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Movaliya Bhikhubhai Balabhai Versus Income Tax Officer - TDS - 1 - Surat & 1

2016 (5) TMI 488 - GUJARAT HIGH COURT

Refund of TDS wrongly deducted - Deduction for TDS on Compensation u/s 28 of Land acquisition Act - TDS u/s 194A on interest awarded on enhanced compensation - Held that:- Interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression “interest” as contemplated in section 145A of the I.T. Act. The first respondent - Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of th .....

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eady been deducted at source. Consequently, the challenge to the above communication has become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 forms part of the compensation and not interest, the second respondent was not justified in deducting tax at source under section 194A of the I.T. Act in respect of such amount. The petitioner is, therefore, entitled to refund of the amount wrongly deducted under section 194 .....

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- PUNJAB & HARYANA HIGH COURT ), the first respondent is directed to forthwith deposit such amount with the Reference Court, which shall thereafter disburse such amount to the petitioner herein. Rule is made absolute accordingly with costs. - Decided in favour of assessee - Special Civil Application No. 17944 of 2015 - Dated:- 31-3-2016 - Harsha Devani And G. R. Udhwani, JJ. For the Petitioner : Mr Kushal V Timbadia, Mr Tushar L Sheth For the Respondent : Mr Hardik Vora, Mr Sudhir M Mehta JUDGM .....

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16/- to the petitioner. 2. The petitioner is the original claimant in Land Reference Case No.1737/1999 which came to be decided by the learned Principal Senior Civil Judge, Junagadh by an award dated 23rd March, 2011 whereby the reference was partly allowed and additional compensation was awarded at the rate of ₹ 41.60 per square metre for the irrigated lands and ₹ 33.28 per square metre for non-irrigated lands along with other benefits under the Land Acquisition Act, 1894 (hereinaft .....

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5 under section 197(1) for deciding the tax liability of interest and to issue a certificate as to NIL tax liability. By the impugned communication dated 9th February, 2015 (wrongly typed as 09.02.2014 in the letter as per paragraph 5 of the affidavit-inreply), the application has been rejected on the ground that the interest amount on the delayed payment of compensation and enhanced value of compensation is taxable as per the provisions of section 57(iv) read with sections 56(2)(viii) and 145A( .....

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t that in terms of Column No.18 of the said statement, out of the amount of interest of ₹ 20,74,157/-, income tax of ₹ 2,07,416/- is required to be deducted at source. It was pointed out that the petitioner s application for a certificate for no deduction of income tax under section 197 of the I.T. Act has been rejected on the ground that the interest amount on delayed payment of compensation and enhanced value of compensation is taxable as per section 57(iv) read with sections 56(2) .....

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anced value of the land which is not the case in the matter of payment of interest under section 34. The court, accordingly, held that interest paid on excess compensation under section 28 of the Act of 1894 has to be treated as part of compensation under section 45(5) of the Income Tax Act. It was submitted that, therefore, when the interest under section 28 of the Act of 1894 is to be treated as part of compensation and is liable to capital gains under section 45(5) of the I.T. Act, such amoun .....

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pondents are required to be directed to pay such amount to the petitioner. It was, accordingly, urged that the petition deserves to be allowed by quashing and setting aside the impugned communication dated 9th February, 2014 (sic. 2015) issued by the Income Tax Officer, TDS-1 refusing to grant the certificate under section 197 of the Act as well as holding the action of the respondents in deducting ₹ 2,07,416/- towards 10% TDS to be illegal and invalid. 4.1 In support of his submissions, t .....

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garded as part of the compensation itself which is not the case of interest under section 34. The court held that any component of compensation that goes towards the discharge of liability under section 28 must be taken as part of the compensation to which section 194 LA shall apply and that compensation being the value of agricultural land, then the exclusion as provided under the section shall also be attracted. The court observed that in the facts of the said case, compensation assessed and t .....

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will not cause any serious prejudice even if the amount ought not to have been deducted by enabling a party applying for refund, if, it might involve a large number of cases, it shall be quite unnecessary for the land owners to directly apply for income tax for refund in every case. Such a requirement is a needless circuitous exercise. What can be prevented even in the first place by not requiring a TDS to be applied for compensation relatable to sections 23(1A), 23(2) and 28 of the Land Acquis .....

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the Income Tax Department, in accordance with law. 4.2 Reliance was also placed upon the decision of the Punjab & Haryana High Court in the case of Haryana State Industrial Development Corporation Ltd. v. Savitri and another rendered in Civil Revision No.2509 of 2012 on 29th November, 2013 wherein the court placed reliance upon its earlier decision in the case of Jagmal Singh v. State of Haryana (supra) and held that it is clear that no tax is to be deducted at source from compensation award .....

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the specific finding in Ghanshyam s case (supra) the amount awarded under section 28 of the Land Acquisition Act is accretion in value and interest therein forms part of compensation; income tax cannot be deducted at source since the land acquired is agricultural land. The learned counsel for the petitioner further pointed out that the land in question being agricultural land in the rural area, the same has not been taxed under the heading of capital gains under section 45(5) of the Act. 5. Oppo .....

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was submitted that the Income Tax Officer, TDS-1, Surat while rejecting the application made by the petitioner under section 197 of the I.T. Act, has taken into consideration the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of that Act. According to the learned counsel, the action of the Assessing Officer in rejecting the application is just, legal and valid because in terms of the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) o .....

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urces . It was pointed out that under sub-clause (iv) of section 57, in case of the nature of income referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income is permissible. It was pointed out that under section 145A of the Act, interest received by the assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. It was submitted that the interest o .....

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(b) which provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income in the year in which it is received, came to be inserted in section 145A of the Act and hence, would not have any applicability in the facts of the present case. In support of his submissions, the learned counsel placed reliance upon the decision of the Punjab & Haryana High Court in the case of Hari Kishan and others v. Union of India an .....

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racter of compensation for acquisition of agricultural land and thus, was not exempt under the Income Tax Act. Once that was so, the tax at source had rightly been deducted by the payer. 5.2 Reliance was also placed upon the decision of the Punjab & Haryana High Court in the case of Commissioner of Income Tax, Faridabad v. Bir Singh (HUF) (supra) wherein the court held thus:- 25. The apex Court in the aforesaid decision has held that interest directed by the Collector is to be treated as par .....

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on and income from other sources are ascertained on the basis of system of accountancy followed by the assessee; (b) where assessee is not maintaining books of accounts by adopting any specific method, it shall be treated to be cash system of accountancy; (c) the interest under Section 34 to be awarded by the Collector partakes the character of compensation and is taxable in the year of receipt in view of Section 45(5)(b) of the Act; and (d) under cash system of accountancy, the element of inter .....

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e year of receipt. 5.3 Reliance was also placed upon the decision of the Punjab & Haryana High Court in the case of Manjet Singh (HUF) v. Union of India, (2016) 237 Taxmann 116, wherein the question for consideration in the petitions related to the nature of interest received by the land owner under section 28 of the 1894 Act namely, as to whether interest which is received by the land owner partakes the character of income or not and in such a situation whether it is taxable under the provi .....

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xable event. The court held that in view of the authoritative pronouncements of the apex court in the above referred decisions, the assessee cannot derive any benefit from the observations of the Supreme Court in the case of Ghanshyam (HUF) and dismissed the petitions. 5.4 Reliance was also placed upon the decision of the Delhi High Court in the case of Commissioner of Income- Tax v. Sharda Kochhar, (2014) 49 taxmann.com 120 (Delhi), wherein the question before the Delhi High Court was as to whe .....

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nder section 28 of the Act of 1894 is in the nature of income from other sources and is taxable under section 56 of the Act. Under the circumstances, the second respondent was wholly justified in deducting tax at source under section 194A of the I.T. Act and that the first respondent was justified in rejecting the application for issuance of certificate under section 197 of the I.T. Act for no deduction of tax. It was, accordingly, urged that the petition being devoid of merits, deserves to be d .....

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the petitioner together with other statutory benefits. Pursuant to such award, the second respondent calculated the amount payable to the petitioner and in terms of the statement showing the amount of compensation to be deposited in the court, computed an amount of ₹ 20,74,157/- as payable to the petitioner by way of interest under section 28 of the Act of 1894. In support of such statement, the second respondent has also issued a communication dated 12th October, 2015 certifying that the .....

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oner of Income Tax, Faridabad v. Ghanshyam (HUF) (supra) wherein, the court has examined the provisions of the Land Acquisition Act, 1894 as well as the provisions of section 45 of the I.T. Act and the intention behind insertion of sub-section (5) of section 45. The court noted that sub-section (5) of section 45 was inserted to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. The court considered the provisions of sec .....

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d to 12% per annum additional amount on the market value for a period commencing on or from the date of publication of the notification under section 4(1) of the 1894 Act up to the date of the award of the Collector or the date of taking possession of the land, whichever is earlier. The court held that the additional amount payable under section 23(1-A) of the 1894 Act is neither interest nor solatium. It is an additional compensation designed to compensate the owner of the land for the rise in .....

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warded has been paid or deposited and when the court awards excess amount. In such cases, interest on that excess alone is payable. Section 28 empowers the court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the court includes the additional compensation awarded under section 23(1-A) and the solatium under section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretio .....

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ction 34 is for the delay in making payment. This vital difference needs to be kept in mind in deciding the matter. Interest under section 28 is part of the 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 the enhanced value of the land which is not the case in the matter of payment of interest under section 34. The court, thereafter, specifically considered the questio .....

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pt of the year of taxability. 48. It is to answer the above questions that we have analysed the provisions of Sections 23, 23(1-A), 23(2), 28 and 34 of the 1894 Act. 49. As discussed hereinabove, Section 23(1-A) provides for additional amount. It takes care of the increase in the value at the rate of 12% per annum. Similarly, under Section 23(2) of the 1894 Act there is a provision for solatium which also represents part of the enhanced compensation. Similarly, Section 28 empowers the court in i .....

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rest is not compensation. It is equally true that Section 45(5) of the 1961 Act refers to compensation. But as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards interest both as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28 unlike interest under Section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under Section 34 of the .....

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Ghanshyam (HUF) came to be followed by the Supreme Court in the case of Commissioner of Income Tax, Rajkot v. Govindbhai Mamaiya, (2014) 16 SCC 449, wherein the court after referring to the above decision in the case of C.I.T. v. Ghanshyam (HUF) (supra) held that it is clear that whereas interest under section 34 of the Act of 1894 is not treated as a part of income subject to tax, the interest earned under section 28, which is on enhanced compensation, is treated as an accretion to the value an .....

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Act. Therefore, interest under section 28 of the Act of 1894 would form part of the enhanced compensation and would be exigible to capital gains under section 45(5) of the I.T. Act. In other words, in case of a transaction which is otherwise exigible to capital gains tax under section 45 of the I.T. Act, the interest received under section 28 of the Act of 1894 being an accretion to the value, would form part of the compensation and would be exigible to tax under section 45(5) of the I.T. Act, .....

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der section 28 of the Act of 1894 and not under section 34 thereof. As noted hereinabove, the petitioner s application for a certificate under section 197 of the I.T. Act for no deduction of tax at source has been rejected on the ground that the interest amount received under section 28 of the Act of 1894 is taxable as per the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of the I.T. Act. Section 145A of the I.T. bears the heading Method of accounting in certain .....

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rom other sources. The first respondent Income Tax Officer seeks to tax the interest received by the petitioner under section 28 of the Act of 1894 as income from other sources under section 56(2)(viii) read with section 145A(b) of the I.T. Act. In the opinion of this court, in the light of the law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra), the interest received under section 28 of the Act of 1894 would not fall within the ambit of the expression interest as envisaged .....

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of the assessee but also with the change in the full value of the consideration (computation) and since the enhanced compensation/consideration (including interest under Section 28 of the 1894 Act) becomes payable/paid under the 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155(16) of the 1961 Act, later on. Hence, the year in which enhanced compensation is received is the y .....

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enhanced compensation under Section 45(5)(b) was taxable in the year of receipt which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt. 55. It is important to note that compensation, including enhanced compensation/consideration under the 1894 Act, is based on the full value of property as on the date of notification under Section 4 of that Act. When the court/tribunal directs payment of enhanced compensation under Section 23( .....

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made under section 28 of the Act of 1894 is interest as envisaged under section 145A of the I.T. Act and has to be treated as income from other sources, deserves to be rejected. 11. It has been vehemently contended on behalf of the first respondent that the above decision has been rendered prior to the substitution of section 145A of the I.T. Act by Finance (No.2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability to the facts of the present case. The scope and e .....

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profession or Income from other sources , shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further the Hon ble Supreme Court in the case of Smt. Rama Bai v. CIT (1990) 84 CTR (SC) 164 : (1990) 181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to the taxpayers. 46.2 With a view to mitigate the hardship, section 145A .....

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sources in the year in which it is received. 46.4 Applicability.- This amendment has been made applicable with effect from 1st April, 2010, and it will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. Thus, the substitution of section 145A by Finance (No.2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF) (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Su .....

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different High Courts taking a different view. This court is not in agreement with the view adopted by the other High Courts which are not consistent with the law laid down in the case of Ghanshyam (HUF) (supra). In Manjet Singh (HUF) v. Union of India (supra), the Punjab and Haryana High Court has chosen to place reliance upon various decisions of the Supreme Court rendered during the period 1964 to 1997 and has chosen to brush aside the subsequent decision of the Supreme Court in Ghanshyam (H .....

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t under section 34 is part of compensation while interest under section 28 is not the interest which partakes the character of compensation and is treated differently. In the opinion of this court, the above view of the Punjab and Haryana High Court is contrary to what has been held in the decision of the Supreme Court in Ghanshyam (HUF) (supra) wherein it has been held that interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced co .....

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sent case. 13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression interest as contemplated in section 145A of the I.T. Act. The first respondent - Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the I.T. Act to the petitioner for non-deduction of tax at source, inasmuch as, the petitioner is not liable to .....

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