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Judgment
Divan, C.J.—Both these references arise out of the same order of the Tribunal and hence we will dispose of both of them by this common
judgment.
The assessment year under consideration is assessment year 1968-69, the relevant previous year being calender year 1967. The assessee is a
limited company and carries on business of manufacturing textiles. In its return of income for the assessment year 1968-69, the assessee-company
disclosed capital gains of Rs. 52, 989. During the accounting year, the Government of Gujarat acquired land admeasuring 10,390 square yards
belonging to the company. Possession of the land was taken on November 24, 1967. The assessee-company received the sum of Rs. 1,74,807 as
an by way of compensation together with interest, etc., under the terms of the award of the Land Acquisition Officer. The company calculated the
capital gains at Rs. 52,989 and disclosed the same in return. The ITO, however, found on inquiry that the assessee-company was not satisfied with
the amount of compensation awarded by the Land Acquisition Officer and had pursued the matter in appeal by asking for a reference under s. 18
of the Land Acquisition Act, 1894. In the reference application, the contention of the assessee-company was that compensation should be paid at
the rate of Rs. 35 per square yard and the amount of compensation should be paid on that basis together with solatium at 15% on the amount that
might be determined. The company was also claiming damages for the severance of the land and, under this item, it was claiming Rs. 25 per square
yard. The company''s claim in the reference application stood at Rs. 5,10,891. The ITO was of the view that, in view of the assessee''s own
contention before the Resident Assistant Collector, Bhavnagar, the total compensation receivable was Rs. 4,73,047 on the basis of fair market
value. The ITO, therefore, proceeded to invoke the provisions of s. 52(2) of the Act of 1961 and on that basis determined the fair market value in
lieu of the full value of consideration received by the assessee. After making adjustments, he determined long-term capital gains at Rs. 4,21,098.
The assessee took the matter in appeal before the AAC. The AAC took into consideration the alternative suggested by the assessee itself and
he held that the proposal made by the assessee was quite fair and reasonable and it safeguarded the interests of the revenue and would not be
unfair to the assessee also. The alternative proposal was that the assessee would not object to the determination of the capital gains with reference
to the revised amount of compensation received by the assessee, in case the application for revision of compensation was accepted by the land
acquisition authorities and the revision was accepted by the Land Acquisition Officer. Against the decision of the AAC,, the assessee went in
appeal to the Tribunal. It was urged on behalf of the assessee that the provisions of s. 52(2) was not attracted and, so long as the award of the
Land Acquisition Officer stood, there was no question of determining fair market value in respect of the property. As regards the alternative
contention, the Tribunal observed that it was not necessary to deal with the said contention in view of the decision on the first contention. It further
observed that it would be open to the ITO to proceed with the matter in accordance with law if a higher amount of compensation is received by
the assessee at a later date. Thereafter, at the instance of the revenue, the following two questions have been referred to us by the Tribunal under s.
256(1) of the I.T. Act, 1961:
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the capital gains has to be determined
with reference to the amount of compensation paid to the assessee by the Land Acquisition Officer ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 52(2) of the
Income Tax Act would not apply to the transfer in the case of the assessee ?
The revenue had also applied for a third question, namely:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in refusing to give direction to the Income Tax Officer to
adopt the revised value of compensation in lieu of the compensation received by the assessee as and when the decision in this regard is reached by
the Land Acquisition Authorities ?
The Tribunal in the first instance felt that this question did not arise out of the order of the Tribunal. However, on an application made in that
behalf, the High Court gave directions under s. 256(2) and the Tribunal, in pursuance of that direction, referred the third question which was not
originally referred by the Tribunal, and that reference is Income Tax Reference No. 124 of 1978. The question that is referred to the High Court
for our opinion in Income Tax Reference No. 124 of 1978 is that third question.
As regards the main contention regarding capital gains arising out of the proceedings in land acquisition, there is the decision of this High Court in
Topandas Kundanmal Vs. Commissioner of Income Tax, Gujarat, . There the legal position was pointed out as follows (Headnote):
Having regard to the provisions of the Land Acquisition Act, the compensation awarded by the Land Acquisition Officer is nothing more than an
offer to the person whose land is sought to be acquired. If that offer is not accepted, the acquisition proceedings are not concluded. The owner has
the statutory right of having the question determined by the court. It is when the amount is thus determined judicially that the acquisition
proceedings would be concluded. The offer made by the Land Acquisition Officer, if not accepted, would not automatically result in a liability to
pay additional compensation. If there is an existing liability, the mere fact that the payment is postponed to future would not detract from that
liability becoming a debt, but the liability to pay unliquidated damages or additional compensation which are inchoate or contingent would not
become a debt. It is on the final determination of the amount of compensation that the right to that income in the nature of compensation would
arise or accrue and till then there is no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the land
sought to be acquired.
If an assessee has got an inchoate right and has not acquired any vested right to enhanced or additional compensation over and above what has
been offered to him by the Land Acquisition Officer, it cannot be said that he has a vested and complete right as to the interest on such amount. It
is only when the amount of compensation is adjudicated upon by the court and it is only when the court awards interest on such enhanced amount
of compensation that the assessee has an enforceable right to the principal amount of compensation as well as to the interest.
It may be pointed out that if the receipt of the compensation amount results in capital gains, then the right to such income would accrue in the
year in which the transfer is effected, that is, when possession is taken under the provisions of the Land Acquisition Act and in the light of s. 45 of
the I.T. Act, 1961, that is the relevant date for computation of capital gains.
We are informed that against this decision of the Bench in Topandas Kundanmal Vs. Commissioner of Income Tax, Gujarat, an application for
leave to appeal to the Supreme Court was made but that application was rejected by the High Court. Thereafter, an application for special leave
was made before the Supreme Court and by its order dated March 9, 1977, the Supreme Court dismissed the special leave application.
Therefore, the position is that the decision in Topandas Kundanmal Vs. Commissioner of Income Tax, Gujarat, states the correct legal position
with which the Supreme Court declined to interfere.
It is, therefore, clear that so far as the compensation amount is concerned, as an when the compensation amount is enhanced by the District
Court or by the High Court or finally by the Supreme Court, that amount will be brought to tax as and when further compensation is finally
determined in the judicial hierarchy of courts. When that amount is thus finally judicially determined, the amount of capital gains will have to be
computed. We may point out that, with effect from April 1, 1974 {1} there is now the provision of s. 155(7A) of the I.T. Act which has a material
bearing on the question before us. Under that sub-section:
Where in the assessment for any year, the capital gain arising from the transfer of a capital asset, being a transfer by way of compulsory acquisition
under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, is
computed u/s 48 and the compensation for such acquisition or the consideration for such transfer is enhanced or further enhanced by any court,
tribunal or other authority, 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, notwithstanding anything contained in this Act, recompute in accordance with section 48 the capital gain arising from
such transfer by taking the compensation or the consideration as enhanced or further enhanced, as the case may be, to the full value of the
consideration received or accruing as a result of such transfer and shall make the necessary amendment; and the provisions of section 154 shall, so
far as may be, apply thereto the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year
in which the additional compensation or consideration was received by the assessee.
Under s. 154, sub-s. (7), the rectification under s. 154 cannot be made after the expiry of four years from the date of the order sought to be
rectified or amended. For the purposes of s. 155(7A), therefore, the provisions of s. 154(7) are not to be taken into consideration and the period
of four years is to be reckoned from the end of the previous year in which additional compensation or consideration was received by the assessee
and the computation or recomputation of capital gains, as the case may be, under s. 155(7A) can be carried out under cases of compulsory
acquisition of land as and when by a process of judicial determination, the original amount of compensation awarded by the Land Acquisition
Officer is finally enhanced indisputably. Final judicial determination is the event after which full amount of capital gains will have to be computed or
recomputed, as the case may be.
It may be pointed out the Andhra Pradesh High Court in Khan Bahadur Ahmed Alladin and Sons Vs. Commissioner of Income Tax, has taken
the same view as we have taken in Topandas Kundanmal Vs. Commissioner of Income Tax, Gujarat, .
In view of these conclusions, it is obvious that the Tribunal was right in law in holding that the capital gains has to be determined with reference
to the amount of compensation paid to the assessee by the Land Acquisition Officer. However, it is open to the officer in the light of the decision in
Topandas Kundanmal Vs. Commissioner of Income Tax, Gujarat, and under s. 155(7A) to recompute the capital gains as and when the amount of
compensation is finally determined by a process of judicial determination.
As regards the question under s. 52(2), we fail to understand how that section could at all be invoked in a case arising under the land
acquisition proceedings. That section, as it stood with effect from April 1, 1964, was in these terms:
Without prejudice to the provisions of sub-section (1), if in the opinion of the Income Tax Officer the fair market value of a capital asset
transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the
transfer of such capital asset by an amount of not less than fifteen per cent. of the value so declared, the full value of the consideration for such
capital asset shall with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its
transfer.
Under sub-s. (1), as it stood with effect from April 1, 1967, the words were:
Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income Tax Officer
has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee u/s 45, the full value of
the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of
the capital asset on the date of the transfer.
In the instant case, the whole question of s. 52(2) can be seen in the proper perspective when one realises that the amount awarded by the
Land Acquisition Officer is merely offered to the owner of the property that is under acquisition and it is open to the owner not to accept the offer
and to insist on judicial determination of the amount of compensation payable to him on the footing of the fair market value of the property. Under
these circumstances, it cannot be said that when the assessee mentioned in the instant case in its return, the amount of compensation awarded by
the Land Acquisition Officer, it was mentioning anything below the market value because the market value was yet to be determined in proper
judicial proceedings on a reference under s. 18 of the Land Acquisition Act. Therefore, in a case arising under the Land Acquisition Act, there is
no scope for invoking the provisions of s. 52(2) of the Act and the assessee was justified in protesting against the invocation of the provisions of s.
52(2) of the Act. Under these circumstances, question No. 2 in Reference No. 207 of 1974 must be answered in the affirmative, that is, in favour
of the assessee and against the revenue.
As regards the third question, that is, the question referred to in Income Tax Reference No. 124 of 1978, it must be pointed out that in its order,
the Tribunal observed as follows in para. 7:
This brings us to consider the alternative submission canvassed before us by the assessee. In the view which we have taken, we do not think it
necessary to deal with the alternative contention in a detailed manner. Shri Rajpal submitted before us that we should direct the Income Tax Officer
to adopt the revised value of the compensation in lieu of the compensation received by the assessee as and when the decision in this regard is
reached by the land acquisition authorities. We do not think that such a direction is necessary for the disposal of this appeal, nor does it arise out of
this appeal before us. We therefore do not consider it necessary, to issue such a direction. It would be open to the Income Tax Officer to proceed
with the matter in accordance with law, if a higher amount of compensation is received by the assessee at a later date.
Under sub-s. (1) of s. 153, no order of assessment shall be made under s. 143 or s. 144 at any time after the expiry of different periods
provided in that sub-section. Under sub-s. (2), no order of assessee, reassessment or recomputation shall be made under s. 147 after the period
specified in sub-s. (2) of s. 153. Under Sub-s (3) of s. 153, it is provided that the provisions of sub-ss. (1) and (2) shall not apply to the following
classes of assessments, reassessments and recomputations which may be completed any time... (ii) where the assessment, reassessment or
recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order,.... or in
an order of any court in a proceeding otherwise than by way of appeal or reference under this Act. It is clear that once the amount of
compensation is finally determined in judicial proceedings, effect to that finding will have to be given with reference to the year in which possession
was taken and since that is so, by virtue of s. 153(3)(ii), the question of limitation would not arise for consideration. That is the prima facie view
which appears to us at the present stage. In view of this prima facie view, it is not necessary that any direction should be given so as to save or
prevent the bar of limitation from operating against the Income Tax authorities as apprehended by them. Under these circumstances, the directions
which were sought for availing of alternative remedy are not necessary at all. Under these circumstances, the Tribunal was right in refusing to give
directions as it did. The question in Reference No. 124 of 1978 must, therefore, be answered in the affirmative, that is, in favour of the assessee
and against the revenue.
In the light of the above discussion, we answer the questions referred to us as follows:
Question No. 1:
In the affirmative, that is, in favour of the assessee and against the revenue, but we may add the qualification that in the light of the decision in
Topandas Kundanmal Vs. Commissioner of Income Tax, Gujarat, , when the amount of compensation is finally determined by courts, the capital
gains may be recomputed treating the amount as income of the year in which the possession was taken.
Question No. 2:
In the affirmative, that is, in favour of the assessee and against the revenue.
In Reference No. 124 of 1978, the question referred to us is answered in the affirmative, that is, in favour of the assessee and against the
revenue.
The Commissioner will pay the costs of both these references to the assessee.