TMI Blog2005 (3) TMI 400X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble High Court by their order dated 18th February, 1994 gave directions to the executing Court to release the amount of enhanced compensation to the assessee against adequate security. The assessee received enhanced compensation along with interest on different dates from 10th June, 1994 to 28th November, 1995 as per the particulars mentioned in the impugned orders. Thereafter, at the request of the assessee the Land Acquisition Officer issued TDS Certificate only on 22nd November, 1996. The assessee filed voluntary returns of income for financial years 1996-97 and 1997-98 relating to assessment years 1997-98 and 1998-99 for assessments years 1994-95 and 1995-96. The Assessing Officer issued notice under section 148 on 1lth December, 1996. The assessee declared total income of Rs. 56,026 in relation to assessment year 1994-95 and Rs. 41,000 in relation to assessment year 1995-96 in the return filed on 12th October, 1998 in response to notice under section 148. In these returns the assessee repeated the income as declared during the original assessment proceedings. The assessee argued that it had received enhanced compensation along with interest amounting to Rs. 20,67,441 on 21st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Hon'ble Supreme Court in the case of CIT v. Hindustan Housing Land Development Trust Ltd. [l986] 161 ITR 524. The Ld. CIT(A) held that the quantum of enhanced compensation receivable was in dispute before the higher Court. In the event of the amount of compensation being reduced the interest was also likely to be reduced. She, therefore, held that only interest on undisputed amount could be brought to tax in the assessment year 1994-95. She directed the Assessing Officer accordingly. For assessment year 1995-96 the ld. CIT(A) deleted the assessment of the sum of Rs. 13,40,123 on the ground that this amount of enhanced compensation was in dispute. Aggrieved by these orders the revenue is in appeal before us. 5. During the course of hearing before us the ld. DR argued that the Ld. CIT(A) erred in applying the judgment of Hon'ble Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. because in the case of the assessee before us the payment had been made to the assessee. He strongly relied upon the judgment of the Hon'ble Supreme Court in the case of Smt. Rama Bai v. CIT 1990] 181 ITR 400. The ld. DR also referred to page 7 of the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of tax. 24.6 With a view to removing these difficulties, the Finance Act, 1987 has inserted a new sub-section (5) in section 45 to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. The additional compensation will be deemed to be 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 will be deemed to be nil. 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 the transfer took place." 7. According to the Ld. AR, these paragraphs suggested that provisions of section 45(5) had been introduced so as to exclude the requirement of rectification. Hence, the provisions of section 45(5) applied only when the amount of additional compensation had become final. 8. We have carefully considered the rival submissions. As far as the Revenue's appeal for assessment year 1995-96 is concerned, the Ld. DR has rightly point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cases where the amount of enhanced compensation itself is in dispute. We, therefore, restore this issue to the file of the Ld. Assessing Officer for determination of interest on enhanced compensation in accordance with the guidelines laid down by Hon'ble Supreme Court in the case of Mrs. Khorshed Shapoor Chenai v. ACED [1980] 122 ITR 21. 10. In the result, while the Revenue's appeal for assessment year 1994-95 is allowed, for statistical purposes Revenue's appeal for assessment year 1995-96 shall be treated as partly allowed. Per N.V. Vasudevan, Judicial Member 11. I have gone through the order proposed by my ld. Brother. I am unable to persuade myself to agree with the conclusions arrived at by my ld. brother. I would however like to highlight the fact that the assessee in the present case follows a mercantile system of accounting. The questions for consideration on the facts of the present case are: (a) Whether the enhanced compensation received by the assessee was taxable in the hands of the assessee as income despite the fact that the quantum of enhanced compensation awarded is subject-matter of proceedings before the appellate forum by the State Government as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion', 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. ITO [1992] 42 ITD 67 (Bom.). Smt. Gulab Sundri Bapna v. Dy. CIT [2001] 79 ITD 455 (Delhi). Rikabchand M. Lalwani (HUF) v. Jt. CIT [2003] 81 TTJ (Pune) 964. 16. My learned brother however in taking a contrary view has followed the decision of the Delhi Bench of the Tribunal in the case of Asstt. CIT v. Trilok Singh [IT Appeal Nos. 708 to 711 (Delhi) of 2001, dated 18-6-2004]. I have perused the said order of the Tribunal and I find that the view expressed by the Tribunal is contrary to the preponderance of judicial opinion on the issue expressed by the decisions of the Tribunal as well as the decisions of the Hon'ble High Courts. There is however a decision of the Hon'ble A.P. High Court in the case of CIT v. M. Sarojini Devi [2001] 116 Taxman 613 in which there appears to be a contrary view expressed. I shall therefore refer to the said decision. The facts in the aforesaid case were that the lands belonging to the assessee were acquired by the Government in the year 1966 and compensation was awarded by the LAO. On reference, compensation at higher rate was awarded. The assessee was held to be entitled to an interest of Rs. 43,642 for the period 18-5-1966 to 9-12-1975. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen from the facts in the aforesaid case, the assessment year was 1976-77 prior to the introduction of section 45(5) in the IT Act. The provisions of section 45(5) of the Act as introduced by the Finance Act, 1987 came into effect only from 1-4-1988. The decision of the Hon'ble A.P. High Court, therefore, runs contrary to the decision of the Hon'ble Supreme Court in the case of CIT v. Hindusthan Housing Land Development Trust Ltd. [1986] 161 ITR 524. 18.1 would, therefore, respectfully following the decision of the Hon'ble Karnataka High Court as well as the Hon'ble Bombay High Court and Rajasthan High Court and the view expressed by the various Benches of the Tribunal, hold that the enhanced compensation could not be brought to tax in the years under consideration as the dispute on the quantum of enhanced compensation had not attained finality. The interest on enhanced compensation would also for the very same reason not be liable to tax. The CIT(A) in my view had rightly allowed the appeal of the assessee and directed the addition made by the Assessing Officer to be deleted. I would therefore dismiss both the appeals by the revenue. The appeals by the revenue arc therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived on the aforesaid disputed enhanced compensation and that arose in the appeal for assessment year 1994-95. The President, therefore, referred the following question also for my opinion as arising in the appeal for assessment year 1994-95: "Whether, on the facts and in the circumstances of the case, the interest received on disputed enhanced compensation which is subject-matter of litigation in appeals before appellate forum can be taxed without attaining finality?" 3. The brief facts of the case are that the assessee's land at Karnal was acquired by Land Acquisition Officer, Panchkula, and a compensation was awarded on 16th February, 1989 and the assessee received a compensation of Rs. 39,03,271 in February, 1989 in two instalments. Thereafter, an enhanced compensation was ordered by District Sessions Judge on 6th May, 1993 against which order both the assessee as well as Land Acquisition Officer went in appeal before the Punjab and Haryana High Court. The High Court by their order dated 18th February, 1994 declined to grant stay though directed the executing Court to release the amount of enhanced compensation to the assessee against adequate security. The assessee receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer issued notices under section 148 on 11th December, 1996 in response to which the assessee declared total income of Rs. 56,026 for assessment year 1994-95 and Rs. 41,000 for assessment year 1995-96 by filing returns on 12th October, 1998 repeating the income as declared during the oringal assessment proceedings. The assessee's contention was that it had received enhanced compensation and interest thereon amounting to Rs. 20,67,441 on 21st November, 1996 and, therefore, the assessee had shown the entire income received on such enhanced compensation on cash/receipt basis in the return of income filed for assessment year 1997-98. The Assessing Officer observed that the assessee had neither received the amount of enhanced compensation nor the amount of interest on such enhanced compensation during the financial year relevant to the assessment year 1997-98. The entire payments had been received by the assessee prior to the commencement of the financial year 1996-97 and, therefore, the assessee was not justified in declaring any income in respect of assessment year 1997-98. According to the Assessing Officer, under section 45(5)(b) irrespective of the method of accounting followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y whether the enhanced compensation received by the assessee was taxable, despite the fact that the quantum of enhanced compensation was subject-matter of proceedings before the appellate forum by the State Government as well as the assessee and secondly, whether the interest received on disputed enhanced compensation is chargeable to tax before the final decision of the appellate forum. The Accountant Member held that the enhanced compensation is assessable in the hands of the assessee by virtue of section 45(5)(b) and the interest on the enhanced compensation is to be chargeable as worked out on the estimated value of enhanced compensation in the light of the Supreme Court decision in the case of Mrs. Khorshed Shapoor Chenai v. ACED [1980] 122 ITR 21. The Judicial Member, on the other hand, held that enhanced compensation could not be brought to tax in the years under consideration as the dispute on the quantum of enhanced compensation has not attained finality. He also held that interest on enhanced compensation would also for the very same reason, not liable to tax. 10. The ld. CIT-DR Shri Rajneeshkumar supporting the order of Accountant Member submitted that the matter has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prior to section 45(5). He also invited attention to provisions of sub-clause (c) of section 45(5) and submitted that the cases referred to above were all before the introduction of clause (c) which was with effect from 1-4-2004 added by Finance Act, 2003. Explanatory notes whereof are reported in 263 ITR 62 (St.) Circular No. 7 dated 5-9-2003 at page 88 paragraph 58.2. He then submitted that the provisions of clause (c) are not substantive but procedural and clarificatory in nature as it only takes into consideration the law as it stood even prior to that. It was in any case enabling provision to reduce the rigours of the assessee. He then referred to the decision of Gujarat High Court in the case of CIT v. Niranjan Narottam [1988] 173 ITR 693 observations at page 701 stating that rule of retrospectivity has to apply to the procedural amendment. He also referred to the decision of Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 for retrospective operation to provisions which supplied the meaning to avoid unintended result. He further submitted that if clause (c) of section 45(5) was not there, there was no remedy for the assessee for rectification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the books of account on the date e of transaction namely, on the date on which the rights accrued or liabilities are incurred irrespective of the date of payment. This has been held by the Supreme Court in the case of CIT v. A. Krishnaswamy Mudaliar [1964] 53 ITR 122 at page 129. The system of accounting again came up for consideration before the Supreme Court in the case of Indermani Jatia v. CIT [1959] 35 ITR 298 wherein it was observed as follows:- "It is well-known that the mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profits or gains arc credited though they are not actually realized, and the entries thus made really show nothing more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from other sources is to be computed as per accrual system of accounting. Therefore, the cases referred to before the Tribunal are to be considered in the light of the system of accounting viz, accrual or cash system. Therefore, the cases arising under the head "Capital gain" prior to the introduction of sub-section (5) of section 45 would be of not much help in determining the taxability of enhanced compensation which is made chargeable on receipt basis as against the mercantile system of accounting prior to 1-4-1988. On the contrary, those cases would be decisive of the matter for determining the chargeability of interest income for which the assessee as well as Revenue have proceeded on the basis that it is to be charged on accrual basis. 15. Section 45 provides for the charging of capital gain arising on transfer of a capital asset. As stated above, it provided charge originally under sub-section (1) of section 45 to be in the year of transfer. Cases have arisen where the gains of compensation determined at the time of acquisition/transfer on compulsory acquisition were carried in litigation and on which determination the assessments made for the year of transfer require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is received by his legal heirs. In the latter type of cases, proceedings have to be initiated against the legal heirs. Repeated rectification of assessments on account of enhancement of compensation by different courts often results in mistakes of computation of tax. 24.6 With a view to removing these difficulties, the Finance Act, 1987 has inserted a new sub-section (5) in section 45 to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. The additional compensation will be deemed to be 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 will be deemed to be nil. 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 the transfer took place. 24.7 These amendments will come into force with effect from 1st April, 1988, and will, accordingly, apply from the assessment year 1988-89 and subsequent years." 17. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer shall amend the order of assessment so as to compute the capital gain by taking the compensation or consideration as so reduced by the court, Tribunal or any other authority to be full value of consideration; and the provisions of section 154 shall, so far as may be, apply thereto, and the period of four years shall be reckoned from the end of the previous year in which the order reducing the compensation was passed by the court, Tribunal or other authority." 19. On a combined reading of these provisions, it is apparent that whereas sub-section (1) of section 45 deems the income arising on transfer of a capital asset to be assessed to be charged in the year in which the transfer has taken place; sub-section (5) provides for the charge on receipt of compensation in the first instance, as income of the year in which the said compensation is first received or the additional compensation in the year in which further enhanced compensation was received. An enabling provision was also made that if compensation is subsequently reduced, the assessment of additional compensation is to be reduced in the year of reduction. In this way there has been a shift in the process of assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard of the Addl. District Judge. 21. Similarly the case of CIT v. A.B.V. Gowda [1986] 157 ITR 697 before the Karnataka High Court is a case prior to insertion of sub-section (5) of section 45 and the entire discussion was on the provisions of section 5(1)(b) with regard to accrual of income and, therefore, this case is of no help to the assessee. Again, the decision of Bombay High Court in the case of Abdul Mannan Shah Mohammed is a case solely resting on the ratio of the decision of Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. and there is no discussion with regard to the provisions of section 45(5) of the Act. These cases, therefore, for similar reasons are of no help to the assessee. 22. Reliance by the assessee in the case of Smt. Gulab Sundri Bapna also does not help because in the said case compensation received by the assessee pertained to compulsory acquisition of property in tenancy right and not the ownership right and the Tribunal held that compensation in respect of tenancy right is not liable to capital gains tax under section 55(2) since section 55(2)(a) was substituted by Finance Act, 1994 with effect from 1-4-1995 including the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... award of the Addl. District Judge was not stayed by the High Court and the amount was received by the assessee pursuant to the said award of the Additional District Judge. 26. In the judgment of Karnataka High Court in the case of Chief CIT v. Smt. Shantavva [2004] 266 ITR 67 though the discussion was with regard to the provisions of section 45(5)(b) but the matter could not have been examined with reference to later introduction of clause (c) in section 45(5) of the Act. Further, in that decision, heavy reliance was placed on the decision of Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. wherein the question was only for the accrual of income to the assessee and not to the receipt which as per the legislative amendment made chargeable to tax as capital gain on receipt basis. 27. A decision of the Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT [2002] 257 ITR 343, may also be referred to here. This is a case arising under section 41 of the IT Act. Here also, section 41(1) provides for two situations for charging the amount where an allowance or deduction has been made in the assessment of the assessee for any year in respect of a los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss or expenditure' occurring in the first limb. As the assessee-company did not obtain any amount by way of refund on excise duty account, the first clause of section 41(1) will not be applicable; it is only the latter part that applies in which case the remission or cessation of liability would assume importance. However, in the present case, as discussed above, it is the first clause that squarely applies but not the second one. Whether there was cessation or remission of liability would be an irrelevant line of enquiry here. The correct way of understanding section 41(1) would be to read the latter clause - 'some benefit in respect of such trading liability by way of remission or cessation thereof as a distinct and self-contained provision. To read the phrase 'by way of remission or cessation thereof as governing the previous clause as well, i.e., 'obtained any amount in respect of such loss or expenditure', would be doing violence to the language and structure of the provision. 'That apart, the operation of the provision which is designed to have widest amplitude will get constricted and truncated by reason of such interpretation." 28. Though this decision is not directly on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceive the compensation and the other a right to receive extra or further compensation. The claimant has only one right which is to receive compensation of the land on the market value on the date of relevant Notification and it is this right which is quantified by the Collector under section 11 and by the Civil Court under section 26 of the Act. The collector's award under section 11 is nothing more than an offer of compensation made by the Government to the claimant whose property is acquired. If the offer is acquiesced by the total acceptance of the right of compensation will not survive but if the offer is not accepted under protest and a reference is sought by the claimant under section 18 the right to receive compensation must be regarded as having survived and kept alive which the claimant prosecutes in civil court. It is not correct to say that no sooner had the collector made the first award under section 11 than the right to compensation is destroyed or ceases to exist or is merged in the award or what is left after the award with the claimant is a mere right to litigate the correctness of the award. The claimant can litigate the correctness of the award because his right ..... X X X X Extracts X X X X X X X X Extracts X X X X
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