TaxTMI 
TaxTMI 
2006 (9) TMI 222
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.... 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 received on furnishing of security?" 3. We have heard both the....
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....mpensation 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 Member, it should be taken as decision of the Special Bench comprisi....
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....d 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 account of difference between the two Hon'ble Judges hearing a matter, his o....
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....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 (4) of section 255 dealing with two different situations. 8. In the case of Oman International ....
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....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 45 with clauses (a) and (b) through Finance Act, 1987, with effect from 1-4-1988 to bring to charge the compensation enh....
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.... 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' to point out that agricultural land of assessee was acquired by Meerut Development Authority and compensation was award....
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....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 as application of clause (c) to sub-section (5) of section 45 was concerned, the learned counsel submitted that said clause is app....
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....ly 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-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C), of section 10]. Explanation.- For the purposes of this sub-cl....
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....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 winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; (ii) 'card game and other game of any sort' includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or ....
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.... 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 accrue or arise to him in Indiaduring such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India." "45. Capital Gains.-[(1)] Any profits or gains arising from the transfer of a capital asse....
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....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 the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration.] Explanation.-For the purposes of this sub-section,- (i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil; (ii) the pro....
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.... 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 deemed to have been wrongly made and the Income-tax Officer shall recomputed the capital gain arising from such transfer by taking the compensation or consideration as enhanced or further enhanced to be the full value of the consideration received or accruing as a result of the transfer, and shall make the necessary amendment. The period of limitation of four years for amending the assessment order laid down in the Income-tax Act will, in such cases, run from the end of the previous year in which the additional compensation or consideration was received by the assessee. 23.4. The new sub-section (7A) takes effect retrospectively from 1st April,....
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....al 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 received. 23.1 It has been brought to the notice of the Government that in cases of compulsory acquisition of assets, at times there is a considerable gap between the dates of acquisition and payment of compensation. The result is that the existing provisions of capital gains taxation operate harshly inasmuch as the affected persons are unable to avail of the exemption for roll-over of capital gains, within the specified time period, through investment in specified assets. 23.2 Section 45 of the Income-tax Act has, therefore, been amended to provide that capital gains arising from the transfer of the capital asset by way of compulsory acquisition under any law shall be charged to tax in the previous year in whi....
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....es 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 because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal were allowed in its entirely, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of Rs. 7,24,914 was not income arising on accruing to the respondent during the previous year relevant to the assessment year 1956-57." (ii) CIT v. Laxman Dass/Ram Murti [2000] 246 ITR 622 (All.) - "Held, dismissing, the application for reference, that the Tribunal was correct in holding that the amounts received by the assessee by way of interest ....
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....il 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 otherwise expressed "debitum in praesenti, solvendum in futuro". . . 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.' A debt is a sum of money which is now payable or will become payable in future by reason of a praesenti obligation. In People v. Arguello [1869] 37 Calif. 524, the Supreme Court of California observed as follows:- 'Standing alone, the word "debt" is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds, "solvendum in praesenti" and "sol....
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....ually 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 received or not and accrued income is that income which the assessee has a legal right to receive. As held by the Supreme Court in CIT v. Shoorji Vallabhadas & Co. [1962] 46 ITR 144, income-tax is a levy on income. The Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously, neither accrual nor receipt of income....
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....ht 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 relevant to the assessment year 1994-95 as the receipt of the said amounts had a condition attached to it and an absolute right thereto had not accrued to the assessee. On appeal to the High Court: Held, dismissing the appeal, that the sum of Rs. 8 lakhs was received by the assessee, not as enhanced compensation, but as payments in pursuance of the interim orders of the court and the Supreme Court by furnishing security to the satisfaction of the Court, pending determination of the additional compensation. Only when the reference court determines the compensation and such determination becomes final, the amount received in pursuance of the interim order will be appropriated against the compensation finally determined and will become income chargeable under the head 'Capital gains'. The mere fact that some amounts had been received by furnishing security, in pursuance of t....
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.... 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 (Appeals) in appeals for the assessment years 1994-95 and 1995-96 held that enhanced compensation received was in dispute before the higher court and therefore could not be brought to tax unless dispute was finally settled. The ld. Commissioner of Income-tax (Appeals) deleted the addition following the decision of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. The ld. Commissioner of Income-tax (Appeals) further held that interest received only on undisputed compensation could be brought to tax. The Revenue being aggrieved filed an appeal against orders of Commissioner of Income-tax (Appeals) before the appellate Tribunal wherein difference on point of law arose between two Members and accordingly, question was referred to the Hon'ble Third Member. After considering relevant provision of sections 4, 5 and 45(5) and its different Clauses as also several decisions cited at Bar as well as E....
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....ed 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 record separately our reasons for reaching conclusion and would like to answer the question referred to us. 21. It is clear from the definition of 'income' that several artificial items which cannot satisfy commercial concept of income are included and are charged to tax under the Income-tax Act. It is always a policy decision of the Government as to which receipt or activity is to be charged and which receipt is to be treated as exempt. Normally gain from transfer of a capital asset is a capital receipt and cannot be taken as taxable income. However, through a fiction it is included in the definition of 'income' and under section 45 of Income-tax Act, it is charged to tax. Validity of imposition of income-tax on capital gains was challenged but their Lordship of the Hon'ble Supreme Court in the case of Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 held that word 'income' should be given its widest conno....
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.... 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 difficulties faced by the Department are enlisted in the Circulars, which have been quoted above. In order to overcome above difficulties and to improve the situation, the Legislature amended section 45 by introducing sub-section (5) to section 45 with effect from 1-4-1988. Now compensation payable is brought to tax at two stages: one under sub-section (1) i.e., in the year in which transfer takes place. This gain is computed with reference to the compensation awarded by the Acquisition Officer. If any capital gain arises or accrues with reference to compensation awarded it is liable to tax under sub-section (1) of section 45. (ii) Secondly enhanced compensation is separately and independently assessed. Earlier right to receive compensation was not separate from right to receive enhanced compensation [See Mrs. Khorshed Shapoor Chenai v. ACED [1980] 3 Taxman 23 but now right to receive enhanced compensation is treated separately for taxation....
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.... 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, has nothing to do with the reasonableness or unreasonableness of a provision of a statute except so far as it may help it in interpreting what the Legislature has said. If the language of a statute be plain, admitting of only one meaning, the Legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results. If the language of this sub-section be not controlled by some of the other provisions of the statute, it must, since its language is plain and unambiguous, be enforced, and your Lordships' House sitting judicially is not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous." [Cooke v. Charles A. Vogeler Co. 1901 AC 102, CapeBrandy Syndicate v. IRC (1921) 1 KB 64: 12 TC 358] After considering above authority, their....
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....ns 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 find any force in the arguments raised on behalf of the assessees or the interveners. As discussed above, a new scheme to tax enhanced or further enhanced compensation on receipt basis in the year of receipt has been introduced by adopting plain and unambiguous language. Tribunals and courts are required to give effect to the mandate of the Legislature. Therefore, decision of Hindustan Housing & Land Development Trust Ltd.'s case and all other decisions which have not taken note of intention and scheme of the Legislature and its purpose, are not applicable to cases where enhanced compensation is received. We have given our reasons for reaching above conclusion which need not be repeated. 25. It is no doubt true that Legislature while inserting sub-section (5) in section 45 through the Finance Act, 1987 with effect from 1-4-1988, did not provide for cases where enhanced or further enhanced compensation was subsequently reduced by any court, Tribunal or other authority. Suc....
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....ion 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 certain conditions or without any condition. This simple answer follows from obvious and plain language. What is required to be considered is that compensation had been paid and received. If for any reason, it is subsequently reduced then assessment is required to be modified to take reduced compensation of income. Thus statutory provision leave no scope for not taxing compensation on receipt basis under any situation. There is no way to read in clear language of statute that receipt, if conditional or allowed as per interim order of High Court is no receipt of compensation and would not be taxed in the year of the receipt. If the arguments of counsel for the assessee and Interveners are adopted, it would tantamount to adopting a narrow and pedantic construction and reduce legislation to futility. Therefore, we do not find any substance in the arguments advanced on behalf of the assessees and the interveners. 29. There is no doubt that in the case of Hindustan Housing & Land Development ....
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....ssed 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 payable on enhanced compensation is pending before a Court of Law and not attained finality, the same will not accrue and not liable to tax. Only after it is finally determined, the same can be subjected to tax, in the light of decisions of the Hon'ble Supreme Court, referred to above. In the light of our directions, the Assessing Officer would revise assessment and tax enhanced compensation and interest, after providing reasonable opportunity of being heard to the assessee. All the above appeals are allowed in terms stated above. Annexure-A Sl.No. Appeal No. Subject 1. ITA 2964/Delhi/02 Padam Prakash (HUF)(A.Y. 1995-96) Revenue's appeal against deletion of addition of enhanced compensation as appeal of the Government was pending. Amount of enhanced compensation of Rs. 92,06,384 deleted following the decision of Hindustan Housing & Land Development Trust Ltd. reported in 161 ITR 524 (SC). 2.&3. ITA 2205 & 2206/Delhi/ 03 Fateh Singh (HUF) A.Y. 1998-99 & 1999-2000 Enhanced ....