2008 (2) TMI 397 - HC - Income Tax

Capital gains - held that 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 as contemplated u/s 45(5)(b) - amendment to S. 45 by inserting clause (c) would not apply prior to April 1 2004 or any assessment year prior to the A.Y. 2004-05

Issues Involved:
1. Interpretation of Section 45(5)(b) of the Income-tax Act, 1961.
2. Applicability of additional compensation for computation of capital gain in the year of receipt.
3. Impact of interim orders on the receipt of additional compensation.
4. Retrospective applicability of amendments to Section 45(5) and Section 155(16) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Interpretation of Section 45(5)(b) of the Income-tax Act, 1961

The core issue revolves around whether the additional compensation received by the assessee under an interim order, subject to furnishing security, can be considered as income in the year of receipt for the purpose of computing capital gains under Section 45(5)(b) of the Income-tax Act, 1961. The appellants argued that the term "received" should mean received in pursuance of the accrual of the right to receive as a result of a final decision by a court, Tribunal, or authority. The court held that the expression "received" in Section 45(5)(b) should not be interpreted as mere physical receipt without the conferred right or title by the adjudicatory process.

Issue 2: Applicability of Additional Compensation for Computation of Capital Gain in the Year of Receipt

The court examined whether the additional compensation received by the assessee under interim orders should be taxed in the year of its physical receipt or when the final decision is made by the appellate court. The Tribunal had held that the entire amount of additional compensation received by the assessee would be liable for computation of capital gain in the year of receipt. However, the court referred to previous judgments, including CIT v. Hindustan and Land Development Trust Ltd. [1986] 161 ITR 524, which established that Section 45(5)(b) would be applicable only when the assessee receives the enhanced compensation in pursuance of a final award/order.

Issue 3: Impact of Interim Orders on the Receipt of Additional Compensation

The court discussed the implications of receiving additional compensation under interim orders. It was argued that such compensation received under a conditional order of the court should not be considered as income because the order is subject to change. The court reiterated that the enhanced compensation received under interim orders, subject to final adjudication, does not constitute income under Section 45(5)(b) until the dispute is finally resolved.

Issue 4: Retrospective Applicability of Amendments to Section 45(5) and Section 155(16) of the Income-tax Act, 1961

The court addressed whether the amendments to Section 45(5) and Section 155(16) introduced by the Finance Act, 2003, should apply retrospectively. The Tribunal had considered these provisions while passing the impugned order, suggesting they were procedural and thus applicable retrospectively. However, the court concluded that these amendments, effective from April 1, 2004, are substantive provisions and cannot be applied retrospectively without express indication. The court emphasized that these amendments would apply only to the assessment year 2004-05 and subsequent years, not to the assessment years 1994-95 to 1998-99 involved in the present case.

Conclusion:

The court held that the Tribunal was not justified in its interpretation and application of Section 45(5)(b) and the subsequent amendments. It reaffirmed that additional compensation received under interim orders should not be considered as income for the year of physical receipt but only when the final decision is rendered by the appellate authority. Consequently, the appeals were allowed, and the substantial questions of law were answered in favor of the assessees and against the Revenue.

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