TaxTMI 
TaxTMI 
2006 (9) TMI 222
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....duction of sub-section (5) of section 45 has not made any difference to the application of decision of Hon'ble Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 whereas other Benches have held above decision is no more applicable and enhanced compensation awarded by Courts is liable to be taxed in the year of receipt. Detail of cases in which divergent opinion have been expressed are listed in paras 3 and 4 of order of reference. After considering relevant facts and circumstances of case, the President constituted a Special Bench for disposal of these appeals. 2. For the benefit of the Interveners, the following two questions were framed for consideration of the Special Bench: "1. Whether, on facts and in the circumstances of the case, enhanced compensation and interest is to be taxed in the year of receipt, notwithstanding that order under which compensation and interest is received, is challenged before the higher courts and litigation is pending? 2. Whether, on the facts and in the circumstances of the case, will it make any difference to the taxability of compensation and interest if the same are r....
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....eon was not taxable. Accordingly, it was directed that enhanced compensation and interest allowed be deleted from assessment. This was done in the main case of Shri Padam Prakash- HUF. In some other cases, the CIT (Appeals) upheld the assessment and the assessees are in appeal. A brief summary of facts involved in all the appeals is given in Annexure A to this order. We are not mentioning facts of each of the case, as in our opinion controversy whether enhanced compensation, in the circumstances mentioned above and interest allowed on such compensation by the Civil Courts is liable to be taxed on receipt basis or not, when such payment is subject-matter of further appeal before the High Court or some other Court is the core question to be considered. 5. Shri Suraj Bhan Nain, the learned Departmental Representative, who initiated arguments on behalf of the Revenue submitted at the outset that question referred to the Special Bench was already decided by a Third Member in the case of Dy. CIT v. Bhim Singh Lather [2006] 99 ITD 46 (Delhi) and, therefore, the matter should be treated as fully covered in favour of the revenue. It was submitted that when a decision is given by a Third ....
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....national Bank SAOG [2006] 100 ITD 285. It was further requested that abovesaid contention and objection of the Revenue be considered as a preliminary objection. 6. The learned representative appearing for the assessees opposed above submissions and contended that a decision by a Third Member is only decision of a Division Bench. A decision given by Third Member cannot be taken as decision of a Special Bench. A Special Bench is constituted as per statutory provision of section 255(3) of the Income-tax Act for disposal of a special case on account of special circumstances, whereas matter is referred to a Third Member under section 255(4) of Income-tax Act to get opinion of the majority. A case disposed of by a Third Member cannot be treated as a decision of a Special Bench. It would mean a majority decision of a Division Bench. 7. We have given careful thought to the rival submissions of the parties. The decision of Hon'ble Delhi High Court in the case of P.C. Puri is binding on us. In the aforesaid decision, it has been clearly laid down that the Third Judge is the Full Bench. So the Hon'ble Delhi High Court is quite clear that where decision is given by Third Judge on....
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....f a Special Bench is somewhat different from purpose mentioned in sub-section (4) of section 255 namely to resolve difference in opinion of Members of Bench by referring the point of difference to the Third Member for getting the majority as envisaged in the provision. It is possible that on account of development in law, and several other reasons, facts and circumstances not considered by a Third Member, it become necessary for the President to constitute a Special Bench to consider the matter which was earlier considered by the Third' Member. In our considered opinion, having in mind plain language of sub-sections (3) and (4) of section 255 of Income-tax Act, there is no impediment to the constitution of a Special Bench. In such a situation, the decision of the Special Bench even of three Members is entitled to all the weight and must have precedence over the decision of a Third Member. Regular Benches are required to follow and act upon the decision of Special Bench and in case its views are contradictory to the views of the Third Member, preference is required to be given to Special Bench. This is held on the basis of language and purpose of provision of subsections (3) and....
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....peals marked to us. Accordingly, we proceed to consider the appeals on merits, in the light of submissions made by the Departmental Representative and counsels for the assessee and the Interveners. 10. On merit, the learned Departmental Representative emphasized that main section under which capital gain is charged to tax is sub-section (1) of section 45. The scheme of said section is that capital gain is to be brought to tax, "in the year in which the transfer takes place". However, difficulties were faced by the revenue from time to time in realizing tax on enhanced compensation awarded by Courts in appellate proceedings and in proceedings challenging the compensation awarded by the Land Acquisition Officer. In order to remedy the difficulties, sub-section (7A) of section 155 was introduced and amended several times. The learned D.R. in this connection referred to Circular of C.B.D.T. No. 214, dated 17-5-1978 and other circulars on the issue. However, amendment referred to above did not serve the purpose and, therefore, statutory provisions were again amended with effect from 1-4-1998 and sub-section (7A) was omitted. The Legislature thereafter added sub-section (5) to section....
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....n enhanced compensation, the learned Departmental Representative submitted that same was also to be assessed in the year of receipt as it has the same character as that of enhanced compensation. He, however, conceded that Third Member in the case of Bhim Singh Lather had taken a view that interest on enhanced compensation is to be assessed from year to year and the decision of Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. was still applicable to the interest awarded. As regards question of receipt of enhanced compensation through Interim Award or after furnishing security, the learned Departmental Representative submitted that it made no material difference whether compensation received was conditional or otherwise. Only thing relevant was that enhanced compensation was paid in terms of clause (b) of sub-section (5). In case enhanced compensation was subsequently reduced, the capital gain levied was required to be reduced by making adjustment in the light of reduced compensation. 12. Shri H.G. Malik, learned counsel for assessee gave us brief background of acquisition in the case of Shri Padam Prakash (HUF) in the shape of 'Synopsis....
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....ght to receive compensation is essential to charge to tax enhanced compensation. A non-operative, non-effective, non-enforceable order or decree on account of stay or conditions imposed by Superior Court cannot give rise to any chargeable income. The income must accrue or arise before it can be brought to tax under the Income-tax Act. Even for application of sub-section (5) of section 45, right to receive compensation should attain finality. Finality of a decision or order is suspended immediately an appeal is filed against it before Superior Court. He also submitted that enhanced compensation in different cases of the assessees was paid as per the decisions of High Court in different cases of Interveners. These orders are available at pages 403 onward in the paper book. It was only an interim arrangement. Compensation received under such an arrangement cannot be income because the order is liable to be varied, reversed or set aside as may be deemed fit and proper by the Court, in the circumstances of the case. Such temporary arrangement cannot give rise to 'accrual' of income. Other arguments of Shri Malik were accepted by the learned counsel for the Interveners. As far....
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....her stated that machinery to tax capital gain was also provided in sub-section (5) of section 45 and, therefore, it was a complete code. There is absolutely no reason why above section should not be applied when all the circumstances justifying its application exist in the case. He accordingly, submitted that both the questions should be answered in favour of the Revenue. 16. We may now refer to relevant provisions of the Act, Circulars and case laws cited by the Bar. (a) The following sections of the Income-tax Act are required to be referred to:- Section 2, sub-section (24) "In this Act, unless the context otherwise requires,- (24) 'Income' includes - (i) profits and gains; (ii) dividend; [(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, [or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) [or by any university or other educational institution referred to in sub-clau....
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....any sum chargeable to income-tax under clause (v) of section 28;] (vi) any capital gains chargeable under section 45; (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule; The following sub-clause (viia) shall be inserted after sub-clause (vii) of clause (24) of section 2 by the Finance Act, 2006, with effect from 1-4-2007. [(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;] (viii) [Omitted by the Finance Act, 1988, with effect from 1-41988. Original sub-clause (viii) was inserted by the Finance Act, 1964, with effect from 1-4-1964;] [(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;] [Explanation.-For the purposes of this sub-clause,- (i) 'lottery' includes....
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....of section 269UA;]" "4. Charge of income-tax. - (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. 5. Scope of Total Income. - (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all incomes from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to ....
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.... the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely:- (a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as [income under the head 'Capital gains' of the previous year in which such compensation or part thereof or such consideration or part thereof, was first received]; and (b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such amount is received by the assessee. [(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as th....
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.... being awarded to the assessee, the earlier computation can be revised within four years from the end of the assessment year, by taking the enhanced compensation as the full value of the consideration received or accruing as a result of the transfer. This is, however, not feasible in most cases because the claim for additional compensation usually gets settled after many years, when the statutory period of limitation for revising the earlier computation of capital gains would have expired. 23.2 With a view to removing this difficulty, the Finance Act has inserted a new sub-section (7A) in section 155 of the Income-tax Act to enable re-computation of capital gains in cases where the transfer of the capital asset is by way of compulsory acquisition under any law or where the consideration for the transfer is determined or approved by the Central Government or the Reserve Bank of India and the compensation or, as the case may be, consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority. 23.3 The new sub-section (7A) provides that, in such cases, the computation or, as the case may be, computations made earlier shall be....
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....eceiver of the additional compensation will be deemed to be nil The compensation awarded in the first instance would continue to be chargeable as income under the head "Capital gains" in the previous year in which the transfer took place. 24.7 These amendments will come into force with effect from 1st April, 1988, and will, accordingly apply from the assessment year 1988-89 and subsequent years. [Sections 13, 14 and 16 of the Finance Act, 1987]." Circular No. 621, dated 19-12-1991 "This Circular explains the substance of the provisions in the Finance (No. 2) Act, 1991 relating to direct taxes. Streamlining the provisions relating to exemption for roll-over of capital gains. 23. Capital gains are deemed to be income of the previous year in which the transfer giving rise to the gains takes place except where otherwise provided. Accordingly, in the case of compulsory acquisition of assets, the capital gains included in the compensation, as originally awarded, is charged to tax in the year in which the transfer by way of compulsory acquisition takes place, but additional compensation is brought to tax only in the year in which it is....
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....amount of the compensation or consideration is subsequently reduced by any court, Tribunal or other authority, the capital gain of that year, in which the compensation or consideration received was taxed, shall be recomputed accordingly. It is proposed to insert a new sub-section (16) in section 155 to provide that the Assessing Officer shall amend the order of assessment to revise the computation of said capital gain of that year by taking the compensation or consideration so reduced by the court, Tribunal or any other authority to be the full value of consideration. These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-05 and subsequent years." 19. Now reference may be made to cases cited at Bar. (i) CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC) - "Held, affirming the decision of the High Court, that although the award was made by the arbitrator on July 29, 1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. And the dispute was regarded by the court as real and substantial....
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....nt Trust Ltd. [1986] 161 ITR 524 (SC), it was observed by the Apex Court that there is a clear distinction between cases where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. The words 'arising' or 'accruing' have receiving interpretation by a long chain of decisions. An important decision on the point is E.B. Sasson & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), in which it was explained that the expression 'accrue' describes the right to receive profit and that there is created in owned to the assessee by somebody. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him. It was, inter alia, observed as follows: 'The basic conception is that he must have acquired a right to receive the income. There must be a debt owned to him by somebody. There must be as is otherwis....
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....is some distinction, yet in the Act they are used to denote idea or ideas very similar and the difference lies in this that one is more appropriate where applied to a particular case (see CIT v. Ahmedbhai Umarbhai & Co.[1950] 18 ITR 474)." (v) CIT v. Orissa State Financial Corpn. [2003] 262 ITR 350 (Ori.) - Before the Hon'ble Orissa High Court in the above case the issue was whether the decision of the Tribunal by holding that no interest can be held to have accrued legally till the decision of court was arrived at the Hon'ble High Court approved the finding of the Appellate Tribunal on the basis of following observations:- "We have heard learned standing counsel for the Revenue. Under section 5 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), taxability is attracted not merely when income is actually received but also when it has 'accrued'. As explained by the Supreme Court in CIT v. K.R.M.T. T. Thiagaraja Chetty & Co. [1953] 24 ITR 525 and Morvi Industries Ltd. v. CIT [1971] 82 ITR 835, income accrues when it falls due that is to say when it becomes legally recoverable irrespective of whether it is actually rec....
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.... The judgment and award of the reference court was challenged before the High Court. The High Court by order dated October 7, 1992, determined the market price at Rs. 7 per sq. ft. plus solatium and interest. The judgment of the court was challenged by the Land Acquisition Officer before the Supreme Court. In terms of the interim orders of the court and the Hon'ble Supreme Court, the assessee received four sums of Rs. 2 Lakhs each on April 1, 1993, June 13, 1993, July 14, 1993, and November 30, 1993, by furnishing security to the satisfaction of the reference court. Ultimately, the Hon'ble Supreme Court, by order dated September 23, 1996, set aside the orders of the court and the reference court and remanded the matter to the reference court for fresh determination of the market value. The Assessing Officer by order passed in regard to the assessment year 1994-95, brought the said amount to tax under section 45(5)(b) of the Act holding that the amounts received by the assessee were deemed to be income of the year in which the amounts were received. However, the Tribunal held that the amounts received by the assessee were not liable to tax in her hands during the period rele....
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....s well as by the assessee and the quantum of enhanced compensation has not attained finality and the assessee has received a part of the enhanced compensation and interest on enhanced compensation pursuant to interim orders passed by the appellate court?" The brief facts of the case are that Land Acquisition Officer, Panchkula awarded compensation to the assessee as per his award dated 16th February, 1989 in respect of land, of the assessee acquired by State of Haryana. Thereafter compensation was enhanced by the District Judge vide his judgment dated 6th May, 1993 against which both the assessee as well as Government went in appeal. The Hon'ble Punjab and Haryana High Court vide their order dated 18th February, 1994 declined to grant stay and through the execution the assessee realised the enhanced compensation on different dates between 10th June, 1994 to 28th November, 1995. The Assessing Officer re-opened the assessment for the assessment years 1994-95 and 1995-96 and taxed the enhanced compensation and interest thereon on receipt basis in terms of section 45(5)(b) of the Income-tax Act. The assessee challenged above assessment and ld. Commissioner of Income-tax (Appe....
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.... of the fact that additional enhanced compensation was subject-matter of further litigation." As far as question of taxability of interest was concerned, ld. Third Member held that taxability of interest would be governed by the decision of Supreme Court in the case of Smt. Rama Bai v. CIT [1990] 181 ITR 400 and in the case of P. Mariappa Gounder v. CIT [1998] 232 ITR 2. It was to be taxed on accrual basis from year to year. The ld. Third Member concluded as under:- "In my opinion, therefore, the interest though would be chargeable on year to year basis but only when the right disputed by the parties is finally settled by the court, Tribunal or any authority and since in this case the matter is pending in the High Court in the relevant year no right to receive compensation or to interest accrued to the assessee and consequently, no assessment can be made in the year under consideration until the matter is finally settled by the court." After considering relevant statutory provision and case law we are in respectful agreement with the decision of the Third Member in the case of him Singh Lather. However as matter has been argued at length before us, we would like to r....
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.... compulsory acquisition is deemed income of the year in which compulsory acquisition takes place. It is the scheme of the Act relating to taxability of the capital gain. It is now restricted to capital gains arising on compensation awarded on compulsory acquisition. Their Lordship of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. held that unless compensation awarded or right to receive compensation attains finality, capital gain cannot be computed. If right to receive compensation awarded is subject-matter of dispute then unless and until that dispute is settled, compensation allowed is inchoate and capital gains cannot accrue or arise. The aforesaid Scheme and statutory provisions which were considered by their Lordship did not work well and Department had to face difficulties in realizing capital gains arising on compensation enhanced by Courts at different stages i.e., at the level of Distt. Judge, High Court and the Supreme Court. It was difficult to keep track of a case and to bring to tax higher amount of compensation. It was not possible to keep on rectifying an assessment under sub-section (7A) of section 155 of the Income-tax Act. These diffi....
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....ld not be brought to tax in the year of the receipt when language and intention of the Legislature is absolutely clear. Why Court should not give effect to the legislative intent and follow its mandate. In the case of A.N. Roy, Commissioner of Police v. Suresh Sham Singh 2006 (6) JT 89 (SC), their Lordship observed as under: "1.8. It is now well-settled principle of law that the Court cannot enlarge the scope of legislation or intention when the language of the statute is plain and unambiguous. Narrow and pedantic construction may not always be given effect to. Courts should avoid a construction, which would reduce the legislation to futility. It is also well-settled that every statute is to be interpreted without any violence to its language. It is also trite that when an expression is capable of more than one meaning, the court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the great consequences of the alternative constructions." Lord Halsbury as early as 1901, in oft-cited decision pertaining to the interpretation of fiscal statutes stated the law in the following manner: "[A] court of law, ....
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....uitable. Obligation to pay tax is cast on the assessee only after enhanced compensation is pocketed by the assessee. It is taxed when it is actually received. 24. The main thrust of the argument of learned counsel for the assessee and of the Interveners was that compensation is received under an order which is not final. The finality is shaken when order is challenged before a superior court. The right to receive compensation is under dispute. The same is yet to be adjudicated upon and court in its wisdom might reverse, modify or reduce the compensation awarded or hold that it was not payable at all. Superior court under an interim arrangement may impose conditions and compensation might be received on furnishing of securities. Therefore, unless final word on compensation or enhanced compensation is heard, there can be no gains. Argument is based and supported by the decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. Some other decisions based on above decisions are also relied upon. On careful consideration of the statutory provision, particularly the scheme adopted with the introduction of sub-section (5) of section 45, we are unable to....
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.... with a situation where enhanced compensation is reduced in further appeal by Courts or Tribunal. The provision was made to obviate the hardship and unintended consequences of subsection (5) of section 45. The clause was inserted to make entire scheme workable and to supply an obvious omission in the provision. The situation envisaged as per clause (c) above was required to be given reasonable construction to accomplish purpose and object of the enactment. Principle of reasonable construction by treating a provision as retrospective, on the ground that such construction would make the whole enactment workable, was applied by their Lordship of the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677. The aforesaid principle is fully applicable to the interpretation of clause (c) and we accordingly hold that it is retrospective in operation. 28. Having held that as per sub-section (5) of section 45 of the Income-tax Act, enhanced or further enhanced compensation is to be taxed on receipt basis, as per scheme of sub-section (5) of section 45, we are of view that it does not make any difference whether compensation is received as per interim order or on cer....
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....section 45 in total disregard of statutory provision of sub-section (5). Further after insertion of sub-section (5), the scheme of assessment of enhanced or further enhanced compensation is to be taxed only in the year of the receipt. If it is not taxed in that year, but is held to be taxed in the year in which amount of compensation is finally determined, then there is no provision to charge it to tax otherwise than in the year of receipt. Therefore special provision relating to taxability of amount in the year of receipt, cannot be disregarded. For aforesaid reasons also the arguments advanced on behalf of assessees cannot be accepted. 30. That as far as question of interest income on enhanced compensation is concerned, the Legislature had made no change in the statutory provision and, therefore, decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. as also decision of Smt. Rama Bai v. CIT [1990] 181 ITR 400 (SC) would apply. The interest is to be assessed on accrual basis from year to year. However, question of assessment of such interest on accrual basis would not arise unless it is finally determined. In case a dispute relating to interest....