Sajjansinh N. Chauhan vs Income Tax Officer

D.A. Mehta, J.—Both these tax appeals which are relatable to one assessment year, namely, the assessment year 1989-90, and which arise from common order dated April 22, 1999, made by the income tax Appellate Tribunal ("the Tribunal") have been heard together and are being disposed of by this common judgment. Vide two orders dated January 17, 2007, the appeals have been admitted on the following substantial questions of law:

Tax Appeal No. 376 of 1999

(1) Whether, in the facts and in the circumstances of the case, the income tax Appellate Tribunal was right in law in rejecting the contention of the appellant that inasmuch as jagir did not have any cost, the provisions of section 45 of the Act did not apply and, therefore, gain, if any, was not liable to be taxed?

(2) Whether, in the facts and in the circumstances of the case, the income tax Appellate Tribunal was right in law in holding that in respect of the compensation received by the appellant, the provisions u/s 45(5)(b) of the income tax Act, 1961, would apply?

Tax Appeal No. 377 of 1999

(1) Whether, in the facts and in the circumstances of the case, the income tax Appellate Tribunal was right in law in holding that the compensation received by the appellant was not exempt from charge of the income tax Act being agricultural income?

(2) Whether, in the facts and in the circumstances of the case, the income tax Appellate Tribunal was right in law in rejecting the contention of the appellant that inasmuch as jagir did not have any cost, the provisions of section 45 of the Act did not apply, and, therefore, gain, if any, was not liable to be taxed?

(3) Whether, in the facts and circumstances of the case, the income tax Appellate Tribunal was right in law in holding that the interest received by the appellant was liable to be assessed on the basis of receipt in the assessment year 1989-90?

The appellant-assessee is a Hindu undivided family. The karta of the Hindu undivided family is the son and the heir of the deceased Maharaja Naharsinhji Fatehsinhji, younger son of the Maharaja of Chhota Udepur. The late Naharsinhji was granted by the Maharaja six villages, including Zar and Dadigam of Chhota Udepur Taluka in 1950 by sanad dated December 22, 1950. The said Jagir came to be abolished by operation of the Bombay Merged Territories and Areas (Jagirs Abolition) Act, 1953 ("the Jagir Abolition Act") with effect from August 1, 1954. Naharsinhji had made an application for compensation and the Jagir Abolition Officer, Baroda, had made an award on July 29, 1959, for an amount of Rs. 38,456 u/s 11(3) of the Jagir Abolition Act. However, it appears that no claim for compensation in respect of forest areas of the two villages, namely, Zar and Dadigam, admeasuring about 2,500 acres and the trees standing thereon, was made on the footing that, according to the jagirdar, the said lands (areas) had not vested in the State Government.

However, pursuant to the Supreme Court judgment in the case of U.R. Mavinkurve Vs. Thakor Madhavsinghji Gambhirsingh and Others, , the State Government prevented the jagirdars from cutting and removing the trees and tried to exercise the rights of ownership and possession in respect of these lands. The jagirdars objected and claimed that if the rights of the jagirdars stood abolished by the Jagir Abolition Act in respect of the said lands and the trees standing thereon, compensation as provided under the Jagir Abolition Act should be paid. For the present, it is not necessary to refer to the chequered history of litigation which ensued thereafter. Suffice it to state that, on October 21, 1977, an award for a sum of Rs. 1,20,567.30 came to be made by the Collector, Baroda, in favour of the appellant. Subsequently, vide order dated July 9, 1980, the Gujarat Revenue Tribunal (the GRT) made an order directing the payment of compensation under the Private Forests Acquisition Act, 1972. The appellant challenged the same before the Gujarat High Court and the Gujarat Revenue Tribunal was directed to decide the matter afresh as to (1) whether the areas in dispute are private forests of the appellant and his predecessor in title, and (2) what amount, if any, is payable as and by way of compensation to the appellant for the private forests. A fresh order came to be made by the Gujarat Revenue Tribunal on September 1, 1984, holding that the appellant was entitled to a sum of Rs. 25,18,264.30 and after giving the credit for a sum of Rs. 1,20,567.30, the balance amount of Rs. 23,97,697 with interest at the rate of 3 percent. per annum from August 1, 1954, till the date of payment should be paid. The State Government challenged the award of the Gujarat Revenue Tribunal, while the appellant filed a writ petition seeking enhancement of the amount of the award. Ultimately, as per the agreement arrived at between the parties, the High Court modified the order of the Gujarat Revenue Tribunal in the following terms:

(1) The Government of India gave up its contention regarding the principal amount of Rs. 25,18,264.30 awarded by the Gujarat Revenue Tribunal;

(2) The appellant gave up claim for interest beyond 20 years from August 1, 1954, i.e., up to 1974 only.

Pursuant thereto, the appellant received the balance principal amount of Rs. 18,97,697 (Rs. 5 lakhs having already been received in 1985-86) with interest of Rs. 6,53,385 computed up to 1974.

Thus, an amount of Rs. 5 lakhs was received in the previous year relevant to the assessment year 1987-88 with interest of Rs. 1,72,156 during the same period; and the balance compensation of Rs. 18,97,697 was received in the accounting period relatable to the assessment year 1989-90 with interest of Rs. 6,53,385 for the same period.

The Assessing Officer brought to tax the aforesaid amount under the head "Capital gains" for the assessment years 1987-88 and 1989-90, and the interest as "revenue receipts". The assessee carried the matter in appeal and succeeded partly. Against the order made by the Commissioner (Appeals), both the assessee and the Revenue carried the matter in appeal before the Tribunal. After hearing the parties, the Tribunal has dismissed the appeal filed by the assessee and allowed the Departmental appeal.

Learned senior counsel appearing for the appellant submitted that the compensation received by the appellant for the trees by operation of the Jagir Abolition Act was on capital account and could not be brought to tax under the head "Capital gains tax". It was submitted that even if the receipt was liable to be treated as capital gains, in the absence of any cost of acquisition, the scheme for taxing capital gains would fail and the appellant could not be taxed in relation to the amount of compensation received. In support of the submissions made, reliance has been placed on the judgment of this High Court in the case of Commissioner of Income Tax Vs. Manoharsinhji P. Jadeja, as well as the apex court decision in the case of Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, .

(6.1) It was submitted that, alternatively, the provisions of section 45(5)(b) of the income tax Act, 1961 (the Act) read with the Explanation thereunder, would also not be applicable as held by the Tribunal because for applying the said provisions also, recourse had to be had to section 48 of the Act and, thus, the scheme to bring to tax capital gains would become unworkable in the light of the settled legal position, in the absence of any cost of acquisition of the trees. Further, the alternative contention was that the trees in question being product of agricultural operations, the compensation was exempt as agricultural income. Lastly, it was submitted that in so far as the additional amount of compensation awarded by the Gujarat Revenue Tribunal is concerned, the facts would show that originally the amount was granted by the authority under the provisions of the Jagir Abolition Act only in relation to limited number of trees, whereas compensation had been granted for the first time in relation to additional number of trees apart from enhancing the rate applicable per tree and, therefore, to the extent of the number of trees for which compensation had been granted for the first time by the Gujarat Revenue Tribunal, it could not be treated as additional/enhanced compensation and would not fall within provisions of section 45(5)(b) of the Act.

As against that, learned counsel for the Revenue submitted that the order made by the Tribunal was just, proper and correct in law and no interference was warranted. That the amount in question had rightly been brought to tax.

In relation to the interest amount, it was submitted on behalf of the appellant that the issue stood concluded by a catena of judgments of the apex court which have been consistently applied and followed by this High Court. In relation to the taxability of interest, learned counsel for the respondent-Revenue was not in a position to dispute the legal position laid down by various judgments.

In so far as the taxability of the principal amount of compensation is concerned, operation of sections 45 and 4545(5)(b) of the Act are interlinked. Section 45 of the Act is a charging section and the moment a capital asset is transferred, the said provision gets attracted. The year of transfer of a capital asset is the year when capital gains is charged to tax by virtue of the difference arising between the consideration for transfer and the cost of acquisition along with other permissible deductions. If section 45 of the Act had to be independently applied, namely, without operation of section 45(5)(b) of the Act the contention of the appellant would merit acceptance. However, once section 45(5)(b) of the Act gets attracted, the position would change.

Section 45(5)(b) of the Act, as is material for the present, reads as under:

(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises 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, 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 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 provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head ''Capital gains'', of such other person.

A plain reading of the opening portion of sub-section (5) of section 45 of the Act makes it clear that this provision operates notwithstanding anything contained in section 45(1) of the Act. In other words, sub-section (5) of section 45 of the Act overrides what is laid down in sub-section (1) of section 45 of the Act. Hence, in a case where a capital asset is transferred by way of compulsory acquisition under any law and capital gain arises as a consequence of such transfer and the consideration for such transfer or the compensation is enhanced or further enhanced by any court, tribunal or other authority, the capital gain shall be dealt with in the manner specified in clauses (a), (b) and (c) of sub-section (5) of section 45 of the Act. To put it differently, whatever may have been the treatment of the compensation/ consideration received on transfer of capital asset originally made by operation of section 45(1) of the Act, despite that in a case where the compensation is enhanced, only sub-section (5) shall operate and shall prevail over operation of sub-section (1) of section 45 of the Act. A plain reading of clauses (a), (b) and (c) indicates that where the compensation is enhanced, or further enhanced after having been enhanced at one stage, the amount of enhanced compensation shall be brought to capital gains tax in the year in which such amount of enhanced compensation is received by an assessee, or where the amount is reduced in further proceedings, the assessed capital gain shall be reduced. Sub-clause (i) of the Explanation provided in the said sub-section states that for the purposes of sub-section (5) of section 45 of the Act in relation to the amount of enhanced compensation, referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be "nil". For the present, it is not necessary to refer to other sub-clauses of the Explanation. Thus, in effect, the provisions of sub-section (5) of section 45 of the Act are a complete code in themselves and operate regardless of operation of section 45(1) of the Act.

In the light of the aforesaid legislative scheme, it is not possible to accept the submission of the appellant that by virtue of operation of sub-clause (i) of the Explanation appearing in sub-section (5) of the Act, the principle enunciated by the apex court in the case of Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, and Commissioner of Income Tax Vs. Manoharsinhji P. Jadeja, , would be attracted. This is not a case where for the purposes of computing capital gains tax u/s 45(1) of the Act and other sections forming the scheme to tax the capital gains, but is a provision which specifically deals with bringing to tax the additional amount of compensation/consideration received subsequent to the point of transfer of a capital asset. In fact, the original transaction has already been subjected to operation of the provisions of section 45(1) of the Act and, therefore, there is no transfer of capital asset in the year under consideration. To obviate the contention that in the absence of any transfer of capital asset, the amount received in the subsequent year/years cannot be brought to tax, sub-section (5) of section 45 of the Act has been enacted. Similarly, the disputes as to year in which the additional amount should be brought to tax, and whether the year in which the transaction was originally taxed should be reopened, and whether limitation would apply for the purposes of reopening, etc., would all stand resolved by operation of sub-section (5) of section 45 of the Act. In the circumstances, once section 48 of the Act has operated when the transaction was originally brought to tax, the assessee cannot successfully contend in the year of receipt of enhanced compensation that section 45 read with section 48 of the Act should operate once again.

In relation to the contention that the Gujarat Revenue Tribunal has also granted compensation for additional number of trees, the same principle would apply. It is not as if the additional number of trees, namely, the capital asset, have been transferred in the previous year relevant to the assessment year in question. The said capital asset, namely, the waste lands and the trees stood transferred in the year of acquisition, i.e., vesting in the State Government by operation of law, namely, the Jagir Abolition Act. There is no further transfer or vesting in the year under consideration. Therefore, the contention that in relation to the additional number of trees considered by the Gujarat Revenue Tribunal, this is the first year of transaction does not merit acceptance. What has happened is that in relation to the capital asset which was already transferred by way of vesting in the State Government, an additional amount over and above the amount awarded by the Collector has been awarded by the Gujarat Revenue Tribunal in relation to the same capital asset which was compulsorily acquired by operation of law. In the circumstances, the said contention raised on behalf of the appellant also fails. Furthermore, the phrase "and the compensation or the consideration for transfer is enhanced or further enhanced...." used by section 45(5) of the Act cannot be restricted to mean only enhancement of amount of compensation. The amount may be enhanced simpliciter, or may be enhanced due to correct identification and quantification of the capital asset.

In so far as the amount of enhanced compensation being agricultural income, as rightly found by the Tribunal, there is no evidence of any agricultural operations having been carried out on the waste lands in question. The Tribunal has found, as a matter of fact that, the Gujarat Revenue Tribunal has recorded that the case of the assessee falls within the provisions of section 11(3)(i) of the Jagir Abolition Act and thus, the compensation has been worked out at the rate prescribed therein on the footing that the land in question is a waste land. The Tribunal has further found that the evidence in the form of undated statements of two persons cannot be relied upon as the said persons have not been produced for examination by the Assessing Officer. The reading of the order dated September, 6/10/12, 1984, made by the Gujarat Revenue Tribunal makes it clear that the Gujarat Revenue Tribunal has proceeded to decide the appeal on the basis that the lands in dispute are waste lands. Admittedly, the said order made by the Gujarat Revenue Tribunal has attained finality, both sides, i.e., the assessee and the State Government, who challenged the same having accepted to abide by the order so made as per the agreement arrived at between the parties. Hence, the Tribunal has rightly come to the conclusion that the enhanced compensation cannot be treated as agricultural income.

To sum up, the enhanced compensation received by the assessee is not amenable to tax under the provisions of section 45(1) read with section 48 of the Act, but is taxable as per the provisions of section 45(5)(b) of the Act. The assessee is, therefore, not entitled to claim that the amount of enhanced compensation cannot be brought to tax by virtue of the cost of acquisition of the capital asset being "nil" in the light of the legislative scheme laid down in section 45(5)(b) of the Act. Nor is it possible to find any legal infirmity in the finding recorded by the Tribunal that the amount of enhanced compensation cannot be treated as agricultural income.

In the circumstances, all the questions, except the one relatable to taxability of interest have rightly been answered by the Tribunal, i.e., against the assessee and in favour of Revenue.

In so far as the component of interest is concerned, the following decisions of the apex court and this High Court make it clear that the interest accrues from year to year and has to be spread over respective years:

(1) Commissioner of Income Tax, Madras Vs. T.N.K. Govinda Raju Chetty, ;

(2) Rama Bai and Others Vs. Commissioner of Income Tax, Andhra Pradesh Hyderabad and Others, ;

(3) K.S. Krishna Rao Vs. Commissioner of Income Tax, Andhra Pradesh, ;

(4) Bikram Singh and Others Vs. Land Acquisition Collector and Others, ; and

(5) Bhanushankar Oghadbhai Mehta v. State of Gujarat [2010] 1 GLH 239

The Tribunal and the authorities have, therefore, erred in bringing to tax the interest amount of Rs. 6,53,385 in the year under consideration, whereas the amount is required to be spread over during the period August 1, 1954, to July 31, 1974. Accordingly, the question in relation to the interest is answered in favour of assessee and against the Revenue.

Both the appeals stand disposed of accordingly with no order as to costs. As a consequence, Civil Application No. 287 of 2006 has been rendered infructuous and stands disposed of accordingly.