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Shri M Shivanna, S/o Late Mallelingappa Versus The Assistant Commissioner of Income Tax

Interest on fixed deposits representing compensation, pledged against bank guarantee given to KIADB pending resolution of dispute over title of land - whether is taxable in the respective years when such interest was credited by bank in its books as held by ITAT? - Held that:- If an amount is received by the assessee on certain conditions or by imposing any restrictions, such as of furnishing security, the assessee does not become the real owner of the money, though received in his name, or the .....

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held by ITAT - whether the capital gains could be charged on the compensation for the standing mango and other fruit bearing trees, building, borewell and other assets on the agricultural land of the assessee, which was acquired under a notification for compulsory acquisition? - Held that:- What is to be noted in this regard is that it was acquisition of the land, along with structure, trees etc., which was made by a single transaction. It was only for the purpose of payment of compensation tha .....

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s regard, since it is clear that the acquisition was for the entire land on "as is where is basis", and the land in question is agricultural land, and the valuation of the trees and other assets, were made only for the purpose of calculating compensation, therefore the amount paid to the assessee was actually for acquisition of the agricultural land, which was exempted from tax. Hence, the question of payment of capital gains on the compensation only for the mango trees, etc., cannot be justifie .....

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d B Manohar, JJ. For the Petitioner : Sri K K Chythanya, Adv For the Respondent : Sri K V Aravind, Adv. A/w Sri Padmabushan N, Adv JUDGMENT This is an appeal filed by the assessee, challenging the assessment order for the Block period from 01-04-1990 to 20-02-2001. 2. Briefly stated the facts of this case are: The assessee-B.M.Shivanna, along with his brother B.M.Mariswamaiah, inherited certain agricultural lands which were acquired by the Karnataka Industrial Area Development Board (for short & .....

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portion was paid to the assessee and his brother vide cheque dated 28-11-1997, and the compensation for the standing trees, building, borewell, etc. was paid on 12-02-1999. 3. Since the cousins of the assessee and his brother had filed a civil suit, being O.S.No.141/1997, whereby the family partition arrived at in 1970 was under challenge, and a claim of share in the properties so acquired had been made, the compensation awarded to the assessee (and his brother) could not be actually received by .....

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e name of the assessee was pledged as security, which he could not withdraw. 4. Consequently, a tripartite agreement was executed between the assessee (including his brother), Vysya Bank and the Board, which provided for Fixed Deposits of the amount credited in the account of assessee and his brother to be kept with the Bank as security on behalf of the Board, and would be payable either to the assessee (and his brother) or the cousins who had filed the suit, after dispute was resolved by the Co .....

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e, which also was dismissed on 26-10-2004. Challenging the said order passed in appeal, a Regular Second Appeal was filed in the High Court which was ultimately dismissed on 23-07-2008, and the dispute between the assessee and his brother on one side, and their cousins on the other side, came to rest. 6. During the pendency of the court proceedings, a search was conducted on 02-02-2001 by the Income Tax Department in the premises of the assessee and his brother, and the business premises of Vysy .....

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his brother, in respect of the trees and other assets was to form part of the capital asset or not? The other question which arises is whether tax would be payable on interest which had accrued in the account of the assessee, and his brother, even when the assessee could not get full ownership on the interest amount? 8. All the authorities below, that is, the Assessing Officer, Appellate Commissioner and the Tribunal have held that the interest amount would be taxable in the year in which it wa .....

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form part of the capital assets and would, thus, not be exempted from payment of tax. 9. Aggrieved by the orders of the authorities below, including the Tribunal, this appeal has been filed, which was admitted on 10-11-2009 with the following order: "Appeal is admitted for examination, not only on the substantial question relating to the levy of tax on the value of the trees, which form part of agricultural lands, which were come to be acquired by the government for a public purpose, and i .....

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rt, which are as follows: "(1) Whether, in the facts and circumstances of the case, the Tribunal is right in law in holding that interest on fixed deposits representing compensation, pledged against bank guarantee given to KIADB pending resolution of dispute over title of land, is taxable in the respective years when such interest was credited by bank in its books? (2) Whether, in the facts and circumstances of the case, the Tribunal is right in law in holding that part of compensation rela .....

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for the acquisition of land was made through cheques in the name of the assessee and his brother, and the same were deposited in their names in the Bank. However, because of pendency of the suit filed by the cousins of the assessee, no amount was actually payable to the assessee or his brother, which remained in Fixed Deposit with the bank as security in favour of the Board. The interest did accrue on such deposit with the Bank, but the same was also to be kept as security and was subject to pa .....

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ed of Bank Guarantee, as well as the Indemnity Bond, we are of the opinion (and the same has also been very fairly accepted by Sri.K.V.Aravind, learned counsel for the respondent-Revenue) that at no point of time, before the final decision in the Regular Second Appeal, the assessee became entitled to withdraw even the interest, which had accrued on such compensation amount which was kept in deposit with the Bank. 12. In the light of the aforesaid facts, we may proceed to answer the two questions .....

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land which was acquired by the Board. It is contended that the assessee does not maintain any books of account and, as such, mercantile method of accounting would not be applicable, and in the cash system of accounting, the income would be chargeable to tax only when the assessee becomes complete owner of the interest amount, without any dispute or restriction over the same. The submission, thus, is that till the title of the suit land was finalized in the Regular Second Appeal by the High Court .....

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Sri.K.V.Aravind, learned counsel for the respondent-Revenue has submitted that as per the definition and scope of 'total income' which would be taxable as per the provisions of the Act (more precisely Section 5 of the Income Tax Act, 1961 for short 'the Act'), as per the cash system of accounting, the assessee would be liable to pay tax on such income received or deemed to be received and as per the mercantile system of accounting, the assessee would be liable to pay tax on such .....

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or payment of tax as on the date of its receipt or accrual, and by not having disclosed such interest income, the same has rightly been considered by the authorities as undisclosed income chargeable to tax at the rate of 60% plus interest. 15. Section 2(24) of the Act defines the 'income' and Section 5 of the Act give scope of 'total income'. Sub- Section (1) of Section 5 of the Act is relevant, which is reproduced below: 5. Scope of total Income: (1) Subject to the provisions of .....

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ed any returns of income prior to the acquisition of the land, and until the search operations were conducted in his premises on 2-2-2001, whereafter also the return was filed in response to the notice issued by the Department and then too, in the said returns, he had disclosed his taxable income as NIL, as by then the Regular Second Appeal had not been decided and he had not acquired full and complete right over the compensation amount, as well as the interest, which was acquired only after the .....

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the assessee. There can be tax imposed only on an income which is real, or in the hands of the assessee. In a case, where the assessee might have received some money in his account, but with certain impediment because of which the same cannot be used by the assessee till such impediment is overcome, which in the present case is of the decision in the suit/appeal filed by the cousins of the assessee, the same cannot be said to be actual receipt of money in the hands of or in favour of the assesse .....

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e presumed income, and not real income. 18. The submission of the learned counsel for the respondent, that since the interest income had been received or accrued in the name of the assessee, the same would become taxable, is not worthy of acceptance. The interest income, in the present case, though may be in the name of the assessee, but was never in the hands of the assessee because of the pendency of the case and the furnishing of Bank Guarantee/Indemnity Bond by the assessee, due to which, ne .....

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e of the assessee, and the same would then alone become liable for payment of tax. 19. A Division Bench of this Court, in the case of CHIEF COMMISSIONER OF INCOME-TAX AND ANOTHER v/s SMT.SHANTAVVA (2004) 267 ITR 67 (Kar), was dealing with a case under Section 45(5) of the Act. Considering a case of awarding of compensation to a land owner, and thereafter enhancement by the Reference Court, which was challenged by the Acquiring Body in the High Court where a conditional deposit of the enhanced am .....

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received part of the enhanced compensation under the interim orders. Though the said case was under Section 45(5) of the Act, the principle laid down in the said judgment, would squarely apply to the facts of the present case. 20. In another case, being COMMISSIONER OF INCOME-TAX v/s A.B.V.GOWDA (DECD) (1986) 157 ITR 697 (Kar), a Division Bench of this Court held that interest on the enhanced compensation, which was in dispute, would be taxable only after the dispute was over. The same view has .....

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61 ITR 524 (SC) has held that in the case of a private dispute between two parties, even if some payment is made to a party, the taxability of the same would arise only when the dispute is finally settled. It has been held that "Merely because by virtue of an interim order, with or without conditions, some payment is made for the purpose of Income tax Act, it would not constitute income and therefore there is no liability to pay tax on the day such interim payment is received". 22. In .....

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assessee and against the Revenue. Question No.2: 24. Coming to the second question of law, which relates to whether the capital gains could be charged on the compensation for the standing mango and other fruit bearing trees, building, borewell and other assets on the agricultural land of the assessee, which was acquired under a notification for compulsory acquisition. What is to be noted in this regard is that it was acquisition of the land, along with structure, trees etc., which was made by a .....

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valued separately, and compensation on the same was treated as taxable. In this regard, since it is clear that the acquisition was for the entire land on "as is where is basis", and the land in question is agricultural land, and the valuation of the trees and other assets, were made only for the purpose of calculating compensation, therefore the amount paid to the assessee was actually for acquisition of the agricultural land, which was exempted from tax. Hence, the question of payment .....

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