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2015 (12) TMI 464 - DELHI HIGH COURT

2015 (12) TMI 464 - DELHI HIGH COURT - [2016] 382 ITR 343 - Money received by the assessee by way of enhanced compensation/interest - Whether the amount of enhanced compensation received by the assessee during the relevant previous year is taxable in view of the provisions of Section 45(5)(b) of the Income Tax Act, 1961? - Held that:- The question of bringing the enhanced compensation received by the Assessee during the relevant previous year to tax for the purposes of capital gains under Sectio .....

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the same year in which the enhanced compensation is received will also have to await the final decision in the appellate proceedings emanating from the order of the ADJ in the proceedings under Section 31 (2) LA Act.

Turning to the wealth tax appeals, it is seen that as held by the ITAT in the present case, amount of compensation received by the Assessee in the nature of ‘trust money’ which may be required to be returned by the Assessee in case she does not succeed in the appeal emana .....

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31 (2) LA Act. - ITA 20/2003, ITA 21/2003, ITA 24/2003, WTA 3 to 6/2003 - Dated:- 8-12-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Rohit Madan, Senior Standing counsel with Mr. Zoheb Hossain, Advocate For the Respondent : Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Advocate. JUDGMENT Dr. S. Muralidhar, J. Introduction 1. These are three Income Tax Appeals (ITAs) and four Wealth Tax Appeals (WTAs) filed by the Revenue. ITA Nos.20, 21and 24 of 2003 are in res .....

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l, 2011, ITA Nos. 22 to 28 of 2003 were disposed of by the Court without answering the questions framed on account of the Circular dated 9th February, 2011 of the Central Board of Direct Taxes (CBDT) since the tax effect in each of the appeals was less than ₹ 10 lakhs. Subsequently, review petitions were filed by the Revenue in respect of three of the appeals, i.e., ITA Nos. 23, 24 and 25 of 2003. The said review petitions were dismissed by the Court on 26th March, 2012, after giving liber .....

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aking note of the above development, this Court on 24th August 2015, passed an order directing that the aforementioned ITA No. 24 of 2003 pertaining to AY 1985-86 be listed along with ITA No. 20/2003 (pertaining to AY 1988-89), ITA No.21/2003 (AY 1989-90) and the four WTAs as noted above. Background Facts 4. The facts leading to the filing of the present appeals is that a land measuring 4826 bighas situated in Village Masoodpur was notified under Section 4 of the Land Acquisition Act, 1894 (LA A .....

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hotra, the vendor, had agreed to sell his share in the said land, which he had purchased by way of a deed dated 14th April, 1960. In the sale deed Mr. Rampal Malhotra was described as holding 1/16th share of the bhumidari rights regarding land measuring 4200 bighas situated in Village Masoodpur. The sale deed stated that from that date, i.e. 1st June, 1965, the vendee, i.e. Mr. J.N. Dhamija shall become a shareholder of 1/16th share and shall be bound to pay or to receive, whatever is written in .....

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M/s. Diwan Bahadur Seth Kesri Singh Budh Singh which had taken the land on sub-lease from M/s. Delhi Pottery Works, which had in turn taken the land on lease (to the extent of 3224 bighas) for a period of twenty years from the owner of the said land in 1939. 7. The land was leased to Smt. Gulab Sundri, the proprietor of the aforementioned concern for the purposes of extracting minerals as well as for agricultural and horticultural purposes. The Revenue Assistant, Delhi in accordance with the pr .....

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laration that the order dated 14th July, 1958 of the Revenue Assistant cancelling the bhumidari certificate in her favour was void, illegal and without jurisdiction. This suit was decreed by the Sub Judge on 12th December, 1966. Against the aforementioned order, the Gaon Sabha as well as the Union of India filed an appeal which was dismissed by the Senior Sub Judge on 23rd April, 1968. No further appeal was filed by the Gaon Sabha. The aforementioned judgement dated 23rd April, 1968 became final .....

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easuring 4826 bighas situated in Village Masoodpur, of which included the land admeasuring 3224 bighas, 1/16th of the bhumidari rights in which was purchased by late Mr. J.N. Dhamija. 11. Since there was a dispute as to who should receive the compensation, a reference was made by the LAC under Section 31(2) of the LA Act to the Additional District Judge (ADJ), Delhi. By a judgement dated 20th April 1980, the learned ADJ decided the claims made by the following three sets of claimants - (i) Gaon .....

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or interest in the land in dispute. If so, to what extent? (iii) Whether the declaration of the bhumidari rights and the issuance of the bhumidari certificate in favour of Gulab Sundri was illegal, void and without jurisdiction? (iv) Whether the alleged owners/bhumidars are legally barred from challenging and disputing the validity of the declaration of bhumidari certificates? (v) Whether the provisions of the DLRA were not applicable to the land in dispute. If so, effect? (vi) Whether the clai .....

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illegal, without jurisdiction and a nullity. If so, to what effect? (ii) Whether the order dated 14th July 1958 passed by the Revenue Assistant operates as res judicata? (iii) Whether the land in dispute was a waste land as defined in the DLRA and as alleged by Gaon Sabha. If so its effect? (iv) Whether there were orders of the Deputy Commissioner dated 1st November 1954 and 10th March 1966 in respect of the land in dispute as alleged by Gaon Sabha and if so, whether the same were valid (objecte .....

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DLRA and that Smt. Gulab Sundri was a tenant as defined under Section 4(5) of the Punjab Tenancy Act. Deciding issue No. (iv) framed on 18th December, 1969 in favour of Smt. Gulab Sundri, the learned ADJ held that she had rightly been declared as a bhumidar and that the proprietors were legally barred from disputing the bhumidari rights confirmed in her favour. Deciding the issue No. (vi) in her favour the learned ADJ held that Smt. Gulab Sundri had been in possession of the entire land on the .....

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ion 18 LA Act for enhanced compensation 15. Meanwhile at the instance of Mr. J.N. Dhamija a reference was made under Section 18 of the LA Act by way of LAC No.201/80 before the learned ADJ, Mr. S.R. Goel, seeking enhancement of compensation. By the judgement dated 7th July 1987, this reference was decided in favour of Mr. J.N. Dhamija holding that he was entitled to compensation of ₹ 18,000/- per bigha and ₹ 10,000/- per bigha for the minerals in respect of his 1/16th share of the ri .....

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r on 9th March, 1988 after noticing that the compensation amount had already been deposited it was directed by the Division Bench that the undisputed amount be paid to Mr. J.N. Dhamija without any guarantee and the disputed amount be paid on Mr. J.N. Dhamija furnishing bank guarantee to the satisfaction of the learned ADJ. 17. Treasury vouchers were then prepared by the learned ADJ on 30th March, 1988 in favour of Mr. J.N. Dhamija for sums of ₹ 6,02,330.67 and ₹ 3,64,03,764.62 both d .....

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ng RFA No.309 and 310/80 in respect of the proceedings under Section 31 (2) of the LA Act were dismissed by the High Court on 26th February, 1991 on the ground of partial abatement in respect of the sum of the Respondents whose LRs were not brought on record by the Appellant. 20. Against the aforementioned order, the Union of India went in appeal to the Supreme Court by way of a Special Leave Petition. By a judgement in S. Amarjit Singh Kalra (Dead) By LRs v. Smt. Pramod Gupta (Dead) By LRs 2002 .....

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of India did not question the enhancement to the extent of ₹ 6,02,330. However, as regards the balance enhanced sum of ₹ 3,64,03,754 the Union of India filed RFA Nos.85 and 868/1987 in this Court. A Division Bench of this Court passed a judgement on 5th October, 2001 dismissing RFA Nos.85 and 868/1987. The appeal filed against the said judgement by the Union of India was allowed by the Supreme Court by judgement dated 7th September, 2005 in Union of India v. Pramod Gupta (2005) 12 S .....

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f which ₹ 14,44,39 was shown as interest from M/s. Kashmir Holdings. During the course of the assessment proceedings, Mr. Dhamija's auditors submitted a letter dated 19th August 1990 to the Assessing Officer (AO) explaining that Mr. Dhamija had received additional compensation of ₹ 3,64,03,764/- and ₹ 6,02,3301- in the previous year relevant to AY 1989-90 for his share in land measuring 3224 bighas situated in village Masoodpur, Delhi pursuant to an order passed by the ADJ .....

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gh Court in the said appeal of the Union of India, the entire amount would have to be returned by the Assessee to the Union of India. A copy of the guarantee was also enclosed with the letter. It was submitted that till finality was attached to the determination of the appeal by the High Court withdrawal of the amount by the Assessee was pursuant to an inchoate and contingent right and therefore not liable to any capital gains. Further details were furnished in this regard by letters dated 27th .....

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amount. The CIT (A) by an order dated 28th August 1992 held following the order rendered by him in the case of Mr. K.K. Kochar, one of the co-owners of the same property, that the land in question was not agricultural land, and to this extent the plea of Mr. Dhamija was negatived. The CIT (A) however agreed with Mr. Dhamija that since the negotiable instrument in the nature of the treasury vouchers were received by Mr. Dhamija on 30th March 1988, the taxability of the said sums had to be examine .....

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the Act by the AO's order dated 24th November 1988. However, consequent upon the developments in relation to the assessment proceedings for AY 1989-90, the assessment for AY 1988-89 was reopened under Section 147 by issue of notice under Section 148 on 22nd March 1991. In response thereto, Mr. Dhamija filed a return declaring the same income on 19th October 1992. 26. As regards AY 1985-86, Mr. Dhamija had originally filed a return disclosing an income of ₹ 49,540. In relation to the sa .....

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Mr. Dhamija for AY 1985-86. 27. The AO, by order dated 18th March 1993, held that under Section 45(5) the entire amount of compensation is to be taxed in the year of receipt and that since Mr. Dhamija was not following the mercantile system of accounting, the interest received was also taxable in the year of receipt. Accordingly, the AO made additions in that regard for AY 1988-89, but on a protective basis and subject to the finality of proceedings in the AY 1989-90 as the Revenue had taken a .....

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R 524, the CIT (A) agreed with Mr. Dhamija that he would be subject to tax at that stage only to the extent of the amount on which there was no dispute, i.e. ₹ 1,20,446/- together with the corresponding interest. The CIT(A) held that the re-opening of the assessments for AY 1981-82 to 1987-88 by invoking Section 147 of the Act was not justified. Consequently, the CIT (A) invalidated the action of the AO in charging interest in AYs 1981-82 to 1987 -88. 29. At this stage Mr. J.N. Dhamija exp .....

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Assessee was in appeal before the ITAT on the ground that the invoking of Section 147 was justified only for AY 1989-90 and not for other years including AY 1988-89. The other contentions urged by the Assessee were that (i) the land in question was agricultural land and therefore not amenable to capital gains tax; (ii) the Assessee was not the owner of the land and was not at all liable to tax in respect of the enhanced compensation and (iii) since the enhanced compensation was not finally settl .....

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ealth as it was only an advance towards compensation for the compulsory acquisition of the land. While the AO did not accept this claim, the CIT(A) accepted it for AY 1988-89. A similar exercise took place at the hands of the CIT(A) for AY 1990-91 as well to 1991-92 with only the amount being different. The Revenue was aggrieved by these orders and therefore appealed to the ITAT. 32. A common order dated 31st December, 2002 was passed by the ITAT disposing of all of the aforementioned appeals. T .....

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his actions was based on his prima facie belief that income chargeable to tax has escaped assessment." To that extent the Revenue's appeals were partly allowed. However, the ITAT agreed with the Assessee that the enhanced compensation could not be included in the total income for the AYs in question for the reason that no finality was attached to the receipt of the amount. The ITAT followed it earlier orders in the cases of Mr. K.K. Kochar and Mrs. Sharda Kochar and also in the case of .....

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tion. Questions of law 34. The following questions of law were framed by this Court in the ITAs by the order dated 14th September, 2004: "1. Whether the amount of enhanced compensation received by the assessee during the relevant previous year is taxable in view of the provisions of Section 45(5)(b) of the Income Tax Act, 1961? 2. Whether the Income Tax Appellate Tribunal was correct in law in holding that the decision of the Supreme Court in CIT vs. Hindustan Housing and Land Development T .....

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r the Tribunal had not erred in holding that the money received by the assessee by way of enhanced compensation/interest was in the nature of trust money and, therefore, not includable in the net wealth of the assessee?" Submissions of counsel 36. On behalf of the Revenue, it was submitted by Mr. Zoheb Hossain, Advocate as under: (i) The order of ITAT in the cases of Mr. K.K. Kochar and Mrs. Sharda Kochar was reversed by this Court by the decision dated 18th July 2014 of this Court in ITA N .....

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f enhanced compensation, solatium, additional amount and interest in the financial year ending 31st March 2008 (relevant to AY 1988-89) was concerned. It made no difference whether the proceedings concerning enhancement of compensation were pending in appeal in the High Court. Section 155(16) read with Section 45(5)(c) of the Act would take care of the consequences of the final orders that might be passed in either the proceedings for enhancement of compensation or those under Section 31(2) LA A .....

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or counsel for the Assessee as under: (i) By virtue of the sale deed executed by Mr. Ram Pal Malhotra in favour of Mr. Dhamija, the latter had merely became a shareholder of 1/16th share of the bhumidari rights which were acquired by him from Mr. Ram Pal Malthora who had agreed to sell his share which he had purchased by virtue of the purchase deed executed on 14the April 1960. In view of the aforesaid purchase deed, Mr. Ram Pal Malhotra had nothing to do with the land in question and consequent .....

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of the Act had no application. Thus, where the right to receive the compensation itself was inchoate and not merely the amount received or receivable, Section 45 (5) of the Act would have no application. The decision in CIT v. Hindustan Housing and Land Development Trust Ltd. (supra) was still applicable. Reliance was also placed on the decisions in CIT v. Sharda Sugar Industries Ltd. 239 ITR 393 (Bom). and CIT v. Smt. Prakash Kaur 330 ITR 332(P&H), (iii) The decisions of this Court in CIT .....

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n be brought to tax only if it falls under any tax provisions of the Act and the burden is on the Revenue to establish the same. Section 155(16) of the Act cannot also be invoked to contend that in case the assessee loses its right, the order could be amended so as to refund the amount. (v) Alternatively, and without prejudice, it is contended that if the amount is held to be includible in the total income then only the amount as computed by the AO for AY 1989-90 i.e. ₹ 26,41,232/- could b .....

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by the AO out of the compensation received as per Section 45 of the Act as it stood for the relevant AY. Analysis of Section 45(5) of the Act 38. The central issue that arises is whether the land acquisition compensation received by the Assessee can be subjected to capital gains tax in her hands for the AYs in question. Section 45 (5) of the Act is relevant in the present case reads as under: 45 (5) Notwithstanding anything contained in sub-Section (1), where the capital gain arises from the tra .....

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e first reference or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India 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 .....

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apital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration. Expla .....

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eferred to in clause (b) shall be deemed to be the income, chargeable to tax under the head Capital gains of such other person. 39. In order to understand the rationale behind the insertion of sub-section (5) to Section 45 of the Act with effect from 1st April 1988, the law that was in force prior to its insertion requires to be noted. 40. To begin with, prior to introduction of sub-section (5) in Section 45, the compensation initially awarded and the enhanced compensation, finally determined on .....

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ed in Section 45 with effect from 1st April 1988. In terms of this provision, both the compensation as first determined in the land acquisition Award as well as the enhanced compensation would be taxed in the respective years of receipt. The amount would be taxed in the hands of the recipient of the additional compensation, even if that person was not the original transferor. Section 155 (7A) was omitted with effect from 1st April 1992. By a further amendment with effect from 1st April 2004, cla .....

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a court, Tribunal or other authority 42. Two questions that have arisen in the past in relation to the enhanced compensation received in terms of Section 45 (5) are: what happens (a) when the right to receive compensation is itself in dispute and has not attained finality, and (b) when the question of the quantum enhanced compensation is pending final determination before a Tribunal or Court? 43.1 The distinction between the two situations was brought out in the decision of the Supreme Court in .....

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mpensation to ₹ 30,10,873 with interest at 5% and a further recurring compensation at ₹ 6,272-10-4 per month. The State Government appealed to the High Court and during the pendency of the appeal, it deposited ₹ 7,36,691, which the Assessee was permitted to withdraw on furnishing security. On receipt of the amount, the assessee credited it in its suspense account on the same date. 43.3 During the assessment proceedings for the AY 1956-57, relevant to the accounting period endin .....

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award. The assessment was confirmed by the Appellate Assistant Commissioner of Income-tax on first appeal. The question was whether the additional amount could be brought to tax in the year in which it was received by the Assessee. The ITAT held that the amount did not accrue to the Assessee as its income in the AY in question. 43.4 Reversing the High Court, the Supreme Court held that "there is a clear distinction between cases such as the present one, where the right to receive payment is .....

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urt enhancing compensation was pending challenge in the superior court. The facts were that the in the return filed for AY 1999-2000, the Assessee did not offer the amount of enhanced compensation and the interest received thereon during the previous year relevant to the assessment year for taxation, on the plea that the amount of enhanced compensation received had not accrued during the year of receipt as the entire amount was in dispute in appeal filed by the State before the High Court agains .....

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ffective from 1st April 1988. In appeal, the CIT (A) agreed with the Assessee that the enhanced compensation and the interest thereon had not accrued to the Assessee since the appeal was pending before the High Court and the Assessee had only been permitted to withdraw the sum upon furnishing security. The CIT (A) referred to the decision in CIT v. Hindustan Housing and Land Development Trust Limited (supra). The ITAT as well as the High Court affirmed the said order. 44.3 The Supreme Court reve .....

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amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34. (iii) Section 45 (5) of the Act refers to compensation. Interest under Section 28 of the LA Act unlike interest under Section 34 of the LA Act is an accretion to the value and hence it is a part of enhanced compensation .....

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) that the amount by which the compensation or consideration is enhanced 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, was introduced with effect from 1st April 2015. It contemplates the passing of an interim order by a court, Tribunal or authority pursuant to which compensation is received. It is not in dispute that the said proviso which is prospective does not apply to the case on hand. Clause (c) to .....

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ances of the present case the conditions for sub-section 5 (b) of Section 45 to be attracted can be said to have been fulfilled? 47. There are two strands of litigation. One pertains to right of the Assessee to receive compensation which, from the above narration of facts, has obviously not attained finality. The civil suit pertaining to the right of the Assessee was decreed. However, after the land acquisition Award was passed, there were three sets of claimants to the compensation and this led .....

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ght in the land in question in favour of the Assessee, the question whether the Assessee is entitled to receive compensation for the extinguishment of such right on its vesting in the State is still uncertain or inchoate. That will also depend on the answer to the question whether the transfer of the bhumidari right by way of sale can be construed as transfer of an asset for the purposes of Section 45 (5) of the Act. 49. The second strand of litigation pertains to the enhancement of compensation .....

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(supra) the legal position is clear that notwithstanding the pendency of appeals regarding enhancement of compensation, the amount of enhanced compensation is taxable in the year of receipt. Also, the said decision clarifies that interest under Section 28 of the LA Act, the additional compensation and the solatium would also be likewise taxable. 51. The right to receive such compensation in the present case is intrinsically linked to the outcome of the appeals arising from the proceedings under .....

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nced compensation she has received. 52. As is evident from the decision of the Supreme Court in S. Amarjeet Singh Kalra (Dead) by LRs v. Smt. Pramod Gupta (Dead) by LRs (supra) there are two other claimants for compensation, viz., the Gaon Sabha of Village Masoodpur and owners of the land. It was acknowledged in the said decision that "the claim of each one was in respect of his distinct, definite and separate share and their respective rights are no inter-dependant but independent." 5 .....

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r the excess collection and obliged to refund the same if so directed by the court. Such amounts collected by the Assessee are not assessable as the income of the Assessee. It was held that the said amounts were, therefore, not assessable in the hands of the Assessee in the AY in which the amount was withdrawn by the Assessee. The decision of the Punjab and Haryana High Court in CIT v. Smt. Prakash Kaur (supra)also supports the stand of the Assessee. 54. Turning to the decisions relied upon by t .....

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ed the contention of the Assessee following the decision of this Court of CIT v. Harish Chander 154 ITR 473 and CIT v. Devki Nand 138 ITR 225 and held that Section 45 (5) would not applicable as the money had been paid on furnishing of bank guarantee. This Court applied the decision of the Supreme Court in Commissioner of Income Tax v. Ghanshyam (HUF) (supra) and reversed the decision of the ITAT. 55. There are two distinct features as far as the above case is concerned. One is there was no issu .....

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Assessee on 30th March 1976 and the possession of the factory building, which was also acquired, was handed over on 17th September 1976. There were three claimants and the District Judge, held that the compensation for acquisition of land and building should be distributed inter se between assigning of the rights in land and the transferring of the land from the original lessor. The Assessee also filed a reference under Section 18 of the Act. Like in the present case, the award for enhanced comp .....

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ed by this Court in the Revenue's appeal read as under: 1. Whether the ITAT is justified in law in deleting the addition of ₹ 59,63,410 being the amount of enhanced compensation received by the Assessee during the year? 2. Whether the amount of ₹ 59,63,410 received by the Assessee during the previous year relevant to assessment year 1988-89 is taxable in view of the provisions of Section 45 (5) of the IT Act? 3. Whether the ITAT is correct in law that no capital gains arose to th .....

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5) is both the charging Section as well as the computation section. For the purpose of taxation of enhanced compensation received, cost of acquisition has to be taken as nil . Logically, therefore, it followed that the compensation received in this year by the Assessee has to be taxed. Each AY was separate and distinct and enhanced compensation received was to be taxed in the year of receipt, i.e., the year in question. Accordingly, the question was answered in favour of the Revenue and against .....

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ate, he becomes entitled to compensation and merely because the amount of compensation is not determined immediately, it cannot be said that there is no right to compensation in the erstwhile holder. Again this decision did not involve the question concerning the entitlement of the Assessee to be considered as a holder of any rights in land and therefore, entitled to receive compensation as such. 61. In the present case the Assessee is justified in contending that although award has been made an .....

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ion is that but for the proceedings under Section 31 (2) of the LA Act still being inconclusive, the amounts received by the Assessee by way of enhanced compensation would have been amenable to capital gains tax in the year of receipt as explained in CIT v. Ghanshyam (HUF) (supra). However, on account of the pendency in this Court of the appeals arising from the order of the ADJ in the proceedings under Section 31 (2) of the LA Act, the right of the Assessee to receive the said sums is still unc .....

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Section 45 (5) effective from AY 1988-89 63. On the question as to the AY from which Section 45 (5) would become applicable, reference may be made to the Circular No. 495 issued by the Central Board of Direct Taxes. Para 24.5 to 24.7 which explain the rationale behind the introduction of Section 45 (5) of the Act read as under: 24.5 Under the existing provisions where capital gains accrue or arise by way of compulsory acquisition of assets, the additional compensation is taken into consideratio .....

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al demand. Another difficulty which arises is in cases where the original transferor dies and the additional compensation is received by his legal heirs. In the latter type of cases, proceedings have to be initiated against the legal heirs. Repeated rectification of assessment 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 Se .....

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ue 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. 64. It is, therefore, clear that Section 45 (5) applies with effect from the AY 1988-89. The decision in Karimatharuvi Tea Estate Limited v. State of Kerala (supra) also supports this position. Conclusions in the ITAs 65. Conse .....

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