2022 (10) TMI 599 - AT - Income Tax

Land Compensation Not Taxable under IT Act: ITAT Decision Upheld, Partnership Exempt

DCIT 27 (1), Mumbai Versus M/s Ganga Developers

DCIT 27 (1), Mumbai Versus M/s Ganga Developers - TMI Issues Involved:1. Taxability of compensation received on compulsory acquisition of land.2. Applicability of Section 10(37) of the Income-tax Act to a partnership firm and non-agricultural land.3. Applicability of CBDT Circular No. 36 of 2016.4. Addition on account of deemed income from house property in respect of unsold flats.Detailed Analysis:Issue 1: Taxability of Compensation Received on Compulsory Acquisition of LandThe primary issue was whether the compensation of Rs. 69,92,42,974 received by the assessee for compulsory acquisition of land was taxable. The learned Assessing Officer (AO) contended that the compensation was taxable as business income since the award was made under Section 11 of the Land Acquisition Act, 1894, which was in force until 31st December 2013, and not under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act). However, the Commissioner of Income-tax (Appeals) [CIT(A)] held that the award was made under the RFCTLARR Act, which came into force on 1st January 2014, and thus, the compensation was exempt from tax under Section 96 of the RFCTLARR Act. The ITAT upheld the CIT(A)'s decision, noting that the old Land Acquisition Act stood repealed as of 1st January 2014, and the award dated 5th August 2016 was governed by the new Act.Issue 2: Applicability of Section 10(37) of the Income-tax Act to a Partnership Firm and Non-Agricultural LandThe AO argued that Section 10(37) of the Income-tax Act, which exempts compensation received on compulsory acquisition of agricultural land from tax, applies only to individuals and Hindu Undivided Families (HUFs) and not to partnership firms or non-agricultural land. The CIT(A) agreed that Section 10(37) was not applicable to the assessee, a partnership firm, but emphasized that the exemption under Section 96 of the RFCTLARR Act, as clarified by CBDT Circular No. 36 of 2016, was broader and covered the compensation received by the assessee. The ITAT concurred with the CIT(A)'s interpretation, confirming that the compensation was not taxable.Issue 3: Applicability of CBDT Circular No. 36 of 2016The AO contended that CBDT Circular No. 36 of 2016, which clarifies that compensation received under the RFCTLARR Act is exempt from tax, was not applicable to the assessee's case. However, the CIT(A) and ITAT disagreed, noting that the circular explicitly states that compensation received under the RFCTLARR Act is exempt from income tax, regardless of whether it pertains to agricultural or non-agricultural land. The ITAT emphasized that the circular is binding on the tax authorities and must be followed.Issue 4: Addition on Account of Deemed Income from House Property in Respect of Unsold FlatsThe AO added deemed income from house property for unsold flats held as closing stock, determining an annual value of Rs. 3,40,459. The CIT(A) deleted this addition, relying on the ITAT's decision in the assessee's own case for the assessment year 2016-17, which followed the Gujarat High Court's ruling in CIT vs. Neha Builders Pvt. Ltd. The ITAT upheld the CIT(A)'s decision, noting that the AO did not provide any reason to deviate from the earlier ITAT judgment.ConclusionThe ITAT dismissed the appeal filed by the AO, confirming the CIT(A)'s order that the compensation received by the assessee was not taxable under the Income-tax Act, 1961, due to the applicability of the RFCTLARR Act and CBDT Circular No. 36 of 2016. The addition on account of deemed income from house property for unsold flats was also deleted, following the precedent set in the assessee's own case for the previous assessment year.