2025 (8) TMI 1747 - AT - Income Tax

Revision u/s 263 quashed as reassessment u/ss 147, 144B, 142(1) valid; double taxation avoided

ITAT set aside the revisionary order u/s 263, holding that the reassessment framed u/s 147 r/w s.144B was neither erroneous nor prejudicial to the ... Revision u/s 263 - assessment was finalized u/s 147 r/w section 144B - interest received on enhanced compensation on acquisition of agricultural land - as per CIT addition being 50% of interest being 25% of total interest on enhanced compensation on acquisition of agricultural land was required to be added assessee income, however, the assessing officer has not made any addition in this regards. HELD THAT:- We note that during the assessment proceedings, the assessing officer has made enough inquiries, as we have noted above, the assessing officer issued notice u/s 142(1). Therefore, respectfully following the judgment of Movaliya Bhikhubhai Balabhai [2016 (5) TMI 488 - GUJARAT HIGH COURT] we note that there is no any case of lack of inquiry on the part of the assessing officer, and the assessing officer has passed order as per the judgement of jurisdictional High Court cited (supra). Besides, the original compensation and enhanced compensation and interest thereon have already been suffered taxation in the hands of one of the co-owners, therefore, there is no loss to the revenue. Now, to tax such compensation/ enhanced compensation, and interest thereon, in the hands of other co-owner, would be tantamount to double taxation. Therefore, the order passed by the assessing officer is sustainable in the eyes of law. Information was given to the assessing officer of remaining co-owners, directing to reject claim of exempt interest income, making a substantial addition for 25% share in interest awarded in hands of respective co-owners. A notice u/s 148 of the Act has been issued, reopening the assessment. In re-assessment proceedings, the assessing officer had made necessary inquiry and verification in respect of interest awarded by the Court with enhanced compensation. In response, the assessee had furnished all the information related to the transaction under consideration. AO had made all necessary inquiry and verification in respect of the interest under consideration and taken a judicious judgment. The assessing officer has taken a plausible view, duly supported by the law settled by the Judicial pronouncements, holding that the interest awarded as per section 28 of the Act, is part of full value of consideration received on compulsory acquisition of agricultural land, hence, the provisions of section 56(2)(viii) r.w.s. 145B of the Act are not applicable. Hence, the order is neither erroneous as provided in Explanation 2 to section 263 of the Income-tax Act, nor the order is prejudice to interest of the Revenue. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the assessment order passed under section 147 read with section 144B, accepting the assessee's claim that interest received under section 28 of the Land Acquisition Act on enhanced compensation was not taxable under section 56(2)(viii) read with section 145B of the Income-tax Act, 1961, was 'erroneous in so far as it is prejudicial to the interests of the revenue' within the meaning of section 263. 1.2 Whether, for purposes of section 56(2)(viii) read with section 145B, 'interest received on compensation or on enhanced compensation' includes interest awarded under section 28 of the Land Acquisition Act, 1894, in light of the binding jurisdictional High Court decision in Movaliya Bhikhubhai Balabhai and the contrary view of the Punjab & Haryana High Court in Manjeet Singh (HUF). 1.3 Whether the assessment order could be revised under section 263 on the ground of 'lack of enquiry' under Explanation 2(a) to section 263 when the Assessing Officer had conducted enquiries and adopted one of the legally permissible views supported by binding judicial precedents. 1.4 Whether section 263 could be invoked to require taxation of the assessee's share of interest on enhanced compensation when the entire interest and TDS thereon had already been subjected to tax in the hands of another co-owner, leading to potential double taxation. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Nature and taxability of interest awarded under section 28 of the Land Acquisition Act, and applicability of section 56(2)(viii) read with section 145B Legal framework (as discussed by the Tribunal) 2.1 The Tribunal considered sections 56(2)(viii) and 145B (earlier 145A(b)) of the Income-tax Act, dealing with 'interest received on compensation or enhanced compensation' assessable as 'income from other sources' in the year of receipt, and their interaction with interest awarded under sections 28 and 34 of the Land Acquisition Act, 1894. 2.2 The Tribunal relied extensively on the jurisdictional High Court decision in Movaliya Bhikhubhai Balabhai v. ITO, which in turn followed the Supreme Court decisions in CIT v. Ghanshyam (HUF) and CIT v. Govindbhai Mamaiya, holding that: * Interest under section 28 of the Land Acquisition Act is an accretion to the value of the land and forms part of the enhanced compensation/consideration. * Interest under section 34 of that Act is true 'interest' for delay in payment and is taxable as 'income from other sources.' * Interest under section 28, being part of compensation, does not fall within the expression 'interest' as envisaged in section 145A/145B and section 56(2)(viii) of the Income-tax Act. 2.3 The Tribunal noted that the Finance (No. 2) Act, 2009 substituted section 145A and inserted section 56(2)(viii) to mitigate hardship arising from taxation of arrears of interest on accrual basis (as per Rama Bai v. CIT), and that such amendments did not alter the character of interest under section 28 as laid down in Ghanshyam (HUF) and Movaliya. Interpretation and reasoning 2.4 The Tribunal observed that in the assessee's case, the interest component was awarded under section 28 of the Land Acquisition Act on enhanced compensation for compulsory acquisition of ancestral rural agricultural land, which was not a 'capital asset' under section 2(14)(iii) of the Income-tax Act. 2.5 Following Movaliya Bhikhubhai Balabhai, the Tribunal held that: * Interest under section 28 is part of the compensation or consideration; it is an accretion to the value of the land, not 'interest' as contemplated in section 145B read with section 56(2)(viii). * Consequently, such receipt is to be treated as part of the full value of consideration for the compulsory acquisition and, where the land itself is not a capital asset, the amount is not taxable either as capital gains or as income from other sources. 2.6 The Tribunal noted that the Principal Commissioner sought to rely on the Punjab & Haryana High Court decision in Manjeet Singh (HUF), which treated interest on enhanced compensation as taxable under section 56. The Tribunal held that: * That decision is of a non-jurisdictional High Court. * It runs contrary to the law laid down in Ghanshyam (HUF) and followed by the jurisdictional Gujarat High Court in Movaliya. * Judicial discipline and the doctrines of precedent and stare decisis mandate following the jurisdictional High Court's decision where there is a conflict with a non-jurisdictional High Court. 2.7 The Tribunal also referred to the Supreme Court decision in Union of India v. Hari Singh, affirming the legal position that interest under section 28 forms part of compensation, thereby reinforcing Movaliya as binding law. Conclusions 2.8 Interest awarded under section 28 of the Land Acquisition Act on enhanced compensation partakes the character of compensation, does not fall within 'interest' contemplated by section 145B read with section 56(2)(viii), and is therefore not taxable as 'income from other sources.' 2.9 Where such interest is part of compensation for compulsory acquisition of rural agricultural land which is not a 'capital asset' under section 2(14)(iii), the amount is not chargeable to tax under the Income-tax Act. 2.10 The Assessing Officer's treatment of the assessee's share of interest under section 28 as non-taxable under section 56(2)(viii) read with section 145B, relying on Ghanshyam (HUF), Movaliya Bhikhubhai Balabhai and other co-ordinate Bench decisions, constituted a legally sustainable and plausible view. Issue 3: Whether the assessment order suffered from 'lack of enquiry' or was 'erroneous and prejudicial to the interests of the revenue' under section 263, including Explanation 2(a) Legal framework (as discussed by the Tribunal) 3.1 The Tribunal considered section 263 and Explanation 2(a), which deems an order 'erroneous in so far as it is prejudicial to the interests of the revenue' if passed without making enquiries or verification which should have been made. 3.2 The Tribunal relied on the principle laid down by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT that: * When the Assessing Officer adopts one of the courses permissible in law, and two views are possible, the order cannot be treated as erroneous and prejudicial merely because the Commissioner does not agree with that view, unless the view taken is unsustainable in law. 3.3 The Tribunal also referred to the decision of the Punjab & Haryana High Court in CIT v. Indo German Fabs that section 263 does not permit the Commissioner to merely substitute his opinion for that of the Assessing Officer; both 'erroneous' and 'prejudicial' conditions must co-exist. Interpretation and reasoning 3.4 On facts, the Tribunal recorded that during reassessment proceedings: * The Assessing Officer issued a detailed notice under section 142(1), specifically calling for explanation and supporting documents regarding substantial interest received on enhanced compensation, applicability of section 56(2)(viii) read with section 145B(1), acquisition documents, bank statements, Form 26AS reconciliation and related materials. * The assessee furnished a comprehensive written reply, explaining the nature of the receipt, share of co-owners, treatment in the capital account, the fact that the entire interest and TDS were reflected and assessed in the hands of one co-owner, and citing judicial precedents including Ghanshyam (HUF), Movaliya Bhikhubhai Balabhai, and relevant Tribunal decisions. * Supporting documents such as computation of income, capital account, orders of the civil court/High Court enhancing compensation, bank statements, Form 26AS and earlier assessment orders were placed before the Assessing Officer. 3.5 The Tribunal found that the Assessing Officer had: * Examined the Land Acquisition Act provisions and characterized the interest under section 28 based on binding judicial precedents. * Considered the nature of land (rural agricultural land, not a capital asset) and the character of the interest as part of compensation. * Taken a conscious and reasoned view that provisions of section 56(2)(viii) read with section 145B were not applicable. 3.6 In light of the above, the Tribunal held that: * The assessment order was not passed without enquiry or verification; rather, detailed enquiry was made, and a judicially supported view was taken. * Explanation 2(a) to section 263 was not attracted, as this was not a case of 'lack of enquiry,' but at best a difference of opinion between the Principal Commissioner and the Assessing Officer on a debatable legal issue. 3.7 The Tribunal emphasized that the Principal Commissioner's reliance on Manjeet Singh (HUF) to fault the Assessing Officer's view was legally untenable in the face of the binding jurisdictional High Court decision in Movaliya and the Supreme Court ratio in Ghanshyam (HUF) and Hari Singh. Hence, the view adopted by the Assessing Officer could not be regarded as unsustainable in law. Conclusions 3.8 The Assessing Officer had conducted necessary and diligent enquiries and applied his mind to the relevant facts and binding judicial precedents; therefore, the order could not be considered as passed 'without making enquiries or verification which should have been made' within Explanation 2(a) to section 263. 3.9 The assessment order, having adopted a plausible and legally sustainable view on a debatable issue, was neither 'erroneous' nor 'prejudicial to the interests of the revenue' within the meaning of section 263. 3.10 The Principal Commissioner was not justified in invoking section 263 to merely substitute his view for that of the Assessing Officer on the character and taxability of interest under section 28 of the Land Acquisition Act. Issue 4: Effect of prior taxation in hands of co-owner and risk of double taxation Interpretation and reasoning 4.1 The Tribunal noted that the entire amount of enhanced compensation along with interest under section 28 and corresponding TDS had been paid to, and assessed in the hands of, one co-owner (the assessee's brother), where: * Substantive addition was made for the brother's 25% share of interest; and * Protective additions were made for the remaining co-owners' shares. 4.2 The Tribunal observed that the Assessing Officer, in the assessee's case, was aware of this position and, after enquiry, did not tax the assessee's share again, thereby avoiding double taxation of the same interest income. 4.3 The Tribunal held that directing substantive addition of the assessee's share of interest in his hands, when the entire amount had already 'suffered taxation' in the hands of another co-owner, would result in double taxation and could not be the basis for holding the assessment order as prejudicial to the interests of the revenue. Conclusions 4.4 The existing tax treatment of the interest component in the hands of the co-owner meant that there was no demonstrable loss to the revenue, and any further taxation in the assessee's hands would lead to impermissible double taxation. 4.5 The prospective double taxation reinforced the conclusion that the assessment order was not prejudicial to the interests of the revenue for purposes of section 263. Overall conclusion on section 263 jurisdiction 4.6 In view of (i) the binding jurisdictional and Supreme Court precedents treating interest under section 28 as part of compensation and outside the scope of section 56(2)(viii) read with section 145B, (ii) the detailed enquiries and conscious application of mind by the Assessing Officer, (iii) the permissibility of the view adopted by the Assessing Officer under Malabar Industrial Co. Ltd., and (iv) the risk of double taxation, the Tribunal held that the conditions for valid exercise of revisionary jurisdiction under section 263 were not satisfied. 4.7 The order passed by the Principal Commissioner under section 263 was quashed, and the assessment order was sustained.