2007 (3) TMI 242 - HC - Income Tax

High Court: Interim compensation not taxable as capital gains until final determination

The High Court ruled that the additional compensation received under interim orders was not taxable as capital gains under section 45(5)(b) until the ... Acquisition of land - additional compensation - applicability of Sec. 45(5)(b) – CIT was right in agreeing with the assessee that the question as regards the right to enhanced compensation was still a matter to be adjudicated upon by HC & hence the assessee did not have the right to receive the enhanced compensation amount - hence question of capital gains could be considered in the year in which the matter was finally decided by the HC – order of tribunal set aside – assessee’s appeal allowed Issues Involved:1. Taxability of additional compensation under section 45(5)(b) of the Income-tax Act, 1961.2. Applicability of section 148 of the Income-tax Act, 1961, regarding the reopening of the assessment.Issue-wise Detailed Analysis:1. Taxability of Additional Compensation under Section 45(5)(b):The assessee and his brothers received certain lands in a partition in 1956, which were later acquired by the Government. The assessee received compensation initially in the assessment year 1984-85 and additional compensation in subsequent years, including Rs. 2,02,624 in the assessment year 1991-92. The assessee claimed exemption for this compensation. The Assessing Officer, invoking section 45(5)(b) of the Income-tax Act, 1961, held that the additional compensation received was taxable as capital gains. The assessee's reliance on the Supreme Court decision in CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 was rejected, noting that the decision applied to cases assessed on an accrual basis, whereas section 45(5)(b) taxed compensation on a receipt basis.The Commissioner of Income-tax (Appeals) allowed the assessee's appeal, agreeing that the right to enhanced compensation was still under adjudication and thus not taxable until the High Court's final decision. The Revenue's appeal to the Income-tax Appellate Tribunal resulted in the Tribunal upholding the taxability under section 45(5)(b), emphasizing that the amendment applied to cases where compensation had not reached finality.The High Court, however, sided with the assessee, noting that section 45(5)(b) applies when compensation is received as a result of a final award or order. Since the compensation was received under a court's interim order and subject to final decision, it did not constitute income under section 45(5)(b). The Court referenced the Supreme Court's decision in CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 and the Karnataka High Court's decision in Chief CIT v. Smt. Shantavva [2004] 267 ITR 67, concluding that conditional receipts pending final adjudication do not attract capital gains tax.2. Applicability of Section 148 for Reopening the Assessment:The assessee challenged the reopening of the assessment under section 148. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's jurisdiction to reopen the assessment, and this was confirmed by the Tribunal. The High Court found no error in the Tribunal's order regarding the reopening of the assessment, noting that the proceedings did not suffer from any illegality.Conclusion:The High Court allowed the appeal on the issue of capital gains, holding that the additional compensation received under interim orders was not taxable under section 45(5)(b) until the final determination by the High Court. The appeal was allowed in part, with no costs, and the Tribunal's order on the reopening of the assessment was upheld.