2014 (9) TMI 59 - HC - Income Tax

Enhanced compensation for tenancy rights taxable as capital gains pre-amendment.

The High Court held that the enhanced compensation received by the assessee for the acquisition of tenancy rights was taxable as capital gains in the ... Enhanced compensation received – Taxability of amount u/s 45(5)(b) – Whether any capital gain arose on receipt of compensation because of the acquisition of land in which the assesse had tenancy rights only – Held that:- Section 45(5) has been interpreted by the Supreme Court in CIT vs. Ghanshyam (HUF) [2009 (7) TMI 12 - SUPREME COURT] - the profits and gains from transfer of a capital asset by compulsory acquisition was chargeable under the head “capital gains”- here the sub-lease was for a period of 17 years and the assessee also had constructed a super-structure, a factory, which was constructed by the predecessor of the assessee - once it was held that it was possible to ascertain the cost of acquisition of tenancy rights then it follows that capital gains could be computed and shall be payable - the compensation received in the year by the assessee has to be taxed - For the purpose of taxation of enhanced compensation received, cost of acquisition is to be taken as NIL as per the statutory mandate of Section 45(5) - The stand that the compensation received in any year pertains to only one transfer and gain, has been undone and negated by enactment of Section 45(5). There is no evidence that original compensation received by the assesse was not taxed and there is no such factual finding to that effect by any authority - each assessment year/order is separate and distinct - The assessee or Revenue cannot take advantage of a wrong computation or failure to tax or erroneous taxation in an earlier year – as decided in Commissioner of Income-Tax Versus DP Sandu Bros. Chembur P. Ltd. [2005 (1) TMI 13 - SUPREME Court] - it is possible to compute and calculate cost of acquisition of tenancy rights and gain on transfer of tenancy rights is taxable as capital gains - Income has been certainly earned is not exempt from tax – Decided in favour of revenue. Issues Involved:1. Whether the ITAT is justified in law in deleting the addition of Rs. 59,63,410/- being the amount of enhanced compensation received by the assessee during the yearRs.2. Whether the amount of Rs. 59,63,410/- received by the assessee during the previous year relevant to assessment year 1988-89 is taxable in view of the provisions of Section 45(5)(b) of the I.T. ActRs.3. Whether the ITAT is correct in law that no capital gains arose to the assessee on receipt of compensation because of the acquisition of land in which the assessee had tenancy rights onlyRs.Issue-wise Detailed Analysis:1. Justification of ITAT in Deleting the Addition of Rs. 59,63,410/-:The ITAT deleted the addition of Rs. 59,63,410/- based on the premise that the compensation received was for tenancy rights, which had no ascertainable cost of acquisition, and hence, capital gains could not be computed. The Tribunal also observed that the compensation was not taxable until the dispute was finally decided by the High Court. However, the High Court overruled this decision, stating that the cost of acquisition of tenancy rights could be determined, and thus, the compensation received was taxable as capital gains even prior to the amendment in Section 55(2) by the Finance Act, 1994.2. Taxability of Rs. 59,63,410/- under Section 45(5)(b) of the I.T. Act:Section 45(5) of the I.T. Act was enacted to address the issue of multiple rectifications in original assessment orders due to additional compensation awarded at various stages by different authorities. The Supreme Court in CIT vs. Ghanshyam (HUF) held that additional compensation received is taxable in the year of receipt. The High Court applied this principle, concluding that the enhanced compensation received by the assessee in the assessment year 1988-89 was taxable under Section 45(5)(b).3. Capital Gains on Compensation for Tenancy Rights:The ITAT held that no capital gains arose as the tenancy rights had no cost of acquisition. However, the High Court referred to the Supreme Court's decision in CIT vs. D.P. Sandu Bros. Chembur (P) Ltd., which stated that the cost of acquisition of tenancy rights could be determined. Therefore, the High Court concluded that capital gains could be computed and were taxable. The compensation received for the surrender or acquisition of tenancy rights was deemed taxable as capital gains.Additional Considerations:A. Section 45(5) Interpretation:Section 45(5) was interpreted to mean that enhanced compensation received due to compulsory acquisition is taxable in the year of receipt. The High Court held that the compensation received by the assessee was taxable in the assessment year 1988-89, rejecting the Tribunal's contrary decision.B. Determination of Cost of Acquisition:The High Court emphasized that the cost of acquisition of tenancy rights could be determined, and hence, capital gains were computable. The sub-lease in question was for 17 years, and the respondent had constructed a factory on the land, indicating that the tenancy rights had value and compensation was paid accordingly.C. Charging and Computation Provisions:Section 45(5) serves both as a charging and computation provision for capital gains on compulsory acquisition. The High Court clarified that the cost of acquisition for enhanced compensation is to be taken as NIL, and the compensation received in the relevant year is taxable.D. Separate and Distinct Assessment Years:Each assessment year is treated as separate and distinct. The High Court rejected the argument that enhanced compensation is taxable only if the original compensation was taxed, emphasizing that each year's income is assessed independently.E. Inapplicability of Exemptions:The High Court dismissed the respondent's contention that they could have availed benefits under Section 54/54F of the Act, noting that the respondent had not claimed such benefits and had instead relied on a legal opinion to argue that the gain was not taxable.Conclusion:The High Court ruled in favor of the Revenue, holding that the enhanced compensation received by the assessee was taxable as capital gains in the assessment year 1988-89. The questions of law were answered in favor of the appellant Revenue and against the respondent assessee. The appeal was disposed of with no order as to costs.