Compulsory land acquisition triggers capital gains tax under Indian Income-tax Act

Dollar Company Versus Commissioner Of Income-Tax, Madras I

Dollar Company Versus Commissioner Of Income-Tax, Madras I - [1977] 107 ITR 280 Issues Involved:
1. Whether the compulsory acquisition of the lands constitutes a transfer as contemplated under section 12B of the Indian Income-tax Act, 1922, so as to attract capital gains tax.
2. Whether the compensation awarded by orders of court subsequent to the previous year ended December 31, 1960, could be taken into account for determining the capital gains under section 12B for the year of assessment 1961-62.
3. Whether the Appellate Assistant Commissioner of Income-tax had the power to set aside the assessment with a direction to the Income-tax Officer to re-do the assessment after the claim for compensation is finally settled through future orders of courts.

Issue-wise Detailed Analysis:

1. Compulsory Acquisition as a Transfer:
The first issue is whether the compulsory acquisition of lands constitutes a "transfer" under section 12B of the Indian Income-tax Act, 1922, thereby attracting capital gains tax. Section 12B(1) specifies that tax is payable on profits or gains arising from the sale, exchange, relinquishment, or transfer of a capital asset effected after March 31, 1956. Although compulsory acquisition does not fall under "sale, exchange, or relinquishment," it must be considered whether it qualifies as a "transfer." The Madhya Pradesh High Court in Commissioner of Income-tax v. Shrikrishan Chandmal [1963] 47 ITR 833 (MP) and this court in Wilfred Pereira Ltd. v. Commissioner of Income-tax [1964] 53 ITR 747 (Mad) concluded that compulsory acquisition by the Government constitutes a "transfer." The Gujarat High Court in Vadilal Soda Ice Factory v. Commissioner of Income-tax [1971] 80 ITR 711 (Guj) also supports this view. Therefore, the Tribunal's conclusion that compulsory acquisition amounts to a "transfer" within the scope of section 12B is justified. The argument that "sale, exchange, relinquishment, or transfer" only includes bilateral transactions is unfounded, as previous cases have addressed this aspect.

2. Compensation Awarded in Subsequent Years:
The second issue concerns whether compensation awarded by court orders after December 31, 1960, can be included in determining capital gains for the assessment year 1961-62. Section 12B(1) introduces a statutory fiction, deeming profits and gains from the transfer of capital assets to be income of the previous year in which the transfer occurred. This fiction overrides other considerations, including the method of accounting. Therefore, all compensation amounts, regardless of the year awarded, must be attributed to the year of acquisition. The Supreme Court's decision in Commissioner of Income-tax v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC) supports this view, as it ruled that subsequent receipts could not be related back to the year of the transaction unless a statutory provision, like section 12B, mandates it. The right to compensation arises from the compulsory acquisition, and subsequent court awards merely quantify it. Thus, the compensation awarded by the City Civil Court and the High Court must be included in the assessment for the year of acquisition.

3. Power of the Appellate Assistant Commissioner:
The third issue examines whether the Appellate Assistant Commissioner had the authority to set aside the assessment and direct the Income-tax Officer to re-do it after the final court determination of compensation. Section 31(3)(b) of the Indian Income-tax Act, 1922, grants the Appellate Assistant Commissioner the power to set aside assessments and direct fresh assessments after further inquiry. The second proviso to section 34(3) removes the time-limit for reassessment in cases where the Income-tax Officer acts on a direction from the Appellate Assistant Commissioner. Therefore, the Appellate Assistant Commissioner's order to re-do the assessment after determining the final compensation amount is valid. This power is comprehensive and not limited by the time constraints of section 34(1)(b). The harmonious construction of sections 31(3)(b), 34(1)(b), and the second proviso to section 34(3) supports this conclusion. The Appellate Assistant Commissioner's power to remand assessments is essential to ensure proper inquiry and accurate assessment, even if it extends beyond the typical time limits.

Conclusion:
All three questions are answered in the affirmative and against the assessee. The compulsory acquisition constitutes a transfer, compensation awarded in subsequent years must be included in the assessment for the year of acquisition, and the Appellate Assistant Commissioner has the authority to set aside and direct the re-doing of assessments based on final court-determined compensation. The department is entitled to costs, with counsel's fee set at Rs. 250.