2005 (3) TMI 400 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of enhanced compensation received by the assessee.
2. Taxability of interest on enhanced compensation.

Detailed Analysis:

1. Taxability of Enhanced Compensation:

The Revenue disputed the orders of the CIT(A) deleting the addition made by the Assessing Officer (AO) on account of enhanced compensation. The assessee's land was acquired, and an enhanced compensation was ordered by the District Sessions Judge. Both the assessee and the Land Acquisition Officer appealed to the Punjab and Haryana High Court. The High Court directed the release of the enhanced compensation to the assessee against adequate security. The assessee received the enhanced compensation on different dates. The AO found that the assessee was liable to capital gains tax on the enhanced compensation received during the financial year 1994-95 relevant to the assessment year 1995-96 under section 45(5)(b).

The CIT(A) held that the quantum of enhanced compensation was in dispute before the higher court, and thus, only interest on the undisputed amount could be taxed. The Revenue argued that the CIT(A) erred in applying the judgment of the Supreme Court in CIT v. Hindustan Housing & Land Development Trust Ltd. because the payment had been made to the assessee. The Revenue relied on the Supreme Court judgment in Smt. Rama Bai v. CIT, arguing that the amount of enhanced compensation had been assessed on an agreed basis.

The Tribunal found that after the enactment of section 45(5), the judgment in Hindustan Housing & Land Development Trust Ltd. could not be applied. The Tribunal restored the issue to the AO for determination of interest on enhanced compensation in accordance with the guidelines laid down by the Supreme Court in Mrs. Khorshed Shapoor Chenai v. ACED.

2. Taxability of Interest on Enhanced Compensation:

The AO attributed the interest on enhanced compensation to various assessment years. The CIT(A) deleted the assessment of interest on enhanced compensation on the ground that the amount was in dispute before the higher court. The Revenue argued that the CIT(A) erred in deleting the assessment of interest on enhanced compensation.

The Tribunal noted that the enhanced compensation was taxable in the hands of the assessee despite the fact that the quantum of enhanced compensation was subject to proceedings before the appellate forum. The Tribunal held that the enhanced compensation received by the assessee was taxable in the year of receipt as per section 45(5)(b), irrespective of the ongoing litigation.

Separate Judgment by Judicial Member:

The Judicial Member disagreed with the conclusions of the Accountant Member. He highlighted that the assessee followed a mercantile system of accounting and argued that the enhanced compensation and interest on enhanced compensation could not be taxed until the quantum of enhanced compensation attained finality. He referred to various judicial precedents supporting the view that an assessee is entitled to resile from a position erroneously taken when filing the return.

The Judicial Member cited the judgment of the Karnataka High Court in Chief CIT v. Smt. Shantavva, which held that section 45(5)(b) would be attracted only when the assessee receives the enhanced compensation in pursuance of a final award/order. He also referred to decisions of other High Courts and the Tribunal supporting the view that enhanced compensation and interest on enhanced compensation could not be taxed until the final decision.

Third Member's Opinion:

The Third Member opined that the enhanced compensation was taxable in the year of receipt as per section 45(5)(b). He distinguished the cases cited by the Judicial Member, noting that those cases were decided before the introduction of section 45(5). The Third Member held that the provisions of section 45(5) shifted the charge of capital gains tax to the year of receipt of enhanced compensation, irrespective of ongoing litigation.

Regarding the interest on enhanced compensation, the Third Member held that it should be taxed on an accrual basis, following the decision in Smt. Rama Bai v. CIT. He noted that the interest would be chargeable on a year-to-year basis but only when the right to receive compensation was finally settled by the court.

Final Decision:

In pursuance of the Third Member's opinion, the Tribunal decided as follows:
- The appeal for assessment year 1994-95 was dismissed.
- The appeal for assessment year 1995-96 was allowed, and the assessment of capital gain amounting to Rs. 13,40,123 made by the AO was restored.