No capital gain accrues until right to receive compensation confirmed in proceedings under Land Acquisition Act
Citation of the Case:- CIT vs. Suman Dhamija (Delhi High Court), Income Tax Appeal Nos. 20 of 2003 & others, Date of Judgment: 08/12/2015
Brief of the Case
Delhi High Court held In the case of: CIT vs. Suman Dhamija that in the present case the Assessee is justified in contending that although award has been made and the compensation payable has been enhanced, the amount itself is in dispute, that dispute is pending in the Court. In E.D. Sassoon & Co. v. CIT (1954) 26 ITR 27 (SC) it was held that income cannot be said to accrue or arise to an Assessee unless and until there is created in favour of the Assessee a debt due by somebody. Unless that happens it could not be said that the Assessee had acquired a right to receive the income or the income has accrued to him. Hence enhanced compensation received by the Assessee for the purposes of capital gains under Section 45 (5) (b) will have to await the final decision from the proceedings under Land Acquisition Act.
Facts of the Case
The land acquisition proceedings that commenced with the notification dated 23rd January, 1965 under Section 4 of the Land Acquisition Act, 1894 (LA Act), an Award No.2225 was made by the Land Acquisition Collector (LAC) on 26th March 1969 in respect of land measuring 4826 bighas situated in Village Masoodpur, of which included the land admeasuring 3224 bighas, 1/16th of the bhumidari rights in which was purchased by late Mr. J.N. Dhamija.
Mr. J.N. Dhamija filed his return of income for AY 1989-90 on 26th August 1989 declaring an income of Rs. 15,61,044 of which Rs. 14,44,39 was shown as interest from M/s. Kashmir Holdings. During the course of the assessment proceedings, Mr. Dhamija’s auditors submitted a letter dated 19th August 1990 to the Assessing Officer (AO) explaining that Mr. Dhamija had received additional compensation of Rs. 3,64,03,764/- and Rs. 6,02,3301- in the previous year relevant to AY 1989-90 for his share in land measuring 3224 bighas situated in village Masoodpur, Delhi pursuant to an order passed by the ADJ in LAC No. 201/80 on 7th July 1987. It was explained in the said letter that while the first enhanced sum of Rs.6,02,330/- was not disputed by the Union and had been disclosed by the Assessee as capital gains, the balance enhanced sum of Rs.3,64,03,764/- was not accepted by the Union of India and an appeal had been filed by it in this Court. It was pointed out that the money had been released to the Assessee against bank guarantee and that in case the Assessee did not succeed in the High Court in the said appeal of the Union of India, the entire amount would have to be returned by the Assessee to the Union of India.
It was submitted that till finality was attached to the determination of the appeal by the High Court withdrawal of the amount by the Assessee was pursuant to an inchoate and contingent right and therefore not liable to any capital gains. The AO passed an order dated 27th March 1992 holding that the entire compensation received by Mr. Dhamija, whether in the form of interest on solatium or additional compensation, was taxable in the year of receipt. Capital gain was charged on this amount.
As far as the Wealth Tax Act (WT Act) proceedings are concerned, the Assessee while computing net wealth for AY 1988-89 claimed that the compensation received under bank guarantee was not includable in the net wealth as it was only an advance towards compensation for the compulsory acquisition of the land. While the AO did not accept this claim, the CIT (A) accepted it for AY 1988-89.
Contention of the Assessee
The ld counsel of the assessee submitted that the compensation received and/or receivable was not in respect of any land and was in respect of a capital asset being merely a right which right itself was an inchoate right. Thus Section 45(5) had no application since the Assessee had not acquired any land but only a 1/16th share in the bhumidari rights.
Further, the question whether the Assessee had the right to receive the compensation was itself in dispute and as such Section 45(5) had no application. Thus, where the right to receive the compensation itself was inchoate and not merely the amount received or receivable, Section 45 (5) would have no application. The decision in CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524 was still applicable. Reliance was also placed on the decisions in CIT v. Sharda Sugar Industries Ltd. 239 ITR 393 (Bom). and CIT v. Smt. Prakash Kaur 330 ITR 332(P&H). The decisions of this Court in CIT v. Sharda Kochar and CIT v. Smt. Gulab Sundri Bapna are not applicable as in neither decision, the question whether the two assessees therein had an inchoate right in the title to the asset said to have been transferred was examined. The dispute was only in respect of their inchoate right in the amount of compensation.
Mere receipt of an amount of compensation could not be held to be income. Reliance is placed on the decision in Parimisetti Seetharamamma v. CIT 57 ITR 532 (SC). A receipt can be brought to tax only if it falls under any tax provisions of the Act and the burden ison the Revenue to establish the same. Section 155(16) cannot also be invoked to contend that in case the assessee loses its right, the order could be amended so as to refund the amount.
Contention of Revenue
The ld counsel of the revenue submitted that the order of ITAT in the cases of Mr. K.K. Kochar and Mrs. Sharda Kochar was reversed by this Court by the decision dated 18th July 2014 of this Court in ITA No. 171 of 2001 (Commissioner of Income Tax v. Sharda Kochar). The order of the ITAT in Gulab Sundri Bapna (supra) was reversed by this Court in CIT v. Gulab Sundri Bapna (2014) 367 ITR 498. Consequently, these appeals of the Revenue ought to succeed on that short ground.
After the decision of the Supreme Court in CIT v. Ghanshyam (HUF) (2009) 315 ITR 1 (SC), the earlier decision in CIT v. Hindustan Housing and Land Development Trust Limited (supra) was no longer good law as far as receipt of enhanced compensation, solatium, additional amount and interest in the financial year ending 31st March2008 (relevant to AY 1988-89) was concerned. It made no difference whether the proceedings concerning enhancement of compensation were pending in appeal in the High Court. Section 155(16) read with Section 45(5)(c) of the Act would take care of the consequences of the final orders that might be passed in either the proceedings for enhancement of compensation or those under Section 31(2) LA Act. Reliance was also placed on the decision in CIT v. Govindbhai Mamaiya 367 ITR 498 (SC).
In support of the submission that Section 45 (5) was applicable from AY 1988-89 onwards reliance was placed on the decisions in CIT v. Commissioner of Wealth Tax, Calcutta v. U.C. Mehatab AIR 1995 SC 1925, Commissioner of Wealth Tax, Kolkata v. Smt. Anjamli Khan AIR 1991 SC 2023, CIT v. Bhanwarlal Choudhary (2002) 125 Taxman 361 (Raj).
Held by CIT (A)
The CIT (A) by an order dated 28th August 1992 held following the order rendered by him in the case of Mr. K.K. Kochar, one of the co-owners of the same property, that the land in question was not agricultural land, and to this extent the plea of Mr. Dhamija was negatived. The CIT (A) however agreed with Mr. Dhamija that since the negotiable instrument in the nature of the treasury vouchers were received by Mr. Dhamija on 30th March 1988, the taxability of the said sums had to be examined in AY 1988-89 and not in the AY 1989-90. The AO was directed to examine the assessability of the amount of capital gains, in the accounting year 1987-88 relevant to AY 1988-89, after considering all the contentions of Mr. Dhamija and pass a speaking order after hearing him on all the relevant points.
The CIT (A), in the appeal by Mr. Dhamija held, inter alia, that Section 45 (5), was not applicable on the enhanced compensation since as of that date the order of the Delhi High Court regarding ownership of the land in favour of the Assessee to the extent of his share had not attained finality. Relying upon the decision of the Supreme Court in CIT v. Hindustan Housing and Land Development Trust Limited (1986) 161 ITR 524, the CIT (A) agreed with Mr. Dhamija that he would be subject to tax at that stage only to the extent of the amount on which there was no dispute, i.e. Rs.1,20,446/- together with the corresponding interest. The CIT(A) held that the re-opening of the assessments for AY 1981-82 to 1987-88 by invoking Section 147 of the Act was not justified. Consequently, the CIT (A) invalidated the action of the AO in charging interest in AYs 1981-82 to 1987 -88.
Held by ITAT
A common order dated 31st December, 2002 was passed by the ITAT disposing of all of the aforementioned appeals. The Assessee’s appeals were dismissed by holding that the reopening of the assessments for AYs 1981-82 to 1987-88 by invoking Section 147 of the Act was valid. It was held that the “AO’s action for reopening assessments for all the assessment years under consideration was based on the material which came into existence only after the completion of the assessments in those years according to which the income chargeable to tax was liable to taxed in those assessment years, we feel that his actions was based on his prima facie belief that income chargeable to tax has escaped assessment.” To that extent the Revenue’s appeals were partly allowed. However, the ITAT agreed with the Assessee that the enhanced compensation could not be included in the total income for the AYs in question “for the reason that no finality was attached to the receipt of the amount.” The ITAT followed it earlier orders in the cases of Mr. K.K. Kochar and Mrs. Sharda Kochar and also in the case of Gulab Sundri Bapna 79 ITD 455 (Del).
As far as the WT Act cases were concerned, the ITAT agreed with the Assessee that the monies received were in the nature of trust money. The WT Act did not contemplate including trust money in the net wealth. The appeals of the Revenue were dismissed and those of the Assessee were allowed. As regards sum of Rs.6,02,330/-, since the CIT(A) had not dealt with the grievance of the Assessee, the said issue was remitted to the CIT(A) for a fresh adjudication.
Held by High Court
Conditions for sub-section 5 (b) of Section 45 to be attracted can be said to have been fulfilled?
There are two strands of litigation. One pertains to right of the Assessee to receive compensation which, from the above narration of facts, has obviously not attained finality. The civil suit pertaining to the right of the Assessee was decreed. However, after the land acquisition Award was passed, there were three sets of claimants to the compensation and this led to the reference to the ADJ under Section 31 (2) of the LA Act. The appeals challenging the order passed by the ADJ in the said proceedings have been remanded by the Supreme Court to this Court for a fresh hearing. The outcome of the said appeals and any further proceedings arising there from would decide whether or not the Assessee has a right to receive compensation for the 1/16th share of the bhumidari rights. Therefore, although there is a transfer of the 1/16th share of the bhumidari right in the land in question in favour of the Assessee, the question whether the Assessee is entitled to receive compensation for the extinguishment of such right on its vesting in the State is still uncertain or inchoate. That will also depend on the answer to the question whether the transfer of the bhumidari right by way of sale can be construed as transfer of an asset for the purposes of Section 45 (5).
The second strand of litigation pertains to the enhancement of compensation in the reference under Section 18 of the LA Act. As far as the second strand of litigation is concerned, in view of the decision of the Supreme Court in CIT v. Ghanshyam (HUF) (supra) the legal position is clear that notwithstanding the pendency of appeals regarding enhancement of compensation, the amount of enhanced compensation is taxable in the year of receipt. Also, the said decision clarifies that interest under Section 28 of the LA Act, the additional compensation and the solatium would also be likewise taxable.
The right to receive such compensation in the present case is intrinsically linked to the outcome of the appeals arising from the proceedings under Section 31 (2) LA Act. The question whether the transfer of the bhumidari rights is also a transfer of a right in the land acquired and is, therefore, capable of being compensated would also hinge on the outcome of the appeals arising from the proceedings under Section 31 (2) of the LA Act. There is a possibility that if the Assesseeis unable to be successful in the said appeals arising from the proceedings under Section 31 (2) LA Act, she may have to return the compensation amount and the enhanced compensation she has received.
The decision of the Bombay High Court in CIT v. Sharda Sugar Industries Limited ITA No. 171 of 2001 dated 18-7-2014 also appears to support the case of the Assessee insofar as it holds that “where the right to receive payment is in dispute, no income will arise or accrue.” In the present case the Assessee is justified in contending that although award has been made and the compensation payable has been enhanced, the amount itself is in dispute, that dispute is pending in the Court. In E.D. Sassoon & Co. v. CIT (1954) 26 ITR 27 (SC) it was held that income cannot be said to accrue or arise to an Assessee unless and until there is created in favour of the Assessee a debt due by somebody. Unless that happens it could not be said that the Assessee had acquired a right to receive the income or the income has accrued to him.
Consequently, the question of bringing to tax the said enhanced compensation has to await the final outcome of the above proceedings. This would equally apply to the interest, solatium, additional sums received by the assessee on enhanced compensation in the AYs in question. A further corollary is that the stage for applying Section 45 (5) (c) read with Section 155 (16) of the Act cannot be said to have arisen yet. Consequently, that question need not be examined at this stage.
Turning to the wealth tax appeals, it is seen that as held by the ITAT in the present case, amount of compensation received by the Assessee in the nature of ‘trust money’ which may be required to be returned by the Assessee in case she does not succeed in the appeal emanating from the order in the proceedings under Section 31 (2) of the LA Act. For an Assessee to be brought to tax within the ambit of the wealth tax provisions, it should be shown, as on the valuation date, to be belonging to the Assessee. In the facts of the case, the ITAT was justified in holding that the provision of WT Act did not stand attracted yet. That too will have to await the final decision in the appellate proceedings emanating from the order of the ADJ in the proceedings under Section 31 (2) LA Act.
Accordingly appeals disposed of.