Sri. K. Mahendar vs The Commissioner of Income Tax

Chitra Venkataraman, J.—This appeal is by the assessee challenging the order of the Tribunal on the following substantial questions of law:

(i) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that the sum of Rs.

2,02,624/- has to be assessed as ""capital gains"" in the assessment year 1991-92 u/s 45(5)(b) of the Income Tax Act, 1961?

(ii) Whether the Income Tax Appellate Tribunal on the facts and circumstances of the case was right in law in upholding the applicability of Section

148 of the Income Tax Act, 1961 especially when all the facts were placed before the assessing authority even while filing the return and at the

assessment stage itself?

The assessee and his brothers received certain lands in a partition in the year 1956 made by their father who died in the year 1969. The said

lands were acquired by the Government in the land acquisition proceedings. The assessee received compensation from the Government for the first

time in the Assessment Year 1984-85. The assessee went on appeal against the compensation granted under the acquisition proceedings before

the Sub Court, Poonamallee, which ordered additional compensation together with interest. Both the assessee as well as the State went on appeal

before the High Court. Till the assessment year 1990-91, the additional compensation received was admitted in the returns. In the Assessment

Year 1991-92, the assessee received additional compensation of Rs. 2,02,624/-. The assessee claimed exemption of this compensation by making

an entry in Part-IV of the income tax return. In the proceedings taken u/s 148, the assessing authority held that in view of the insertion of the

Section 45(5)(b) with effect from the Assessment Year 1988-89, the additional compensation of Rs. 2,02,624/- received by the assessee was

taxable u/s 45(5)(b). It was pointed out that the State Government obtained stay from the High Court, Madras; that it ordered release of 50% of

the enhanced compensation.

It is seen that the Assessing Officer rejected the assessee''s reliance on the decision reported in Commissioner of Income Tax, West Bengal-II,

Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., , taking the view that the decision of the Apex Court would apply only to

cases where the additional compensation was assessed on accrual basis. The Assessing Authority further pointed out that u/s 155(7-A) (since

omitted with effect from 1.4.1992) introduced the Finance Act, 1978 with effect from 1.4.1974 and amended by the Direct Tax Laws

(Amendment) Act, 1978 with effect from 1.4.1988, the additional compensation was liable to be calculated for the purpose of working out the

capital gains in the year in which the amount was received by the assessee. Noting the difference between the law as it stood prior to the

amendment by the Finance Act, 1987, and the law as on 1988-89 with reference to Section 45(5)(b) that the enhanced compensation would be

brought to tax on receipt basis, the assessing authority held that the said sum was liable to be considered for the purpose of capital gains in the

assessment year concerned, namely, 1991-92.

Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), contending that the law declared by the

Supreme Court in the decision reported in 161 ITR 424 (CIT v. Hindustan Housing & Land Development Trust) still governed the issue even after

the amendment.

By order dated 14.11.1995, the Commissioner of Income Tax (Appeals) allowed the appeal. On the question of reopening the assessment, he

held that the Assessing Officer was within his jurisdiction to do so. The Commissioner of Income Tax (Appeals) also noted that the High Court, in

its order, allowed the assessee to withdraw a part of the amount deposited by the Government. Thereafter, in the appeal preferred before the

Apex Court as against the order of this Court in its order dated 25.7.1990, the Supreme Court allowed the withdrawal of the said amount of 50%

of compensation on the claimant assessee filing a written undertaking to return the same with interest if called upon. On the question of applicability

of Section 45(5)(b), the Commissioner of Income Tax (Appeals) agreed with the assessee that the question as regards the right to enhanced

compensation was still a matter to be adjudicated upon by the High Court, and hence the assessee did not have the right to receive the enhanced

compensation amount. The question of capital gains could be considered in the year in which the matter was finally decided by the High Court. In

so holding, the Commissioner of Income Tax (Appeals) followed the decision of the Supreme Court reported in 161 ITR 534 (CIT v. Hindustan

Housing & Land Development Trust). Thus, on merits, the Commissioner of Income Tax (Appeals) allowed the appeal.

The Revenue preferred an appeal before the Income Tax Appellate Tribunal, challenging the correctness of the order of the Commissioner of

Income Tax (Appeals) on the question of assessability of the compensation enhanced, then pending before the High Court for final verdict. The

assessee filed a cross appeal and challenged the order of the Commissioner of Income Tax (Appeals) that the appellate authority erred in not

giving a clear direction that the entire amount of Rs. 2,02,624/- received from the Sub Court, Poonamallee, was not income and hence, taxable;

that the Income Tax Officer bifurcated the said amount, treating the sum of Rs. 1,34,998/- as capital gains and Rs. 67,626/- as income from other

sources, it being the interest on additional compensation. The assessee challenged the reopening of the assessment u/s 148. By order dated

21.8.2001, the Income Tax Appellate Tribunal allowed the Revenue''s appeal, holding that in terms of Section 45(5)(b) of the Income Tax Act,

introduced in the statute in the Finance Act, 1987, the assessee was liable to be assessed on the additional compensation. As regards the cross

appeal preferred by the assessee, the Tribunal held that the intimation sent u/s 143(1)(a) is subject to scrutiny and regular assessment u/s 143(3).

The non-application of the provisions of Section 45(5)(b) is a serious irregularity and the same has to be corrected in the course of regular

assessment. Considering the amendment brought forth under the Finance Act, 1987 and the introduction of the provisions of Section 45(5)(b), the

Tribunal viewed that the assessee was liable to be assessed to capital gains on the additional compensation received and that the decision of the

Apex Court reported in Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., was

concerned with the provision prior to the amendment u/s 45(5), which was given effect to from 1.4.1988. In the circumstances, the said sum was

liable to be assessed under the provisions of Section 45(5)(b). Consequently, the Tribunal confirmed the assessment; thereby the liability to capital

gains tax.

The assessee has now come on appeal before this Court, challenging the said order of the Tribunal. He contended that the introduction of the

amendment to Section 45(5) did not have the effect of nullifying the decision of the Supreme Court reported in Commissioner of Income Tax,

West Bengal-II, Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., . The assessee further contended that the right to receive the

compensation and its character as an income would arise or accrue only after the final determination of the right of the assessee to the enhanced

compensation. Consequently, the ruling of the Supreme Court reported in Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan

Housing and Land Development Trust Ltd., would apply in full force to the facts of the case. The assessee also questioned the Tribunal''s order in

dismissing the cross objection that the action taken u/s 148 was well within law.

Learned Counsel appearing for the assessee submitted that the Tribunal ought to have considered the decision of the Apex Court in proper

perspective to grant the relief.

Learned Counsel appearing for the assessee pointed out to the passages from the decision of the Apex Court to contend that the amendment

had not brought forth any change in the declaration of law by the Apex Court. He also referred to the order of the Apex Court dated 14.11.1991

in C.A. No. 3094 of 1990 etc. and to the order of this Court dated 22.12.1997 in A.S. Nos. 1122 of 1990 etc.; that the mere receipt of money

under an undertaking does not make the recipient as having received the income; that until such time the dispute reaches a finality, the recipient

need not claim it as his income. In these circumstances, placing reliance on the decision of the Karnataka High Court reported in Chief

Commissioner of Income Tax and Another Vs. Smt. Shantavva, , the assessee submitted that the decision of the Karnataka High Court fully

governed the case and hence, prayed for setting aside the order of the Tribunal.

Learned Counsel appearing for the assessee submitted that the assessee was permitted to withdraw a portion of the enhanced compensation

only under orders of the Court and after filing a written undertaking, to return the same with interest, if called upon to do so. The holding of the said

sum, hence, was as per the orders of the Court, pending a final outcome in the appeal preferred by the State. In the above circumstances, learned

Counsel appearing for the appellant submitted that the final determination of tax is based on the amount of compensation receivable by the

assessee, the receipt on an undertaking given did not have the character of income to attract the provisions of Section 45(5). Given the

circumstances that the final determination on the amount of compensation was still a matter pending before the High Court, he pointed out that the

ratio laid down by the Supreme Court in the decision reported in Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing

and Land Development Trust Ltd., applies to the facts of the case. In this connection, he also placed reliance on the decision reported in Shah

Vrajlal Madhavji Vs. Commissioner of Income Tax, , apart from Chief Commissioner of Income Tax and Another Vs. Smt. Shantavva, , rendered

by the Karnataka High Court. Hence, he prayed that the plea be accepted.

Learned standing counsel appearing for the Revenue, however, supported the orders of the Tribunal, placing reliance on Section 45(5) and the

purpose of introduction of the same.

A perusal of the documents filed before this Court reveal that by order dated 9.4.1990, the Supreme Court, while granting the Special Leave,

ordered as follows:

It is not necessary to consider the validity of the High Court order in view of the consent that is given by the claimants in this case. The claimants

have filed a counter affidavit dated 9.4.1990 stating that they have no objection to the Housing Board being impleaded as a party or co-appellant

in the pending appeals before the High Court. They have also stated that they would give consent to any applications for receipt of additional

evidence if the Housing Board comes forward with such applications subject to the liberty reserved to them to adduce rebuttal evidence. They

have further stated that they would not oppose the applications of the Housing Board u/s 5 of the Limitation Act.

In the light of the statements contained in the counter affidavit of the claimants, we dispose of these SLPs. No order as to costs. Stay granted in

this case shall stand vacated. Claimants may move the High Court for appropriate order for withdrawing the compensation amount.

The order in the main appeal was passed by the High Court after remand from the Supreme Court only on 22.12.1997. The further SLP

preferred was dismissed by the Supreme Court on 22.1.1999. Hence, at least till orders on the question of additional enhanced compensation

reached a finality, the amount received by the assessee as per the orders of the Supreme Court was on the basis of a written undertaking given by

the assessee to return the receipt of 50% of the enhanced compensation with interest.

Dealing with the contention based on the decision of the Supreme Court reported in Commissioner of Income Tax, West Bengal-II, Calcutta

Vs. Hindustan Housing and Land Development Trust Ltd., , the Assessing Authority took the view that the provisions of law under the Finance

Act of 1987 made the difference that the amendment itself was brought about to cover cases of capital gains arising out of additional compensation

even in cases where finality had not been reached.

It is an admitted fact that Section 45(5)(b) was inserted with effect from 1.4.1988 to cover cases of receipt of enhanced compensation that

they shall be deemed as income chargeable; that they shall be considered for chargeability under the head ""capital gains"" of the previous year in

which such amount was received by the assessee.

The provisions of Section 45(5)(b), as are relevant to the case on hand, reads as follows:

Section 45(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) ...

(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) ...

Explanation:- for the purposes of this sub-section, --

(i) ...

(ii) ...

(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 perusal of Section 45(5) shows that two conditions are to be satisfied for the application of the Section, namely, the capital gains must arise

from the transfer of a capital asset by way of compulsory acquisition under any law and the compensation for such transfer is enhanced or further

enhanced by any Court or Tribunal or other authority.

The purport of introduction of Section 45(5) needs to be noted. It is seen that the additional compensation is awarded at several stages by

different appellate authorities. This necessitated rectification of the original assessment under the Income Tax Act at each stage. To provide for

rectification of the assessment of the year in which the capital gain was originally assessed, Section 155(7-A) was introduced. Section 155(7-A) of

the Income Tax Act, 1961, enabled the Income Tax Officer to re-compute the capital gains arising from the transfer of the capital asset by taking

the enhanced compensation to be the full value of the consideration received or accrued as a result of the transfer. Thus the provision enabled re-

computation by providing for a period of limitation of four years to be reckoned from the end of the previous year in which the additional

compensation was received by the assessee. However, difficulties were also experienced in cases where the additional compensation is received

by a person other than the original transferor where the legal heirs stepped into the shoes of the original owner. Repeated rectification of

assessment on account of the enhanced compensation at different stages often resulted in mistakes of computation of tax liability. To remove these

difficulties, Sub-section (5) of Section 45 was inserted by the Finance Act, 1987, to provide for taxation of additional compensation in the year of

receipt in respect of the transfer of capital asset. The explanation to Sub-section (5) of Section 45, particularly to Clause (iii), shows that where by

reason of the death of the original owner or for any reason, the enhanced compensation is received by any other person, the amount referred to in

Clause (b) shall be deemed to be the income of such other person chargeable to tax under the head of capital gains of the previous year in which

such amount is received by the assessee. The cost of acquisition in the hands of the recipient is deemed to be nil. The streamlining of the provision

amply makes it clear that the assessability of the enhanced compensation chargeable under the head ""capital gains"" is only with reference to the

previous year in which such amount is received on a final settlement of the quantum of compensation by the Court. A reading of the provision

leaves no room for any interpretation that unless and until the right becomes an enforceable right, the mere claim cannot be regarded as a receipt to

attract the provisions of Section 45(5)(b). With the claim for enhanced compensation under dispute and the same pending during the Assessment

Year under consideration, conditional receipt does not bestow the character of income u/s 45(5)(b).

In the decision of the Apex Court reported in E.D. Sassoon and Company Ltd. Vs. The Commissioner of Income Tax, Bombay City, , it has

been held that to have the character of income, a debt must have come into existence and the assessee must have acquired a right to receive the

payment. The Apex Court held that unless and until there exist ""a debt or a right to receive the payment or in other words a debitum in praesenti,

solvendum in futuro, it cannot be said that any income has accrued to him."" In the light of the above-said law laid down by the Apex Court, the

stand of the assessee merits to be accepted.

Interpreting the provisions of Section 45(5)(b), the Karnataka High Court, in the decision reported in Chief Commissioner of Income Tax and

Another Vs. Smt. Shantavva, , took the view that:

Section 45(5)(b) will be attracted only when the assessee receives the ""enhanced compensation"", in pursuance of a final award/order of a court,

Tribunal or other authority increasing the compensation. If any amount is received after stay of the award, in pursuance of any interim order, as a

payment subject to the final result, it will not be an amount received as ""enhanced compensation"" contemplated u/s 45(5)(b), but only an interim

payment received subject to final decision. It will attract Section 45(5)(b) only when the final decision is rendered. We are supported in the said

view by a decision of the Supreme Court and a decision of this Court.

The decision of the Supreme Court reported in Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing and Land

Development Trust Ltd., relied on by the assessee and referred to in the above decision may also be noted. It related to a case of an award

granted in respect of compulsory acquisition of land. It was taken up on appeal by the land owner. The Arbitrator made an award enhancing the

compensation to Rs. 30,10,873/- as against the award at a sum of Rs. 24,97,249/-, and interest at 5% from the date of acquisition was also

ordered. The State went on appeal to the High Court. Pending the appeal, the State Government deposited a sum of Rs. 7,36,691/-, being the

additional amount payable under the award. The claimant was permitted to withdraw the said amount on furnishing a security bond for refunding

the amount in the event of the State succeeding the appeal. The assessee credited the amount in a suspense account on the same day. The said

amount was assessed at the hands of the assessee in respect of the Assessment Year 1956-57 on the ground that it became payable pursuant to

the Arbitrator''s award dated 29.7.1955. The Tribunal held that the amount did not accrue to the assessee as its income during the relevant

previous year ended on March 31, 1956 and hence, not taxable in the Assessment Year 1956-57. On further appeal, the High Court affirmed the

decision of the Tribunal. The Apex Court confirmed the view of the Calcutta High Court. Referring to the decision reported in E.D. Sassoon and

Company Ltd. Vs. The Commissioner of Income Tax, Bombay City, , the Apex Court held, the terms ""arising or accruing"" referred to a right to

receive profits and that there must be a debt owed by somebody. Considering the fact that the assessee therein was permitted withdrawal only on

furnishing security bond for refunding the same in the event of the appeal being allowed, the Apex Court held that ""there was no absolute right to

receive the amount at that stage. If the appeal was allowed in its entirety, the right of payment of enhanced compensation would have fallen

altogether."" The Apex Court also referred to the decision of the Gujarat High Court reported in Topandas Kundanmal Vs. Commissioner of

Income Tax, Gujarat, to hold that the additional compensation which are inchoate or contingent, would not create a debt that only on a final

determination of the amount of compensation that the right to such income in the nature of compensation would arise or accrue, and till then, there

was no liability in praesenti in respect of additional amount of compensation claimed by the owner of the land. The Supreme Court pointed out that

there was a clear distinction between a case 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 is left to be determined in accordance with

the settled or accepted principles. The Apex Court pointed out that the enhanced compensation accrues only when it becomes payable, i.e., when

the Court accepts the claim.

This Court had an occasion to consider the question as regards the nature of receipt of the amount as per the interim conditional orders in State

appeal in land acquisition matters pending before the Court. In the decisions reported in The Commissioner of Wealth Tax Vs. Smt. T. Girija

Ammal, and Anil Kumar Forma (HUF) and Others Vs. Commissioner of Income Tax, , this Court held that the additional compensation received

could not be treated as part of the compensation received for the transfer of the land until it is finally determined by the High Court or the Supreme

Court. The decision reported in Anil Kumar Forma (HUF) and Others Vs. Commissioner of Income Tax, followed the decision reported in The

Commissioner of Wealth Tax Vs. Smt. T. Girija Ammal, . The view expressed therein fully covers the issue here too.

It may be seen that following the decision of the Supreme Court reported in Commissioner of Income Tax, West Bengal-II, Calcutta Vs.

Hindustan Housing and Land Development Trust Ltd., , a similar view was also taken by the Allahabad High Court in the decisions reported in

Commissioner of Income Tax Vs. Laxman Dass and Ram Murti, and Chief Commissioner of Income Tax and Another Vs. Smt. Shantavva, .

These decisions relate to the period prior to the amendment.

In the light of the decisions of the Apex Court and this Court referred to above, we accept the stand of the assessee and allow the appeal on

the issue relating to capital gains.

On the question of reopening of the assessment, we do not find any error in the order of the Tribunal. The proceedings taken do not suffer

from any illegality to warrant an interference by this Court. No serious argument was however made by the appellant too.

Considering the view that we have taken as to the scope of Section 45(5)(b), we allow the Tax Case Appeal on the question of assessability

u/s 45(5)(b) of the Income Tax Act, 1961 and thereby set aside the order of the Tribunal. The appeal is allowed in part. No costs.