, the compensation is received several years after the acquisition of the land, and therefore, the deeming provision in section 45(5)(b) provides for taxing the additional compensation not in the year of acquisition, but in the year when the compensation amount is received by the assessee. The Tribunal held that the deeming effect of the clause (b) of section 45(5) cannot be extended so as to take in its fold, conditional interim payments, made subject to the final orders of the court. We may clarify the effect of clauses (a) and (b) of section 45(5) with reference to the following two illustrations: -------------------------------------------------------------------------------- Illustration I Illustration II -------------------------------------------------------------------------------- 1-5-1990 Award of the LAO Award by the LAO (Rs. 50,000) (Rs. 50,000) 1-8-1990 Receipt of Rs. 50,000 Receipt of Rs. 50,000 by the assessee by the assessee. 10-6-1992 Award of reference court Award of reference court increasing the increasing the compensation to Rs. 90,000 compensation to Rs. 90,000 1-9-1992 Appeal filed by the LAO Appeal filed by the assessee before the High Court, before the High Court for challenging the increasing the compensation enhancement from Rs. from Rs. 90,000 to 50,000 to Rs. 90,000(Note: Rs. 1,00,000.(Note: No appeal No appeal by the assessee) by the LAO) 1-10-1992 Deposit by the LAO of Deposit of Rs. 40,000 Rs. 20,000 by the LAO being the balance being 50 per cent. of amount due as per the award of enhanced compensation, reference court. deposited as a con- dition of interim stay of the award granted by the High Court 1-11-1992 The assessee withdraws The assessee withdraws Rs. 20,000 deposited by Rs. 40,000 deposited by the LAO by furnishing the LAO. security, subject to final decision in the appeal 1-7-1994 Decision of the High Decision of the High Court Court reducing the increasing the compensation compensation to to Rs. 1,00,000 (no further Rs. 80,000 (no further appeal). appeal) 1-10-1995 Payment of Rs. 10,000 Payment of Rs. 10,000 in full settlement to in full settlement to the assessee. the assessee Position The assessee will have The assessee will have to under to pay tax on the capital pay tax on the capital gain, section gain as follows: as follows: 45(5) (i) The capital gain comp- (i) The capital gain computed uted with reference to with reference to Rs. 50,000 Rs. 50,000 received received as compensation as compensation in the in the first instance will be first instance will be chargeable to tax as capital gain chargeable to tax, as for the previous year, relevant capital gain for the to the assessment year 1991-92; previous year,relevant to the assessment year 1991-92; (ii) The sum of Rs. 20,000 (ii) The sum of Rs. 40,000 shall be shall be chargeable to tax chargeable to tax for the assessment for the assessment year year 1993-94, under the head of capi- 1995-96, under the head of tal gains for the previous year; capital gains for the previous year; (iii) The sum of Rs. 10,000 (iii) The sum of Rs. 10,000 shall shall be chargeable to tax be chargeable to tax,as capital as capital gain for the gain for the previous year, rele- previous year,relevant to vant to the assessment year the assessment year 1996-97. 1996-97. ----------------------------------------------------------------------------------- Note: In the first illustration, the sum of Rs. 20,000 is received on November 1,1992, in pursuance of an interim order, not as enhanced compensation, but as an interim payment to be accounted when the quantum of compensation is determined. The sum of Rs. 20,000 may have to be returned if the compensation is finally determined at only Rs. 50,000. The said sum became enhanced compensation only when the High Court rendered its decision on July 1,1994. The sum of Rs. 20,000 received by the assessee as an interim payment subject to final decision got appropriated towards the enhanced compensation determined on July 1,1994, and is therefore deemed to be an income received on July 1,1994. In the second illustration, the sum of Rs. 40,000 was received on November 1,1992, as an undisputed part of compensation as the award of reference court increasing the compensation became binding as no appeal was filed by the LAO; and the appeal by the assessee was for further enhancement. The deposit of Rs. 40,000 on November 1,1992, was not a payment in pursuance of an interim order, as in the first illustration, but a payment of enhanced compensation. Therefore, the sum of Rs, 40,000 drawn on November 1,1992, attracts sub-section (5)(b) of section 45 and is deemed to be income under the head 'Capital gains' received on November 1,1992. Section 45(5)(b) will be attracted only when the assessee receives the "enhanced compensation", in pursuance of a final award/order of a court, Tribunal or other authority increasing the compensation. If any amount is received after stay of the award, in pursuance of any interim order, as a payment subject to the final result, it will not be an amount received as "enhanced compensation" contemplated under section 45(5)(b), but only an interim payment received subject to final decision. It will attract section 45(5)(b) only when the final decision is rendered. We are supported in the said view by a decision of the Supreme Court and a decision of this court. In CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524, the Supreme Court held: "In the present case, although the award was made by the arbitrator on July 29,1955, enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs. 7,36,691 deposited by the State Government on April 25,1956, without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether." In CIT v. A.B.V. Gowda [1986] 157 ITR 697, this court held as follows: "A mere claim to income without an enforceable right thereto cannot, therefore, be regarded as an accrued income for the purpose of the Income-tax Act." The above principles are squarely applicable and section 45(5)(b) does not change the position in any manner. Section 45(5)(b) shifts the date of "income" from the date of acquisition and from the date of determination of compensation by a court/Tribunal/authority, to the date of receipt of the compensation in pursuance of an enhancement by the court/Tribunal/authority. Two conditions have to be satisfied for applicability of section 45(5)(b): (i) There should be enhancement of compensation by a court/Tribunal/ authority. (ii) The assessee should receive payment of such enhanced compensation. When the award of the reference court enhancing the compensation is stayed and an interim payment is ordered as condition of such stay or otherwise and is paid, pending final decision, neither of the two conditions are satisfied. The amount received in pursuance of an interim order by furnishing security, not being an amount payable in pursuance of an enforceable order or decree increasing the compensation, cannot be considered as receipt of enhanced compensation. Therefore all the three questions have to be answered against the Revenue. We find no error in the order of the Tribunal and the appeal is dismissed as having no merit.