Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Padam Prakash (Huf) on 29 September, 2006
Equivalent citations: (2006)104TTJ(DELHI)989
ORDER
Vimal Gandhi, President
1. In these appeals, question of taxability of compensation enhanced by Courts, after it was awarded by Collector, under the Land Acquisition Act is involved. The question has been referred for consideration of Special Bench.
The regular Bench while hearing appeal of Shri Om Prakash (HUF) found that different Benches of Tribunal, at different places, are interpreting Section 45(5) of IT Act inserted by Finance Act, 1987 differently and there is a divergence of opinion on the issue. Some Benches have held that amendment and introduction of Sub-section (5) of Section 45 has not made any difference to the application of decision of Hon'ble Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. whereas other Benches have held above decision is no more applicable and enhanced compensation awarded by Courts is liable to be taxed in the year of receipt. Details of cases in which divergent opinions have been expressed are listed in paras 3 and 4 of order of reference.
After considering relevant facts and circumstances of case, the President constituted a Special Bench for disposal of these appeals.
2. For the benefit of the Interveners, the following two questions were framed for consideration of the Special Bench:
1. Whether, on facts and in the circumstances of the case, enhanced compensation and interest is to be taxed in the year of receipt, notwithstanding that order under which compensation and interest is received, is challenged before the higher Courts and litigation is pending ?
2. Whether, on the facts and in the circumstances of the case, will it make any difference to the taxability of compensation and interest if the same are received on furnishing of security ?
3. We have heard both the parties. The land of the assessees before us was acquired under the Land Acquisition Act and compensation was awarded by the Land Acquisition Officer. The said Award was not accepted and challenged before the Civil Court to claim higher compensation. The Civil Court (Addl. Distt. Judge) awarded higher compensation along with interest in all the cases. The details of compensation awarded in different cases is annexed hereto in Annexure-'A'. Enhanced compensation along with interest and certain other amounts was received by the assessees in the period under consideration. The AO assessed enhanced compensation on receipt basis in terms of Section 45(5)(b) of IT Act. The assessees had objected to above assessment on the ground, that decree/order of the Civil Court was challenged by the State in further appeal before the Hon'ble High Court and, therefore, enhanced compensation cannot be treated as final. With the filing of the appeal, the finality of the order/decision under which enhanced compensation was awarded, was dislodged. The assessee had only inchoate right to receive compensation. There was no legally enforceable right. In several cases, compensation was received on furnishing of bank guarantee or on certain terms and conditions imposed by Hon'ble High Court. Chances of assessees losing appeal before High Court could not be ruled out. In fact the Government has challenged the very right of assessee to receive enhanced compensation: Thus when very right to receive enhanced compensation was in dispute, how enhanced compensation could be treated as a taxable receipt ? All the above contentions were negatived by the AO who held that provisions of Section 45(5)(b) were specific and applicable in these cases. Accordingly, enhanced compensation was brought to tax. Interest allowed on enhanced compensation was also charged in the year of receipt.
4. The assessees challenged above assessment in appeal before the learned CIT(A). The learned CIT(A) accepted the contention of the assessees (Padam Prakash-HUF) and held that there was no absolute right to receive enhanced compensation and/or interest thereon and since the right held was inchoate, no income accrued during the year and hence amount of enhanced compensation and interest thereon was not taxable. Accordingly, it was directed that enhanced compensation and interest allowed be deleted from assessment. This was done in the main case of Shri Padam Prakash HUF. In some other cases, the CIT(A) upheld the assessment and the assessees are in appeal. A brief summary of facts involved in all the appeals is given in Annex. A to this order. We are not mentioning facts of each of the case, as in our opinion controversy whether enhanced compensation, in the circumstances mentioned above and interest allowed on such compensation by the Civil Courts is liable to be taxed on receipt basis or not, when such payment is subject-matter of further appeal before the High Court or some other Court is the core question to be considered.
5. Shri Suraj Bhan Nain the learned Departmental Representative, who initiated arguments on behalf of the Revenue submitted at the outset that question referred to the Special Bench was already decided by a Third Member in the case of Dy. CIT v. Bhim Singh Lather (2006) 100 TTJ (Del)(TM) 170 : (2006) 99 ITD 46 (Del)(TM) and, therefore, the matter should be treated as fully covered in favour of the Revenue. It was submitted that when a decision is given by a Third Member, it should be taken as decision of the Special Bench comprising of three Members. In support of above contention, learned Departmental Representative relied on the decision of the Hon'ble jurisdictional High Court in the case of P.C. Puri v. CIT wherein the learned third Judge observed as under:
There is no difference, really speaking, between a Full Bench of three Judges sitting together and this method of referring to the third Judge in the case of a difference of opinion between the two Judges. Whether the first method is adopted or the second, 'opinion of the majority' will be decisive. In this case, there is a formal reference to a third Judge to ascertain his opinion. His is the deciding voice. He turns the scales. The third Judge is the Full Bench. Not alone. But along with the two others who first heard the case. Whether the three Judges sit at the same time or at different times--two at one time, and the third hearing the matter later on a difference of opinion--does not make much difference. As has happened in this case, the two Judges have differed. So the case has come to me, the third Judge. The two Judges have expressed their opinion. I am now called upon to give my opinion. The opinion of the majority will prevail. All that happens is that the third is segregated from the two and does not sit with them. He comes in later on when there is a difference of opinion between them. In all cases, it is the theory of numbers which is the foundation of the doctrine of stare decisis. Majority is a term signifying the greater number. Counting of heads underlies the theory of judicial precedents as in any majority decision. The constitutional requirement of a constitution Court of five Judges is based on this theory. Similarly, the CPC, 1908, enacts that in the case of a difference of opinion, the matter has to be referred to a third Judge, (see Section 98, CPC). In my opinion, the reference was correctly made to me as the third Judge.
Above decision relating to Third Judge decision was equally applicable to the Tribunal and decision of Third Member should be taken as the decision of Special Bench as the matter was also considered by three Members. The learned Departmental Representative further relied upon decision of the Special Bench of Tribunal, Mumbai in the case of Dy. CEP v. Oman International Bank SAOG (2006) 102 TTJ (Mumbai)(SB) 207 : (2006) 100 ITD 285 (Mumbai)(SB). It was further requested that above said contention and objection of the Revenue be considered as a preliminary objection.
6. The learned representative appearing for the assessees opposed above submission and contended that a decision by a Third Member is only decision of a Division Bench. A. decision given by Third Member cannot be taken as decision of a Special Bench. A Special Bench is constituted as per statutory provision of Section 255(3) of the IT Act for disposal of a special case on account of special circumstances, whereas matter is referred to a Third Member under Section 255(4) of IT Act to get opinion of the majority. A case disposed of by a Third Member cannot be treated as a decision of a Special Bench. It would mean a majority decision of a Division Bench.
7. We have given careful thought to the rival submissions of the parties. The decision of Hon'ble Delhi High Court in the case of P.C. Pun (supra) is binding on us. In the aforesaid decision, it has been clearly laid down that the Third Judge is the Full Bench. So the Hon'ble Delhi High Court is quite clear that where decision is given by Third Judge on account of difference between the two Hon'ble Judges hearing a matter, his opinion is decisive and, therefore, for that reason, decision by three Judges should be taken as decision by Full Bench. No contrary decision was cited before us and, therefore, we are required to go with the opinion expressed by jurisdictional High Court. Accordingly, we hold that majority decision in Third Member case is entitled to as much weight and respect as a decision of a Special Bench. It should be followed and applied by regular Benches and cannot be disregarded.
Having said so, we must take into account special provisions relating to procedure to be followed by Tribunal as per Sub-section (3) and Sub-section (4) of Section 255 of the IT Act. These are as under:
255(3) The President or any other member of the Tribunal authorized in this behalf by the Central Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he is a member and which pertains to an assessee whose total income as computed by the AO in the case does not exceed five hundred thousand rupees, and the President may, for the disposal of any particular case, constitute a Special Bench consisting of three or more members, one of whom shall necessarily be a JM and one an AM.
(4) If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Tribunal for hearing on such point or points by one or more of the other members of the Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Tribunal who have heard the case, including those who first heard it.
It is evident from above that Special Bench can be constituted by the President under Sub-section (3) of Section 255 of IT Act. The circumstances under which Special Benches are to be constituted have been elaborately discussed by their Lordships of Supreme Court in the case of ITAT v. Dy. CIT . A perusal of the above decision would reveal that purpose of constitution of a Special Bench is somewhat different from purpose mentioned in Sub-section (4) of Section 255 namely to resolve difference in opinion of Members of Bench by referring the point of difference to the Third Member for getting the majority as envisaged in the provision. It is possible that on account of development in law, and several other reasons, facts and circumstances not considered by a Third Member, it becomes necessary for the President to constitute a Special Bench to consider the matter which was earlier considered by the Third Member. In our considered opinion, having in mind plain language of Sub-sections (3) and (4) of Section 255 of IT Act, there is no impediment to the constitution of a Special Bench. In such a situation, the decision of the Special Bench even of three Members is entitled to all the weight and must have precedence over the decision of a Third Member. Regular Benches are required to follow and act upon the decision of Special Bench and in case its views are contradictory to the views of the Third Member, preference is required to be given to Special Bench. This is held on the basis of language and purpose of provision of Sub-sections (3) and (4) of Section 255 dealing with two different situations.
8. In the case of Oman International Bank SAOG (supra), the majority view of Special Bench held as under:
The Third Member decision in the case of Anil H. Rastogi (supra) is as good as a Special Bench decision within the territorial jurisdiction of the Bombay High Court as there is no contrary view expressed by the Bombay High Court on the issue in question. It will be laying down a wrong precedent if the Third Member decision in the case of Anil Rastogi is slighted by any other Division Bench as not being bound. The sanctity of the Third Member decision and the Special Bench decision is of the same nature [paras 42 and 43].
The Hon'ble Members who dissented with above view have observed as under:
The Special Bench decision is collective decision which has always more weightage than separate opinions given by different Members at different point of time. Similarly, as per the provisions of the Act, Third Member expresses his opinion which is binding on the regular Bench which decides the case finally. Such final order is of two Members only. Therefore, such decisions by Bench of two Members, though guided by Third Member opinion, cannot be binding on Special Bench. [para 20].
9. We agree with the majority view but would like to clarify that in the above case, the Special Bench was not dealing with a situation where on the same issue a decision of a Special Bench as also a Third Member Bench is available. We, therefore, reiterate that in case of any conflict between the two, regular Benches should follow and give preference to the decision of Special Bench.
It is also relevant to observe that question of referring the matter for consideration of 5 Members Special Bench was considered but such reference was not deemed necessary as here we see no conflict in the views of the Third Member in the case of Bhim Singh Lather (supra). In our opinion, it would be sufficient to explain the position of Special Benches and leave the matter without further elaboration. Having regard to specific reference and in the light of what we have discussed above, we do not think that the matter should be closed on the basis of preliminary objection raised by the Revenue. As the reference has been made to the Special Bench by the President, we are required to dispose of the appeals marked to us. Accordingly, we proceed to consider the appeals on merits, in the light of submissions made by the Departmental Representative and counsel for the assessee and the intervenes.
10. On merits, the learned Departmental Representative emphasized that main section under which capital gain is charged to tax is Sub-section (1) of Section 45. The scheme of said section is that capital gain is to be brought to tax, "in the year in which the transfer takes place". However, difficulties were faced by the Revenue from time to time in realizing tax on enhanced compensation awarded by Courts in appellate proceedings and in proceedings challenging the compensation awarded by the Land Acquisition Officer. In order to remedy the difficulties, Sub-section (7A) of Section 155 was introduced and amended several times. The learned Departmental Representative in this connection referred to Circular of CBDT No. 240, dt. 17th May, 1978 (1979 117 ITR (St) 17 and other circulars on the issue. However, amendment referred to above did not serve the purpose and, therefore, statutory provisions were again amended w.e.f. 1st April, 1988 and Sub-section (7A) was omitted. The legislature thereafter added Sub-section (5) to Section 45 with Clauses (a) and (b) through Finance Act, 1987, w.e.f. 1st April, 1988 to bring to charge the compensation enhanced or further enhanced. It was provided that such enhanced compensation would be taxed on receipt basis. The provision also covered cases where original owner had died and enhanced compensation was awarded to his legal heirs. Thus, a new chargeability or a new scheme was introduced to tax enhanced compensation on receipt basis. However, there were certain defects in the amendment as it did not deal with situation where enhanced compensation was reduced on appeal. Accordingly a corrective measure was introduced through Finance Bill, 2003 and Clause (c) was inserted in Sub-section (5) of Section 45 to deal with the above situation. If contentions advanced on behalf of the assessees are accepted, then Clause (c) would have no meaning. It would be rendered redundant. The position taken by assessees did not take note of Sub-section (5) of Section 45 introduced to bring to charge enhanced compensation on receipt basis. It is not possible to accept the submissions of the assessee that even after above change capital gain on enhanced compensation is liable to be taxed only under Sub-section (1). This argument ignores the new scheme introduced by Sub-section (5) of Section 45 of the IT Act. There is no question of any "accrual" or "arising" of income. It is to be assessed in the year in which the enhanced compensation is actually received. Clause (c) of Sub-section (5) automatically takes care of the situation where enhanced compensation is subsequently reduced by any Court or other authority. The capital gain earlier levied shall be accordingly reduced. The aforesaid Clause (c) was only declaratory in character. Thus Sub-section (5) of Section 45 was a complete code it provided both for chargeability of enhanced or further enhanced compensation and meets the situation where enhanced compensation earlier received is reduced subsequently by Tribunal or Court or other authorities. There is no justification for ignoring scheme of assessment of enhanced compensation on receipt basis. Having regard to above provision, the decision of Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd (supra) has no application in the above situation.
11. As regards assessment of interest on enhanced compensation, the learned Departmental Representative submitted that same was also to be assessed in the year of receipt as it has the same character as that of enhanced compensation. He, however, conceded that Third Member in the case of Bhim Singh Lather (supra) had taken a view that interest on enhanced compensation is to be assessed from year to year and the decision of Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) was still applicable to the interest awarded.
As regards question of receipt of enhanced compensation through interim award or after furnishing security, the learned Departmental Representative submitted that it made no material difference whether compensation received was conditional or otherwise. Only thing relevant was that enhanced compensation was paid in terms of Clause (b) of Sub-section (5). In case enhanced compensation was subsequently reduced, the capital gain levied was required to be reduced by making adjustment in the light of reduced compensation.
12. Shri. H.G. Malik, learned Counsel for assessee gave us brief background of acquisition in the case of Shri Padam Prakash (HUF) in the shape of 'Synopsis' to point out that agricultural land of assessee was acquired by Meerut Development Authority and compensation was awarded by Special Land Acquisition Collector on 23rd Feb., 1988. Being aggrieved by the above award, the assessee filed reference before Addl. District Judge, Meerut who vide his order enhanced rate of compensation to Rs. 400 per sq. yd. and also allowed additional compensation @ 12 per cent per annum and solatium @ 30 per cent and interest thereon.
The award of Addl. Distt. Judge was followed by decree dt. 29th May, 1992. However, State Government challenged above decree/order of Addl. Distt. Judge before Allahabad High Court and prayed for setting aside of the award. It was contended that award was not maintainable. The assessee took several legal steps to realize compensation from the State Government and ultimately succeeded in receiving Rs. 92,06,384 in May, 1994. However, this was only an interim relief and question whether additional compensation awarded was maintainable was subject-matter of dispute before the Hon'ble Allahabad High Court.
13. Shri Malik further submitted that receipt of ad hoc compensation was inchoate and not final. The money received was held in trust and could not be a taxable receipt under Sections 4/5 of the IT Act. The income can be said to have "accrued" or "arisen" to the assessee only if there was right to receive. Here right to receive enhanced compensation was suspended on account of appeal filed by the State Government. Thus unless awarded enhanced compensation attained finality, it could not be said to have accrued to the assessee. There was no question of assessing compensation without right to receive the same. A large number of decisions were cited in support of above arguments. Shri Malik contended that unless receipt is backed by authority to receive, the same held in trust cannot be treated as income. Reliance in this connection was placed on decision of Orissa High Court in the case of CIT v. Orissa State Financial Corpn. . It was accordingly prayed that the decision of Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) still governed the situation.
14. Shri Vijay Kumar Gupta, appearing on behalf of certain Interveners like Shri Fateh Singh (HUF) and others, submitted that right to receive compensation is essential to charge to tax enhanced compensation. A non-operative, non-effective, non-enforceable order or decree on account of stay or conditions imposed by superior Court cannot give rise to any chargeable income. The income must accrue or arise before it can be brought to tax under the IT Act. Even for application of Sub-section (5) of Section 45, right to receive compensation should attain finality. Finality of a decision or order is suspended immediately an appeal is filed against it before superior Court. He also submitted that enhanced compensation in different cases of the assessees was paid as per the decisions of High Court in different cases of Interveners These orders are available at p. 403 onward in the paper book. It was only an interim arrangement. Compensation received under such an arrangement cannot be income because the order is liable to be varied, reversed or set aside as may be deemed fit and proper by the Court, in the circumstances of the case. Such temporary arrangement cannot give rise to "accrual" of income. Other arguments of Shri Malik were accepted by the learned Counsel for the Interveners.
As for as application of Clause (c) to Sub-section (5) of Section 45 was concerned, the learned Counsel submitted that said clause is applicable only if at the time of receipt of enhanced compensation, there is no dispute relating to payment of compensation before any Court. But if order awarding compensation is challenged or is in dispute, the clause would have no application. He emphasized that the decision of the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) was still applicable. In support of his contention, he placed further reliance on the following decisions:
(i) Chief CIT v. Smt. Shantavva ;
(ii) CWT v. Smt. T. Girija Ammal (2006) 282 LTR 614 (Mad); and
(iii) Mercantile Bank Ltd. v. CIT .
15. In rebuttal the learned Departmental Representative emphasized that capital gains was not income in the real sense. It was notional income included in the definition of "income" under Section 2(24(vi) of the IT Act. He also referred to Clause (1) of Section 5 relating to scope of "total income" and pointed out that now receipt or deemed receipt is also included in the "total income" liable to be taxed. The learned Departmental Representative emphasized that Section 45 is also a charging section, apart from other charging sections like Sections 4 and 5 of the IT Act. Capital gains may not be income in the commercial sense but it is charged to tax as per the policy of the State. He further argued that for purposes of accrual or arising of income Sub-section (1) of Section 45 was relevant but no such rider to the chargeability of income on receipt basis was placed in Sub-section (5) of Section 45. Once enhanced compensation was received, it was liable to be charged to tax notwithstanding any method of accounting followed by the assessee. After introduction of Sub-section (5) of Section 45, the decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) had no application. A totally new scheme to tax enhanced compensation on receipt basis was introduced. Assessability of enhanced compensation had nothing to do with "accrual" of income, a question which was subject-matter of discussion before the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra). The learned Departmental Representative further stated that machinery to tax capital gain was also provided in Sub-section (5) of Section 45 and, therefore, it was a complete code. There is absolutely no reason why above section should not be applied when all the circumstances justifying its application exist in the case. He accordingly submitted that both the questions should be answered in favour of the Revenue.
16. We may now refer to relevant provisions of the Act, circulars and case laws cited by the Bar.
(a) The following sections of the IT Act are required to be referred to:
Section 2 Sub-section (24) In this Act, unless the context otherwise requires,-
(24) "Income" includes-
(i) profits and gains;
(ii) dividend;
(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, or by an association or institution referred to in Clause (21) or Clause (23), or by a fund or trust or institution referred to in Sub-clause (iv) or Sub-clause (v) or by any university or other educational institution referred to in Sub-clause (iiiad) or Sub-clause (vi) or by any hospital or other institution referred to in Sub-clause (iiiae) or sub- Clause (via) of Clause (23C), of Section 10.
Explanation : For the purposes of this sub-clause, "trust" includes any other legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under Clauses (2) and (3) of Section 17;
(iiia) any special allowance or benefit, other than perquisite included under Sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;
(iiib) any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living;
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in Clause (iii) or Clause (iv) of Sub-section (1) of Section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary;
(v) any sum chargeable to income-tax under Clauses (ii) and (iii) of Section 28 or Section 41 or Section 59;
(va) any sum chargeable to income-tax under Clause (iiia) of Section 28;
(vb) any sum chargeable to income-tax under Clause (iiib) of Section 28;
(vc) any sum chargeable to income-tax under Clause (iiic) of Section 28;
(vd) the value of any benefit or perquisite taxable under Clause (iv) of Section 28;
(ve) any sum chargeable to income-tax under Clause (v) of Section 28;
(vi) any capital gains chargeable under Section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with Section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
The following Sub-clause (viia) shall be inserted after Sub-clause (vii) of Clause (24) of Section 2 by the Finance Act, 2006, w.ef. 1st April, 2007.
(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;
(viii) Omitted by the Finance Act, 1988, w.ef. 1st April, 1988. Original Sub-clause (viii) was inserted by the Finance Act, 1964, w.ef. 1st April, 1964;
(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;
Explanation : For the purposes of this sub-clause,-
(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;
(ii) "card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game;
(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund. set. up under the provisions of the Employees State Insurance Act, 1948 (34 of 1948) or any other fund for the welfare of such employees;
(xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation : For the purposes of this clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to Clause l0D)of Section 10;
(xii) any sum referred to in Clause (va) of Section 28;
(xiii) any sum referred to in Clause (v) of Sub-section (2) of Section 56; Section 2 (47) (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 is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;
(iva) the maturity or redemption of a zero coupon bond; or;
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.
Explanation : For the purposes of Sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in Clause (d) of Section 269UA;
4. Charge of income-tax--(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under Sub-section (I), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.
5. Scope of total income.--(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
45. Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.
(1A) Notwithstanding anything contained in Sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of any capital asset, as a result of--
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of Section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.
Explanation.--For the purposes of this Sub-section, the expression "insurer" shall have the meaning assigned to it in Clause (9) of Section 2 of the Insurance Act, 1938 (4 of 1938).
xxxxxxx (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 RBI, 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 RBI 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 income chargeable under the head "Capital gains" of the previous year in which such amount is received by the assessee.
(c) 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) 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.
Explanation : For the purposes of this sub-section,
(i) in relation to the amount referred to in Clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;
(ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;
(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in Clause (b) shall be deemed to be the income chargeable to tax under the head "Capital gains", of such other person.
17. We are not reproducing provisions of Section 155(7A) and the changes made therein from time to time as circulars of CBDT faithfully take note of changes made as also explain the need for such changes required to be brought in the above provision as also in Section 45 of the IT Act. Relevant circulars are reproduced below:
Circular No. 240, dt. 17th May, 1978 23.1 Recomputation of capital gains on receipt of additional compensation or consideration--Section 155(7A).--Under the existing provisions of the IT Act, the capital gain arising from the transfer of a capital asset is charged to tax in the previous year in which the asset is transferred. The capital gain is computed by deducting from the full value of the consideration received or accruing as a result of the transfer (i) the cost of acquisition of the asset as increased by the cost of improvements thereto ; and (ii) the expenditure incurred in connection with the transfer. Where the transfer of the capital asset is by way of compulsory acquisition under any law, the capital gain has to be computed by taking the compensation awarded by the Government as the full value of the consideration, even though the adequacy of the compensation may be questioned by the assessee. On additional compensation being awarded to the assessee, the earlier computation can be revised within four years from the end of the assessment year, by taking the enhanced compensation as the full value of the consideration received or accruing as a result of the transfer. This is, however, not feasible in most cases because the claim for additional compensation usually gets settled after many years, when the statutory period of limitation for revising the earlier computation of capital gains would have expired.
23.2 With a view to removing this difficulty, the Finance Act has inserted a new Sub-section (7A) in Section 155 of the IT Act to enable recomputation of capital gains in cases where the transfer of the capital asset is by way of compulsory acquisition under any law or where the consideration for the transfer is determined or approved by the Central Government, or the RBI and the compensation or, as the case may be, consideration for such transfer is enhanced or further enhanced by any Court, Tribunal or other authority.
23.3 The new Sub-section (7A) provides that, in such cases, the computation or, as the case may be, computations made earlier shall be deemed to have been wrongly made and the ITO shall recompute the capital gain arising from such transfer by taking the compensation or consideration as enhanced or further enhanced to be the full value of the consideration received or accruing as a result of the transfer, and shall make the necessary amendment. The period of limitation of four years for amending the assessment order laid down in the IT Act will, in such cases, run from the end of the previous year in which the additional compensation or consideration was received by the assessee.
23.4 The new Sub-section (7A) takes effect retrospectively from 1st April, 1974, and will accordingly, apply in relation to the asst. yr. 1974-75 and subsequent years.
Circular No. 495 dt. 22nd Sept., 1987 (1988) 67 CTR (St) 1 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 consideration for determining the capital gain for the year in which the transfer took place. To provide for rectification of assessment of the year in which the capital gain was originally assessed, Section 155(7A) was introduced. The additional compensation is awarded in several stages by different appellate authorities and necessitates rectification of the original assessment at each stage. This causes great difficulty in carrying out the required rectification and in effecting the recovery of additional 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 assessments 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 Section 45 to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. The additional compensation will be deemed to be 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 will be deemed to be nil. 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 the transfer took place.
24.7 These amendments will come into force w.e.f. 1st April, 1988, and will, accordingly apply from the asst. yr. 1988-89 and subsequent years.
Secs. 13, 14 and 16 of the Finance Act, 1987 Circular No. 621, dt. 19th Dec, 1991 (1992) 101 CTR (St) 1 This circular explains the substance of the provisions in the Finance (No. 2) Act, 1991 relating to direct taxes.
Streamlining the provisions relating to exemption for rollover of capital gains.
23. Capital gains are deemed to be income of the previous year in which the transfer giving rise to the gains takes place except where otherwise provided. Accordingly, in the case of compulsory acquisition of assets, the capital gains included in the compensation, as originally awarded, is charged to tax in the year in which the transfer by way of compulsory acquisition takes place, but additional compensation is brought to tax only in the year in which it is received.
23.1 It has been brought to the notice of the Government that in cases of compulsory acquisition of assets, at times there is a considerable gap between the dates of acquisition and payment of compensation. The result is that the existing provisions of capital gains taxation operate harshly inasmuch as the affected persons are unable to avail of the exemption for rollover of capital gains, within the specified time period, through investment in specified assets.
23.2 Section 45 of the IT Act has, therefore, been amended to provide that capital gains arising from the transfer of the capital asset by way of compulsory' acquisition under any law shall be charged to tax in the previous year in which the compensation is first received.
23.3 This amendment takes effect retrospectively from 1st April, 1988.
18. Extracts from Explanatory Memorandum accompanying the Finance Bill, 2003 relating to changes made in Section 45 (5) of the IT Act are as follows:
Recomputation of capital gains in case of reduction in compensation The existing provisions of Sub-section (5) of Section 45, provide for method of computation of capital gains arising 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 RBI, and where the compensation or the consideration for such transfer is enhanced or further enhanced by any Court, Tribunal or other authority. The said Sub-section provides that the capital gain shall be computed by taking the compensation or consideration or enhanced compensation or consideration, as the case may be, as the full value of consideration and such capital gain shall be chargeable as income of the previous year in which such compensation or consideration is received by the assessee.
The assessees in some cases are facing hardship when such compensation or consideration is subsequently reduced by any Court, Tribunal or other authority, since there is no existing provision providing for recomputation of the capital gain charged in the year of receipt of the compensation or consideration.
With a view to mitigate this hardship, it is proposed to amend Sub-section (5), by inserting a new clause to provide that where such amount of the compensation or consideration is subsequently reduced by any Court, Tribunal or other authority, the capital gain of that year, in which the compensation or consideration received was taxed, shall be recomputed accordingly.
It is proposed to insert a new Sub-section (16) in Section 155 to provide that the AO shall amend the order of assessment to revise the computation of said capital gain of that year by taking the compensation or consideration so reduced by the Court, Tribunal or any other authority to be the full value of consideration.
These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the asst. yr. 2004-05 and subsequent years.
19. Now reference may be made to eases cited at Bar.
(i) CIT v. Hindustan Housing & Land Development Trust Ltd. (supra) Held, affirming the decision of the High Court, that although the award was made by the arbitrator on 29th July, 1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. And the dispute was regarded by the Court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal were allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of Rs. 7,24,914 was not income arising on accruing to the respondent during the previous year relevant to the asst. yr. 1956-57.
(ii) CIT v. Laxman Das and Anr.
Held, dismissing the application for reference, that the Tribunal was correct in holding that the amounts received by the assessee by way of interest in respect of additional compensation under the Land Acquisition Act, 1894, were not taxable in view of the finding of the Tribunal that the grant of additional compensation and interest thereon had not become final due to appeals preferred by the Government to the High Court. No question of law arose from its order.
(iii) CIT v. Abdul Mannan Shah Mohammed Agricultural lands owned by the assessee were acquired by the Government in 1989 under the Land Acquisition Act. On a civil suit filed by the assessee, the civil Court awarded Rs. 33,80,172 which included the interest on the additional compensation amounting to Rs. 13.50 lakhs. The State Government filed an appeal before the High Court and the amount was deposited in the Court. Pending the appeal, the assessee was permitted to withdraw the amount on giving security. The questions before the Court were whether the additional compensation which was deposited in the Court and permitted to be withdrawn was taxable at that stage and whether the said amount could be taxed when it was specifically deposited by the Government in appeal to the High Court:
Held, that the additional compensation which was deposited in the Court and permitted to be withdrawn on giving security was not taxable at that stage. No substantial question of law arose.
(iv) CIT v. National Electric Supply & Trading Corporation (P) Ltd.
In order to appreciate the stand taken by the Revenue certain settled principles have to be taken note of in CIT v. Hindustan Housing & Land Development Trust Ltd. ; it was observed by the apex Court that there is a clear distinction between cases where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. The words "arising" or "accruing" have been receiving interpretation by a long chain of decisions. An important decision on the point is E.D. Sassoon & Co. Ltd. and Ors. v. CIT (Hon'ble Supreme Court), in which it was explained that the expression 'accrue' describes the right to receive profit and that there is a debt owned to the assessee by somebody. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.
It was, inter alia, observed as follows (p. 51):
The basic conception is that he must have acquired a right to receive the income. There must be a debt owned to him by somebody. There must be as is otherwise expressed 'debitum in prasenti, solvendum in futuro' unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him.
A debt is a sum of money which is now payable or will become payable in future by reason of a prasenti obligation. In People v. Arguello (1869) 37 Calif. 524, the Supreme Court of California observed as follows:
Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds, 'solvendum in praesenti' and 'solvendum in futuio'....A sum of money which is a certainty and in all events payable is a debt without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt or does not become a debt, until the contingency has happened.
The principles were reiterated by the apex Court in Kesoram Industries & Cotton Mills Ltd. v. CWT . Section 5 of the Act, deals with the scope of total income. The expressions 'income', 'is received", "accrues" and "arises", as appearing in Section 5 of the Act, have not been defined. According to the Oxford English Dictionary, the meaning of the expression "accrue" is to fall as a natural growth or increment; to come as an accession or advantage'. The word 'arise" is defined as "to spring up, to come into existence". The two words, i.e., "accrue and arise" do not mean actual receipt of profits and gains. Both these words are used in contradistinction to the word 'receive". Thus, it is manifest that if an assessee acquires a right to receive the income, the income can be said to accrue to him, though, it may be received later on see CIT v. Govind Prasad Prabhu Nath . It can be said without hesitation that the words "accrue" or "arise" though not defined are certainly synonymous and are used in the sense of bringing in as a natural result. Though strictly speaking and as per dictionary meaning, there is some distinction, yet in the Act they are used to denote idea or ideas very similar and the difference lies in this that one is more appropriate where applied to a particular case [see CIT v. Ahmedbhai Umarbhai and Co. (1950) 18 ITR 474(SC)
(v) CIT v. Orissa State Financial Corpn. (supra) Before the Hon'ble Orissa High Court in the above case the issue was whether the decision of the Tribunal by holding that no interest can be held to have accrued legally till the decision of Court was arrived at, the Hon'ble High Court approved the finding of the Tribunal on the basis of following observations:
We have heard learned standing counsel for the Revenue.
Under Section 5 of the IT Act, 1961 (hereinafter referred to as "the Act"), taxability is attracted not merely when income is actually received but also when in has "accrued". As explained by the Supreme Court in CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. (1953) 24 ITR 525 (SC) and Morvi Industries Ltd. v. CIT , income accrues when it falls due that is to say when it becomes legally recoverable irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive.
As held by the Supreme Court in CIT v. Shoorji Vallabhadas & Co. , income-tax is a levy on income. The Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously, neither accrual nor receipt of income, even though an envy to that effect might, in certain circumstances, have been made in the books of account.
(vi) Chief CIT and Anr.. v. Smt. Shantavva (supra) Section 45(5)(b) of the IT Act, 1961, shifts the date of "income" from the date of acquisition and from the date of determination of compensation by a Court/Tribunal/authority, to the date of receipt of the compensation in pursuance of an enhancement by the Court/Tribunal/authority, Two conditions have to be satisfied for applicability of Section 45(5)(b) : (i) There should be enhancement of compensation by a Court/Tribunal/authority; (ii) The assessee should receive payment of such enhanced compensation. When the award of the reference Court enhancing the compensation is stayed and an interim payment is ordered as condition for such stay or otherwise and is paid pending final decision, neither of the two conditions are satisfied. The amount received in pursuance of an interim order by furnishing security, not being an amount payable in pursuance of an enforceable order or decree increasing the compensation, cannot be considered as. receipt of enhanced compensation.
The assessee's land was acquired under notification dt. 24th April, 1977, for extension of market yard. The Land Acquisition Officer made an award at the rate of 75 paise per sq. ft. in regard to the acquired land. The assessee sought increase in compensation. The reference Court increased the compensation to Rs. 8.50 per sq.ft. The judgment and award of the reference Court was challenged before the High Court. The High Court by order dt. 7th Oct., 1992, determined the market price at Rs. 7 per sq. ft. plus solatium and interest. The judgment of the Court was challenged by the Land Acquisition Officer before the Supreme Court. In terms of the interim orders of the Court and the Hon'ble Supreme Court, the assessee received four sums of Rs. 2 lakhs each on 1st April, 1993, 13th June, 1993, 14th July, 1993, and 30th Nov., 1993, by furnishing security to the satisfaction of the reference Court. Ultimately, the Hon'ble Supreme Court, by order dt. 23rd Sept., 1996, set aside the orders of the Court and the reference Court and remanded the matter to the reference Court for fresh determination of the market value. The AO by order passed in regard to the asst. yr. 1994-95, brought the said amount to tax under Section 45(5)(b) of the Act holding that he amounts received by the assessee were deemed to be income of the year in which the amounts were received. However, the Tribunal held that the amounts received by the assessee were not liable to tax in her hands during the period relevant to the asst. yr. 1994-95 as the receipt of the said amounts had a condition attached to it and an absolute right thereto had not accrued to the assessee. On appeal to the High Court:
Held, dismissing the appeal, that the sum of Rs. 8 lakhs was received by the assessee, not as enhanced compensation, but as payments in pursuance of the interim orders of the Court and the Supreme Court by furnishing security to the satisfaction of the Court, pending determination of the additional compensation. Only when the reference Court determines the compensation and such determination becomes final, the amount received in pursuance of the interim order will be appropriated against the compensation finally determined and will become income chargeable under the head "Capital gains". The mere fact that some amounts had been received by furnishing security, in pursuance of the interim orders, pending final determination, would not make the amounts received by the assessee "compensation" or "consideration" that could be subjected to tax under Section 45(5)(b).
(vii) CWT v. T. Girijammal When the additional compensation awarded by the Civil Court has not been accepted by the State and it has preferred an appeal objecting to the enhancement, the additional compensation received cannot be treated as part of the compensation received for the transfer of the land until it is finally determined by the higher judicial forums.
Held, accordingly, dismissing the appeal, that when the income itself has not accrued or arisen, the question of levying wealth-tax did not arise as it was only consequential in nature.
CWT v. Smt T. Girija Ammal followed.
20. Before proceeding to discuss the issue, we deem it relevant to refer to Third Member decision in the case of Dy. CIT v. Bhim Singh Lather in ITA Nos. 4756 and 4757/Del/2000 (supra). In the aforesaid case the following question was referred to the Third Member:
Whether, on the facts and in the circumstances of the case, the enhanced compensation received by the assessee was taxable in the hands of the assessee as income despite the fact that the quantum of enhanced compensation awarded is subject-matter of proceedings before the appellate forum by the State Government as well as by the assessee and the quantum of enhanced compensation has not attained finality and the assessee has received a part of the enhanced compensation and interest on enhanced compensation pursuant to interim orders passed by the appellate Court ?
The brief facts of the case are that Land Acquisition Officer, Panchkula awarded compensation to the assessee as per his award dt. 16th Feb., 1989 in respect of land of the assessee acquired by State of Haryana. Thereafter compensation was enhanced by the District Judge vide his judgment dt. 6th May, 1993 against which both the assessee as well as Government went in appeal. The Hon'ble Punjab & Haryana High Court vide their order dt. 18th Feb., 1994 declined to grant stay and through the execution the assessee realised the enhanced compensation on different dates between 10th June, 1994 to 28th Nov., 1995. The AO reopened the assessment for the asst. yrs. 1994-95 and 1995-96 and taxed the enhanced compensation and interest thereon on receipt basis in terms of Section 45(5)(b) of the IT Act.
The assessee challenged above assessment and learned CIT(A) in appeals for the asst. yr. 1994-95 and 1995-96 held that enhanced compensation received was in dispute before the higher Court and therefore could not be brought to tax unless dispute was finally settled. The learned CIT(A) deleted the addition following the decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra). The learned CIT(A) further held that interest received only on undisputed compensation could be brought to tax.
The Revenue being aggrieved filed an appeal against orders of CIT(A) before the Tribunal wherein difference on point of law arose between two Members and accordingly question was referred to the Hon'ble Third Member.
After considering relevant provision of Sections 4, 5 and 45(5) and its different clauses as also several decisions cited at Bar as well as Explanatory Notes and circulars of CBDT, learned Third Member decided the issue. He held that provision of Sub-section (1) of Section 45 deems income arising on transfer of a capital asset to be assessed in the year in which the transfer of capital asset takes place. Sub-section (5) of said section provides for the charge on receipt of additional or enhanced compensation in the first instance as income of the year in which the said compensation is first received. Clause (c) of Sub-section (5) of Section 45 is an enabling provision made to allow relief if compensation is subsequently reduced. In that case the reduction is to be allowed to the assessee. The learned Third Member held that Clause (c) of Sub-section (5) was applicable with retrospective effect. The learned Third Member observed that the decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) was applicable in the case of assessment of capital gain on accrual basis under Section 45(1) of the IT. Act. The said section was not applicable where enhanced compensation was being assessed under Section 45(5) on receipt basis. The learned Third Member rejected the argument that no right had accrued to the assessee to receive compensation under Section 45(5) as right to receive compensation was subject-matter of dispute before the higher Court. He held that provisions of Section 45(5) of the Act were applicable on enhanced compensation on receipt basis, "irrespective of the fact that additional enhanced compensation was subject-matter of further litigation."
As far as question of taxability of interest was concerned, learned Third Member held that taxability of interest would be governed by the decision of Supreme Court in the case of Rama Bai v. CIT and case of P. Mariappa Gounder v. CIT . It was to be taxed on accrual basis from year to year. The learned Third Member concluded as under:
In my opinion, therefore, the interest though would be chargeable on year to year basis but only when the right disputed by the parties is finally settled by the Court, Tribunal or any authority and since in this case the matter is pending in the High Court in the relevant year no right to receive compensation or to interest accrued to the assessee and consequently, no assessment can be made in the year under consideration until the matter is finally settled by the Court.
After considering relevant statutory provision and case law we are in respectful agreement with the decision of the Third Member in the case of Bhim Singh Lather (supra). However as matter has been argued at length before us, we would like to record separately our reasons for reaching conclusion and would like to answer the question referred to us.
21. It is clear from the definition of "income" that several artificial items which cannot satisfy commercial concept of income are included and are charged to tax under the IT Act. It is always a policy decision of the Government as to which receipt or activity is to be charged and which receipt is to be treated as exempt. Normally gain from transfer of a capital asset is a capital receipt and cannot be taken as taxable income. However, through a fiction it is included in the definition of "income" and under Section 45 of IT Act, it is charged to tax. Validity of imposition of income-tax on capital gains was challenged but their Lordships of the Hon'ble Supreme Court in the case of Navinchandra Mafatlal v. CIT held that word "income" should be given its widest connotation. Thus inclusion of capital gains in the definition of "income" was upheld. Their Lordships pointed out that capital gains was taxed in United Kingdom and in United States of America as "income". In the case of CIT v. B.C. Srinivasa Setty , their Lordships of Supreme Court held that Section 45 charges profit and gains arising from transfer of a capital asset to income-tax. Therefore, it is not necessary here to consider the provision of Section 4 which is the main charging section. However, Section 5 of IT Act is required to be considered and same has been reproduced in earlier part of this decision. It defines the scope of the "total income" which not only brings to tax income accruing or arising but also income which is received or is deemed to be received. Thus income received or deemed to be received under law is also part of the total income liable to be charged to tax. The expression "income received" is used in contradiction to income accruing or arising. Under Sub-section (1) of Section 45, capital gain arising from transfer of a capital gain is charged to income-tax in the year in which transfer of a capital asset takes place. It is deemed to be income of the previous year relevant to the assessment year.
The definition of "transfer" of a capital asset, as per Section 2(47) encompass the compulsory acquisition under law. Profit or gain arising from compulsory acquisition is deemed income of the year in which compulsory acquisition takes place. It is the scheme of the Act relating to taxability of the capital gains. It is now restricted to capital gains arising on compensation awarded on compulsory acquisition. Their Lordships of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) held that unless compensation awarded or right to receive compensation attains finality, capital gain cannot be computed. If right to receive compensation awarded is subject-matter of dispute then unless and until that dispute is settled, compensation allowed is inchoate and capital gains cannot accrue or arise. The aforesaid scheme and statutory provisions which were considered by their Lordships did not work well and Department had to face difficulties in realizing capital gains arising on compensation enhanced by Courts at different stages i.e. at the level of Distt. Judge, High Court and the Supreme Court. It was difficult to keep track of a case and to bring to tax higher amount of compensation. It was not possible to keep on rectifying an assessment under Sub-section (7A) of Section 155 of the IT Act. These difficulties faced by the Department are enlisted in the circulars, which have been quoted above.
In order to overcome above difficulties and to improve the situation, the legislature amended Section 45 by introducing Sub-section (5) to Section 45 w.e.f. 1st April, 1988. Now compensation payable is brought to tax at two stages : one under Sub-section (1) i.e., in the year in which transfer takes place. This gain is computed with reference to the compensation awarded by the Acquisition Officer. If any capital gain arises or accrues with reference to compensation awarded it is liable to tax under Sub-section (1) of Section 45. (ii) Secondly enhanced compensation is separately and independently assessed. Earlier right to receive compensation was not separate from right to receive enhanced compensation See Mrs. Khorshed Shapoor Chenai v. Asstt. CED but now right to receive enhanced compensation is treated separately for taxation purposes as per the changed provision. Sub-section (5) of the section deals with a situation where compensation on compulsory acquisition is enhanced (including further enhanced) by any Court, Tribunal or other authority. Such enhancement of compensation is brought to charge in the year in which such enhanced compensation is received. Sub-section (5) is a complete code as it provides not only for charging enhanced compensation but also contains a machinery for computation of income by providing that cost of acquisition and cost of improvement in such a case would be nil. It further provides that in case of a death, enhanced compensation shall be deemed to be the income of the person receiving it. The amount is to be taxed in the year of the receipt. Sub-section (5) is an overriding provision and quite different from Sub-section (1) of Section 45 in content and texture. Intention of the legislature to depart from the earlier scheme of taxability of compensation on account of difficulties faced by the Revenue has been referred to above is quite clear. It is not possible to disregard change introduced by the legislature by applying old scheme to cases of enhanced compensation.
22. In the background narrated above, we do not see nor were given any good reason why scheme of Sub-section (5) should not be applied to receipt of enhanced or further enhanced compensation as envisaged by the sub-section. Why the amount received should not be brought to tax in the year of the receipt when language and intention of the legislature is absolutely clear. Why Court should not give effect to the legislative intent and follow its mandate. In the case of A.N. Roy, Commr. of Police and Anr. v. Suresh Sham Singh , their Lordships observed as under:
18. It is now well settled principle of law that the Court cannot enlarge the scope of legislation or intention when the language of the statute is plain and unambiguous. Narrow and pedantic construction may not always be given effect to. Courts should avoid a construction, which would reduce the legislation to futility. It is also well settled that every statute is to be interpreted without any violence to its language. It is also trite that when an expression is capable of more than one meaning, the Court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the great consequences of the alternative constructions.
Lord Halsbury as early as 1901, in oft-cited decision pertaining to the interpretation of fiscal statutes stated the law in the following manner:
[A] Court of law, has nothing to do with the reasonableness or unreasonableness of a provision of a statute except so far as it may help it in interpreting what the legislature has said. If the language of a statute be plain, admitting of only one meaning, the legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results. If the language of this sub-section be not controlled by some of the other provisions of the statute, it must, since its language is plain and unambiguous, be enforced, and your Lordships' House sitting judicially is not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous." Cooke v. Charles A. Vogeler Co. (1901) AC 102; Cape Brandy Syndicate v. IRC (1921) 1 KB 64 : 12 Tax Cases 358 After considering above authority, their Lordships of Supreme Court in the case of Orissa State Warehousing Corporation v. CIT observed as under:
A fiscal statute has to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe natural and ordinary meaning to the words used by the legislature and ought not, under any circumstances, substitute its own impression and ideas in place of the legislature's intent as is available from a plain reading of the statutory provisions. Individual cases of hardship and injustice do not and cannot have any bearing for rejecting the natural construction.
23. Having in mind above authorities and plain and unambiguous language of Sub-section (5) of Section 45, we do not see any good ground why the changed scheme should not be applied and why enhanced compensation be not brought to tax in the year of receipt. There is no scope to whittle down applicability of the provision by introducing philosophy that gain has not accrued or arisen. The right to receive compensation has not attained finality. "Idea" of accrual of income not being supported by the legislature's intent as is available from the plain language cannot be accepted. Even otherwise statutory provision is quite equitable. Obligation to pay tax is cast on the assessee only after enhanced compensation is pocketed by the assessee. It is taxed when it is actually received.
24. The main thrust of the argument of learned Counsel for the assessee and of the intervenes was that compensation is received under an order which is not final. The finality is shaken when order is challenged before a superior Court. The right to receive compensation is under dispute. The same is yet to be adjudicated upon and Court in its wisdom might reverse, modify or reduce the compensation awarded or hold that it was not payable at all. Superior Court under an interim arrangement may impose conditions and compensation might be received on furnishing of securities. Therefore, unless final word on compensation or enhanced compensation is heard, there can be no gains. Argument is based and supported by the decision of Supreme Court in the case of Hindustan Housing Development Corpn, (supra). Some other decisions based on above decisions are also relied upon.
On careful consideration of the statutory provision, particularly the scheme adopted with the introduction of Sub-section (5) of Section 45, we are unable to find any force in the arguments raised on behalf of the assessees or the interveners. As discussed above, a new scheme to tax enhanced or further enhanced compensation on receipt basis in the year of receipt has been introduced by adopting plain and unambiguous language. Tribunals and Courts are required to give effect to the mandate of the legislature. Therefore, decision of Hindustan Housing Development Corpn. (supra) and all other decisions which have not taken note of intention and scheme of the legislature and its purpose, are not applicable to cases where enhanced compensation is received. We have given our reasons for reaching above conclusion which need not be repeated.
25. It is no doubt true that legislature while inserting Sub-section (5) in Section 45 through the Finance Act, 1987 w.e.f. 1st April, 1988, did not provide for cases where enhanced or further enhanced compensation was subsequently reduced by any Court, Tribunal or other authority. Such situation has been taken care of by insertion of Clause (c) to Sub-section (5). The said clause no doubt was inserted by Finance Act, 2003 w.e.f. 1st April, 2004, but it has to be taken to be declaratory in character. In a given case where enhanced compensation is assessed on receipt basis, and amount of compensation is subsequently reduced, then Revenue will have to rectify and take reduced amount in place of the amount originally taken in the assessment. Thus the legislature has dealt with a situation of compensation getting reduced in appeal or other proceedings. How to ignore above provision and the purpose for which such provision was made by the legislature ? Mischief rule of interpretation is clearly applicable here. Therefore, with utmost respect we are unable to follow the cases cited on behalf of the assessees.
26. Even specific provision like Sub-section (7A) of Section 155 supported above inference. Therefore, we are of view that Clause (c) of Sub-section (5) was declaratory and would come into force w.e.f. 1st April, 1988, the date on which Sub-section (5) was inserted in the statute.
27. Clause (c) to Sub-section (5) was inserted by Finance Act, 2003 but it has to be held to be retrospective in operation and taken to be introduced w.e.f. 1st April, 1988. The picture without insertion of above Clause (c) was incomplete as the section did not deal with a situation where enhanced compensation is reduced in further appeal by Courts or Tribunal. The provision was made to obviate the hardship and unintended consequences of Sub-section (5) of Section 45. The clause was inserted to make entire scheme workable and to supply an obvious omission in the provision. The situation envisaged as per Clause (c) above was required to be given reasonable construction to accomplish purpose and object of the enactment. Principle of reasonable construction by treating a provision as retrospective, on the ground that such construction would make the whole enactment workable, was applied by their Lordships of the Supreme Court in the case of Allied Motors (P) Ltd v. CIT . The aforesaid principle is fully applicable to the interpretation of Clause (c) and we, accordingly, hold that it is retrospective in operation.
28. Having held that as per Sub-section (5) of Section 45 of the IT Act, enhanced or further enhanced compensation is to be taxed on receipt basis, as per scheme of Sub-section (5) of Section 45, we are of the view that it does not make any difference whether compensation is received as per Interim order or on certain conditions or without any condition. This simple answer follows from obvious and plain language. What is required to be considered is that compensation had been paid and received. If for any reason, it is subsequently reduced then assessment is required to be modified to take reduced compensation of income. Thus statutory provisions leave no scope for not taxing compensation on receipt basis under any situation. There is no way to read in clear language of statute that receipt, if conditional or allowed as per interim order of High Court is no receipt of compensation and would not be taxed in the year of the receipt. If the arguments of counsel for the assessee and interveners are adopted, it would tantamount to adopting a narrow and pedantic construction and reduce legislation to futility. Therefore, we do not find any substance in the arguments advanced on behalf of the assessees and the interveners.
29. There is no doubt that in the case of Hindustan Housing & Land Development Trust Ltd. (supra), it was laid down by their Lordships of Supreme Court that there is no accrual of income unless right to receive compensation is finally determined. Such a view had been taken by several High Courts and by several Benches of Tribunal, following aforesaid decision of Hon'ble Supreme Court. The case law in which aforesaid scheme of legislation to tax compensation and enhanced compensation on receipt basis and its object and purpose were not considered, have no application. We have given sufficient reasons to hold why enhanced compensation or further enhanced compensation is to be taxed on receipt basis in the year of the receipt. Therefore, the cases in which this changed scheme was not considered at all have no application. Some decisions of Benches wherein even after introduction of Sub-section (5) of Section 45, it was held that there has to be right to receive compensation in our humble opinion, do not lay down correct law, and should be taken to be overruled.
It will not be out of place to state that Clause (c) of aforementioned sub-section would be redundant if arguments of assessee are accepted. In fact all the clauses would be redundant if capital gain is to be brought to tax only when compensation attains finality. Sub-section (5) of Section 45 has no purpose to serve if above contention is accepted. The assessee wishes to apply only Sub-section (1) of Section 45 in total disregard of statutory provision of Sub-section (5). Further after insertion of Sub-section (5), the scheme of assessment of enhanced or further enhanced compensation is to be taxed only in the year of the receipt. If it is not taxed in that year, but is held to be taxed in the year in which amount of compensation is finally determined, then there is no provision to charge it to tax otherwise than in the year of receipt. Therefore special provision relating to taxability of amount is the year of receipt, cannot be disregarded. For aforesaid reasons also the arguments advanced on behalf of assessees cannot be accepted.
30. That as for as question of interest income on enhanced compensation is concerned, the legislature had made no change in the statutory provision and, therefore, decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) as also decision of Rama Bed v. CIT (supra) would apply. The interest is to be assessed on accrual basis from year to year. However, question of assessment of such interest on accrual basis would not arise unless it is finally determined. In case a dispute relating to interest payable on enhanced compensation is pending before a Court of Law and not attained finality, the same will not accrue and not liable to tax. Only after it is finally determined, the same can be subjected to tax, in the light of decisions of the Hon'ble Supreme Court, referred to above.
In the light of our directions, the AO would revise assessment and tax enhanced compensation and interest, after providing reasonable opportunity of being heard to the assessee. All the above appeals are allowed in terms stated above.