T.N. Vasavan vs Commissioner of Income Tax

K.P. Radhakrishna Menon, J.—The year of assessment is 1974-75. The reference is at the instance of the assessee. The question referred reads :

"Whether, on the basis of materials available, the Appellate Tribunal was justified in law in holding that the capital gains arising from the compulsory acquisition of the land of the assessee''s wife of an extent of 2.45 acres has to be treated separately and that there is no scope for the application of Section 54(1) of the Income Tax Act, 1961, in respect thereof ?"

Facts relevant and requisite can briefly be stated thus :

Land measuring an extent of 2.45 acres (50 cents) comprised in Survey No. 945/1 of Poonithura Village originally belonged to the assessee. He gifted the same to his wife in the year 1960. He, thereafter, constructed a building on the said land in the year 1970. The Government of Kerala, in the year 1973, acquired the aforesaid land and the building and also the adjoining land of an extent of 5.79 acres belonging to the assessee for a public purpose, namely, widening of the National Highway. The Land Acquisition Officer awarded compensation in a sum of Rs. 73,500 for the land belonging to the wife and Rs. 1,05,518 for the building. Both the assessee and his wife, not being satisfied with the compensation so awarded, got the question relating to enhancement of compensation referred to the court of the Second Additional Subordinate Judge, Ernakulam, as is seen from L. A. R. No. 899 of 1973. The Subordinate Judge, by his judgment and decree, awarded additional compensation of Rs. 23,418.21 for the land and Rs. 33,992.31 for the building. Solatium at 15 per cent, was also awarded. As a result of the judgment and decree, the assessee''s wife received a total amount of Rs. 1,16,692 as compensation for the land and trees thereon and the assessee was paid compensation in a sum of Rs. 1,59,766 for the building.

The return for the assessment year in question filed by the assessee, however, did not include the capital gains arising from the compulsory acquisition of the land belonging to his wife. When questioned, he gave the explanation that he was not liable to account for the capital gains but the wife probably would be liable to account. The assessing authority did not accept the contention. He, accordingly, held that the capital gains arising from the compulsory acquisition of the land belonging to the wife is liable to be assessed in the hands of the assessee in view of the provisions contained in Section 64 of the Income Tax Act, 1961. Aggrieved by the order of assessment, the assessee preferred an appeal before the Appellate Assistant Commissioner of Income Tax, Ernakulam, wherein he reiterated the various contentions he had raised before the assessing authority. He also raised the contention that, if the capital gains the wife is liable to account for is liable to be assessed in his hands, then he is entitled to the benefit of Section 54. The Appellate Assistant Commissioner by his order accepted this case of the assessee. He accordingly found that the assessee is entitled to the benefit of Section 54 in respect of the capital gains he has been called upon to account for which, but for Section 64, should have been accounted for by the wife. The assessee as also the Department attacked the said order of the Appellate Assistant Commissioner by filing appeals. These appeals were disposed of by a common order, annexure "C". It can be seen from this order that the case set up by the Department was that the wife of the assessee alone can lay claim to the compensation awarded by the Land Acquisition Officer for acquiring the land and the building. This contention was resisted by the assessee. He, in this connection, reiterated the contentions he had raised before the assessing authority as also the Appellate Assistant Commissioner. Considering the various aspects of these competing contentions, the Tribunal held that the wife alone is entitled to get the compensation for acquiring the land. The Tribunal also held that the husband alone can get the compensation for the building. We shall, in this connection, reproduce the said finding :

"... The Income Tax Officer has proceeded on the basis that the building which was compulsorily acquired belonged only to the husband. It is not disputed that it was constructed by him with his own funds. The Appellate Assistant Commissioner also has proceeded on the basis that the building in question belonged only to the husband. There is no case for the Department that the assessee had gifted the building to. his wife though he had built it with his own funds. Merely because the building had been contructed on the land which originally belonged to the assessee, but which he had gifted to his wife, it will not follow that the building in question also belonged to the assessee''s wife .... What is more important is that the compensation for the building has been awarded by the Land Acquisition Officer and by the learned Second Additional Subordinate Judge, Ernakulam, only to the husband in respect of the buildings, while compensation for the land was awarded to the assessee''s wife. In the face of these circumstances, it is idle for the Department to contend, for the first time, before us that the building in question also belonged to the assessee''s wife, and that the assessee was residing there only as a member of the family and not in his capacity as the owner.".

The only inference possible from the above findings which stand unchallenged can be stated thus ; The assessee can claim" compensation for the building whereas the wife of the assessee alone is entitled to get the compensation for the land in dispute.

The question, therefore, is : would the capital gains arising out of the compensation paid to the wife for the acquisition of the land belonging to her, attract the provisions of Section 54, while the same is being assessed in the hands of the husband by virtue of the provisions contained in Section 64 ? To find an answer to this question, we necessarily have to refer to sections 45, 54 and 64. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B (Section 45 as it stood at the time of assessment), be chargeable to Income Tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. It is clear from the scheme of this section that the capital gains chargeable is deemed to be income as defined in Section 2(24)(vi). It, therefore, follows that if any profits or gains arise from the transfer of a capital asset, the same must be treated as income in the hands of the person to whom the capital asset belonged. Such profit or gain is charged subject to the sections made mention of therein. But the profit or gain arising from the transfer of a capital asset belonging to the wife, however, will be treated as the income of the husband and assessed in his hands provided the conditions stipulated in Section 64 are satisfied. We shall now consider the scope of Section 64 :

"64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-- . . .

(iv) subject to the provisions of Clause (i) of Section 27, in a case not falling under Clause (i) of this sub-section, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration and in connection with an agreement to live apart ;"

The compensation amount the wife of the assessee was found entitled to get on her land being acquired by the Government, satisfies the requirements prescribed in Clause (iv) of Sub-section (1) of the section is the common case of the parties. The capital gains arising out of the said transaction can, therefore, be lawfully assessed in the hands of the assessee. The capital gains which is sought to be assessed in the hands of the assessee, learned counsel for the assessee argues, must be treated as the capital gains arising out of the acquisition of land with the building and, if that be so, the assessee is entitled to claim the benefit of Section 54. Dilating on this argument, learned counsel submitted that the capital gains which, by virtue of Section 64, is treated as the capital gains of the assessee is in no way different from the capital gains he is found to have got by way of acquisition of the house. The provisions of Section 64(1)(iv), therefore, have the same effect as the words "deemed to arise" used in Section 64(2)(c). In support of this argument, he cited a ruling of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, , particularly the following passage therefrom (at page 340) :

" In view of the aforesaid and in view of the attitude of the lawmakers in dealing with this problem as evidenced by the amendment and in the circular originally issued prior thereto and bearing in mind that under the scheme of the Act where the wife or minor child carries on a running business, the right to carry forward the loss in the running business would be available to the wife or minor child if they themselves were assessed, but the right would be completely lost if the individual in whose total income the loss is to be included is not permitted to carry forward the loss u/s 24(2), since that would be the result of the strict literal construction, it is apparent that that could not have been the intent of Parliament. Therefore, where Section 16(3) of the Act operates, the profit or loss from a business of the wife or minor child included in the total income of the assessee should be treated as the profit or loss from a '' business carried on by him'' for the purpose of carrying forward and set off of such loss u/s 24(2) of the Act.

On a consideration of the scheme of the Act and the provisions therein as noted before, the share income of the wife and minor children included in the assessee''s total income u/s 16(3) of the Act should be regarded as business income derived from business carried on by the assessee and, in that view of the matter, the assessee is entitled to set off his loss carried forward from the previous years."

Counsel for the Revenue, however, contended that Parliament, in Section 64(1)(iv) has not used the expression "deemed to be the income" in contradistinction to the said expression used in Section 64(2)(c). The capital gains in question included in the income of the assessee cannot, therefore, be treated as income earned by him and as such he cannot take advantage of any of the sections, namely, sections 53, 54 and 54B of the Act. This argument reflects the plain literal interpretation of the section. This interpretation, if accepted, would defeat the object sought to be achieved by enacting the section. On going through the whole scheme of the Act, particularly the object to accomplish which the section is enacted, it can be inferred without fear of contradiction that it has been enacted to counteract the effect of the transfer of assets so far as the computation of the income of the assessee is concerned. This object sought to be achieved shall be borne in mind to find out what exactly was the intention of Parliament. This shall be found out from the language employed by Parliament and if a strict literal interpretation leads to an absurd result in that the object sought to be accomplished would get defeated by such interpretation, then a construction that would avoid such absurdity shall be thought of. Under such circumstances, a construction which results in equity rather than injustice shall be preferred although it is often said that equity and taxation are strangers. This principle of construction, in our view, shall govern the field here because, in the case on hand, we are dealing with an artificial liability created for counteracting the effect of attempts by the assessee to reduce his tax liability by transfer of assets. If that be so, the "capital gains" in question cannot be said to be in any way different from the "capital gains" of the assessee for the purpose of the Act (see Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, ).

The assessing authority, therefore, is bound to treat the" capital gains "which, but for Section 64, should have been assessed in the hands of the wife, as the capital gains of the assessee liable to be assessed in his hands in the same way in which the same would have been assessed in the hands of the wife. The capital gains is chargeable in terms of Section 54 read with Section 72 of the Act. The facts of the case do not attract the provisions of Section 72. What about Section 54? The main purpose of the section is only to give relief in respect of profits on the sale of residential houses. Construing this section, the Supreme Court in Commissioner of Income Tax, Andhra Pradesh Vs. T.N. Aravinda Reddy, , has observed that if you sell your house to make a profit, pay Caesar what is due to him unless it be that you have bought or built another house, subject to the conditions of Section 54(1). If that be the position, the capital gains in question, inasmuch as the same docs not arise from out of the acquisition of a house property, would not attract Section 54. We, accordingly, hold that the finding of the Tribunal, namely, that "the capital gains arising from the compulsory acquisition of the land of the assessee''s wife of an extent of 2.45 acres has to be treated separately and that there is no scope for the application of Section 54(1) of the Income tax Act, 1961, in respect thereof" is beyond challenge.

For the reasons stated above, the question is answered in the affirmative and in favour of the Department.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.