TMI Blog2009 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... the interpretation of Section 45(5) of the Income-tax Act, 1961, as it stood prior to 1.4.2004. FACTS IN THE LEAD MATTER Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17640 of 2008 - Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF). 4. Assessee received enhanced compensation on its lands being acquired by Haryana Urban Development Authority (HUDA) as also interest thereon during the previous year relevant to assessment year 1999-2000. 5. Assessee filed its return on income for the assessment year 1999-2000 in which he 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 to the assessee during the year of receipt as the entire amount was in dispute in appeal before the High Court which appeal stood filed by the State against the order of the Reference Court granting enhanced compensation. The amount was received by the assessee in terms of the interim order of the High Court against the assessee's furnishing security to the satisfaction of the executing court. The inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al against the order of enhanced compensation and interest thereon the receipt of additional compensation and interest thereon was not taxable as income as the said two items were disputed by the Government in appeal. Consequently, the Department's appeal was dismissed by the High Court, hence this civil appeal is filed by the Department. ISSUE 8. The short question to be decided in this batch of civil appeals is : whether ITAT was right in ordering deletion of enhanced compensation and interest thereon from the total income of the assessee on the ground that the said two items, awarded by the Reference Court, was under dispute in First Appeal before the High Court. Analysis of provisions of the 1961 Act 9. We quote hereinbelow Section 2(47) of the 1961 Act which reads as under: "2 - Definitions In this Act, unless the context otherwise requires,- (47) "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income chargeable under the head "Capital gains" of the previous year in which such amount is received by the assessee;" 12. We also quote hereinbelow Section 45(5) of the 1961 Act after 1.4.2004 which reads as under: "45 - Capital gains (5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :- (a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sub-section (5) of Section 45, to be the full value of consideration deemed to be received or accruing as a result of the transfer of the asset and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, the Assessing Officer shall amend the order of assessment so as to compute the capital gain by taking the compensation or consideration as so reduced by the court, Tribunal or any other authority to be the full value of consideration; and the provisions of Section 154 shall, so far as may be, apply thereto, and the period of four years shall be reckoned from the end of the previous year in which the order reducing the compensation was passed by the court, Tribunal or other authority." 14. The following conditions need to be satisfied for taxing a transaction as capital gains, viz., the subject-matter must be a capital asset, the transaction must fall in the definition of "transfer", there must be profit or loss called "Capital Gains" and that the taxpayer has claimed exemption in whole or in part by complying with legal provisions (Like Section 54F). 15. Section 45(1) of the 1961 Act speaks about capital gains arising out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the Finance Act 1987 inserted Section 45(5) to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. Accordingly, additional compensation is treated as "deemed income" in the hands of the recipient even if the actual recipient happens to be a person different from the original transferor by reason of death, etc. For this purpose, the cost of acquisition in the hands of the receiver of the additional compensation is deemed to be nil. However, the compensation awarded in the first instance would continue to be chargeable as income under the head "Capital Gains", in the previous year in which transfer took place. At this stage, it may be noted, that, Section 45(1) stood further amended (w.e.f. 1.4.91) so as to include reference to Section 54H and Section 45(5)(a) which, as stated above, stood amended (w.e.f. 1.4.88). The scope and effect of the above amendments made in Section 45, as also insertion of Section 54H, by Finance Act 1991, has been elaborated in the following portion of the Departmental Circular No.621 dated 19.12.91: ``Streamlining the provisions relating to exemption for roll- over of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a capital asset, being— --a transfer by way of compulsory acquisition under any law, or --a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and --the compensation or consideration for such transfer is enhanced or further enhanced by any court, tribunal or other authority. In such a situation, the capital gain so arising is, for and from assessment year 1988-89, to be dealt with as under:- (a) the capital gain computed with reference to-- -- the compensation awarded in the first instance 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 is 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 is to be deemed to be the income chargeable under the head "Capital gains" of the previous year in which such amount is received by the assessee. Analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centum on such market-value, in consideration of the compulsory nature of the acquisition." 20. We also quote hereinbelow Section 28 of the 1894 Act which reads as under: "28. Collector may be directed to pay interest on excess compensation. - If the sum which, in the opinion of the court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of [nine per centum] per annum from the date on which he took possession of the land to the date of payment of such excess into Court." 21. We also quote hereinbelow Section 34 of the 1894 which reads as under: "34. Payment of interest.- When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited. Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provided, the Court shall in every case award a sum of 30% on such market value, in consideration of the compulsory nature of acquisition. This is under Section 23(2) of the 1894 Act. In short, Section 23(2) talks about solatium. Award of solatium is mandatory. Similarly, payment of additional amount under Section 23(1A) is mandatory. The award of interest under Section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded 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(1A) and the solatium under Section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount, which is determined by the Court after a reference under Section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award for compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of the compensation under Section 45(5) of the 1961 Act? 27. In the case of Hindustan Housing (supra) certain lands belonging to the assessee-company, which was in the business of dealing in land and which maintained its account on mercantile system, were first requisitioned and then compulsorily acquired by the State Government. The Land Acquisition Officer awarded Rs.24,97,249/- as compensation. On appeal the Arbitrator made an award at Rs.30,10,873/- with interest at 5% from the date of acquisition. Thereupon, the State preferred an appeal to the High Court. Pending the appeal, the State Government deposited in the Court Rs.7,36,691/- being the additional amount payable under the award and the assessee was permitted to withdraw that additional amount on furnishing a security bond for refunding the amount in the event of the said Appeal being allowed. On receiving the amount, the assessee credited it in its suspense account on the same date. The question was : whether the additional amount of Rs.7,24,914/- could be taxed as the income on the ground that it became payable pursuant to the award of the Arbitrator. The Tribunal held that the amount did not accrue to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed point of time, viz, date of transfer. Section 45(5), newly inserted by the Finance Act, 1987, w.e.f. 1.4.88 and subsequently amended, retrospectively w.e.f. 1.4.88, by the Finance Act, 1991, enacts overriding provision and takes care of a situation - where the capital gains arise from the transfer of a capital asset, being a transfer by way of compulsory acquisition and the compensation for such transfer stands enhanced in stages by any court, tribunal or authority. In such a situation, the capital gains so arising is, for and from assessment year 1988-89, has to be dealt with as under : - (i) the capital gains computed with respect to the compensation awarded in the first instance would be chargeable as Income under the head "Capital Gains" of the previous year in which such compensation or part thereof was first received; and (ii) amount by which compensation or consideration is enhanced or further enhanced by the court, tribunal or authority is to be Deemed Income chargeable under the head "Capital Gains" of the previous year in which such amount is received by the assessee. 30. For the said purpose, the cost of acquisition is to be taken as Nil [See: Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the case with interest under Section 34 of the 1894 Act. So also additional amount under Section 23(1A) and solatium under Section 23(2) of the 1961 Act forms part of enhanced compensation under Section 45(5)(b) of the 1961 Act. In fact, what we have stated hereinabove is reinforced by the newly inserted clause (c) in Section 45(5) by the Finance Act, 2003 w.e.f.1.4.2004. This newly added clause envisages a situation where in the assessment for any year,- the capital gain arising from the transfer of a capital asset is computed by taking the- -compensation or consideration referred to in clause (a) of section 45(5) or, as the case may be, -enhanced compensation or consideration referred to in clause (b) of section 45(5), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority. 34. In such a situation, 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. For giving effect to such recomputation, the provisions of the newly inserted (w.e.f. 1.4.2004) section 155(16) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under the 1894 Act, is based on the full value of property as on date of notification under Section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under Section 23(1A), or Section 23(2) or under Section 28 of the 1894 Act it is on the basis that award of Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification. 36. Having settled the controversy going on for last two decades, we are of the view that in this batch of cases which relate back to assessment years 1991-92 and 1992-93, possibly the proceedings under the L.A. Act 1894 would have ended. In number of cases we find that proceedings under the 1894 Act have been concluded and taxes have been paid. Therefore, by this judgment we have settled the law but we direct that since matters are decade old and since we are not aware of what has happened in Land Acquisition Act proceedings in pending appeals, the recomputation on the basis of our judgment herein, particularly in the context of type of interest under Section 28 vis-`-vis interest under Section 34, additional compensation under Section 23(1A) and solatium und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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