C I T KOTA vs. M/S MITTAL BROTHERS

Judgment 12/09/2017

the appeal of the department and confirmed the order of the CIT (A).

(2 of 16) [ITA-143/2012]

business

income.

This represented the difference between the sum

(4 of 16) [ITA-143/2012] of Rs. 7,37,190 payable to the assessee in terms of the award dated July 29, 1956 of the Arbitrator and a sum of Rs. 12,276 out of that amount which had already been assessed to tax. The Income tax Officer treated the sum as liable to income-tax during that year on the basis that the income accrued to the assessee on the date of the award. The assessment was confirmed by the Appellate Assistant Commissioner of Income-tax on first appeal. In second appeal by the assessee before the Income-tax

Appellate

Tribunal,

two contentions were raised by it. It was urged that the amount of compensation received by the assessee was not a receipt of a revenue nature. It was also contended that in any event the amount did not accrue to the assessee as its income during the relevant previous year ended March 31, 1956. The Appellate Tribunal rejected the first contention and held that the compensation received by the assessee related to the acquisition of land which was the stock-in-trade of the assessee, and was, therefore, a trading receipt of the business carried on by the assessee, and therefore, a receipt of a revenue nature liable to tax. The Appellate Tribunal, however, accepted the other contention that the sum of Rs. 7,24,914 was not taxable in the assessment year 1956-57. It allowed the appeal

accordingly by its order dated February 22, 1964. At the instance of the Revenue the Appellate Tribunal referred the question of law set out earlier to the Calcutta High Court for its opinion, and by its judgment dated January 9, 1973 the High Court answered the question in favour of the assessee and against the Revenue.

Bombay City MANU/SC/0088/1954 : [1954]26ITR27(SC) this Court considered

(5 of 16) [ITA-143/2012] the question as to the point at which income could be said to accrue or arise to an assessee for the purpose of the Indian Income Tax Act. In the majority judgment delivered by N.H. Bhagwati, J. it was explained that the words "arising or accruing" describe a right to receive profits, and that there must be a debt owed by some body. "Unless and until there is created in favour of the assessee a debt due by somebody", it was observed "it cannot be said that he has acquired a right to receive the income or the income has accrued to him". In the present case, although the award was made by the Arbitrator on July 29, 1955 enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the Court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs. 7,36,691

deposited by the State Government on April 25, 1956 without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety the right to payment of the enhanced compensation would have fallen altogether. This is a case which must be distinguished from that decided by this Court in Kedarnath Jute Mfg. Co. Limited, v. Commissioner of Income-Tax (Central), Calcutta MANU/SC/0438/1971 : [1971]82ITR363(SC) where the liability to sales tax arose immediately on a dealer affecting sales which were subject to sales tax and what remained to be done was a mere quantification of that liability. The case compares rather with Commissioner of Income-tax v. Jai Parkash Om Parkash Co. Ltd. MANU/PH/0305/1960. The very foundation of the claim made by the assessee was in serious jeopardy and nothing would be due if the appeal was decided against the assessee. Our attention has been drawn by the Revenue to Pope The King Match Factory v. Commissioner of Income-tax MANU/TN/0558/1962 : [1963]50ITR495(Mad) . That case, however, proceeded on the basis that excise duty was payable and its quantification alone remained to be decided in the appeal. We

(6 of 16) [ITA-143/2012] may point out that the Andhra Pradesh High Court, dealing with the taxability of compensation received under the Land Acquisition Act in Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income- tax MANU/AP/0157/1968 : [1969]74ITR651(AP) held that when land was taken over by the Government the right of the owner to compensation was an inchoate right until the compensation had been actually determined and had become payable. It was observed that the enhanced compensation accrued to an assessee only when the Court accepted the claim and not when the land was taken over by the Government. Examining the question whether income could be said to have accrued to the assessee on the date when possession of the land was taken by the Government for the purpose of assessment to tax in the year of assessment P. Jaganmohan Reddy, C.J., speaking for the Court, said: If the actual amount of compensation has not been fixed, no income could accrue to him. It cannot be contended that the mere claim by the assessee, after taking of possession, at a particular rate or for a certain sum is the compensation. It is the amount actually awarded by the Collector or subsequently decreed by the court which accrues to him, and the respective amounts, whether awarded by the Collector or the court accrue on the respective dates on which the award or the decree is passed. Income-tax is not levied on a mere right to receive compensation; there must be something tangible, something in the nature of a debt, something in the nature of an obligation to pay an ascertained amount. Till such time, no income can be said to have accrued.... On the date when the Collector awarded the compensation, it is only that amount which had accrued or deemed to accrue, whether in fact paid or not. But by no stretch of the words in Section 4(1)(b)(i), could it be said that the right to enhanced compensation, which has not yet been accepted by the proper forum, namely, the court, has become payable on the date when the original compensation became payable, for being included in that year of assessment. The enhanced compensation

(7 of 16) [ITA-143/2012] accrues only when it becomes payable, i.e., when the court accepts the claim. As has been stated earlier, a mere claim by the assessee, after taking of possession of the land, at a particular rate or for a certain sum is not compensation. It must not be forgotten that, even if a court was awarded enhanced compensation, there is a right of appeal by the Government to the High Court, and the High Court may either disallow that claim or reduce the compensation. As against that judgment, there is further right of appeal to the Supreme Court. The assessee also can appeal against the insufficiency of the enhanced compensation. Can it be said that the final determination by the highest court of the compensation would entitle the Income-tax Officer, notwithstanding the period of limitation fixed under the Income- tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation? We do not think there can be any justification for such a proposition. On a proper construction of the terms 'accrue' or 'arise', we are of the view that such an interpretation cannot be placed. The interpretation given by us does not affect the interests of the revenue. At the same time, it safeguards the assessee and prevents harassment. To hold otherwise would be contrary to the provisions of law. The legal position was explained in further detail by the Gujarat High Court in Topandas Kundanmal v. Commissioner of Income-tax, Gujarat MANU/GJ/0029/1976 : [1978]114ITR237(Guj) . The High Court was called upon to decide without the right to receive the enhanced compensation under the Land Acquisition Act accrued or arose to the assessee when he sought a reference under Section 18 of the Act or when the award was made by the Civil Judge although an appeal was pending against that award. The learned Judges referred to the nature of an award made by the Collector, and adverting to the opinion of this Court in Harish Chandra Raj Singh v. The Deputy Land

Acquisition

Officer

and Anr. MANU/SC/0386/1961 : [1962]1SCR676 that the award made by the Collector was (8 of 16) [ITA-143/2012] merely an offer or tender of the compensation determined by the Collector to the owner of the property on the acquisition, the High Court observed: .. the legal position which emerges is that there is no liability in praesenti to pay an enhanced compensation till it is judicially determined by the final court since the entire question, namely, whether the offer made by the Land Acquisition Officer is inadequate and the claimant is entitled to an additional compensation and if yes, at what rate is in flux till the question is set at rest finally, we do not think that any enforceable right to a particular amount of compensation arises. The offer made by Land Acquisition Officer, by his award, if not accepted by a claimant would not result automatically in a liability to pay additional compensation as claimed by party aggrieved. There is no doubt a liability to pay compensation as offered by the Land Acquisition Officer. But that is far from saying that liability is a liability to pay additional compensation or enhanced compensation as claimed by a party aggrieved. If there is an existing liability, the mere fact that the payment is postponed to the future would not detract that liability from becoming a debt but the liability to pay unliquidated damages or additional compensation which are inchoate or contingent would not create a debt. Khan Bahadur Ahmed Alladin & Sons (supra) and Topandas Kundanmal (supra) were relied on by the Gujarat High Court in Additional Commissioner of Income-tax, Gujarat v. New Jehangir Vakil Mills Co. Ltd. MANU/GJ/0025/1979 : [1979]117ITR849(Guj) for reaffirming that it was on the 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 the additional amount of compensation claimed by the owner of the land.

when

Section 45(5) stood incorporated by Finance Act 1987 w.e.f. 1.4. 88. Further, the judgment of this Court in Hindustan Housing (supra) has been given in respect of assessment year 1956-57 under the Income-tax Act, 1922 whereas, in the present case, we are concerned with the 1961 Act which defines the word "transfer" in much wider sense under Section 2(47). Lastly, for the reasons given hereinafter, particularly in the context of introduction of Section 45(5) of the 1961 Act w.e.f.1.4.88 a totally new scheme stood introduced keeping in mind cases of compulsory acquisition under the 1894 Act under which compensation is payable at multiple stages and amounts stand withdrawn by the assessee- claimants and used by the assessee(s) for several years, during which litigation is pending. It is in the context of Section 45(5) that we need to decide the year of taxability. It is significant to note that Section 12B of 1922 Act did not contain specific reference to compulsory acquisition as contained in Section 2(47) of the 1961 Act. Therefore, in our view, the judgment of this Court in Hindustan Housing (supra) is not applicable to the present case.

(11 of 16) [ITA-143/2012] compensation into deemed income on receipt. We find no merit in this argument. The scheme of Section 45(5) of the 1961 Act was inserted w.e.f. 1.4.88 as an overriding provision. As stated above, compensation under the L.A. Act, 1894, arises and is payable in multiple stages which does not happen in cases of transfers by sale etc. Hence, the legislature had to step in and say that as and when the assessee-claimant is in receipt of enhanced compensation it shall be treated as "deemed income" and taxed on receipt basis. Our above understanding is supported by insertion of Clause (c) in Section 45(5) w.e.f.

and Section 155(16) which refers to a situation of a subsequent reduction by the Court, Tribunal

or other

authority

and recomputation/amendment

of the assessment order. Section 45(5) read as a whole (including clause "c") not only deals with re- working as urged on behalf of the assessee but also with the change in the full value of the consideration (computation) and since

the enhanced compensation/consideration

(including interest under Section 28 of the 1894 Act) becomes payable/paid under 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155(16) of the 1961 Act, later on. Hence, the year in which enhanced compensation is received is the year of taxability. Consequently, even in cases where pending appeal, the Court/Tribunal/Authority

before

which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under Section 45(5) of the 1961 Act. This is the scheme

of Section 45(5) and Section 155(16) of the 1961 Act. We may clarify that even before the insertion of Section 45(5)(c) and Section 155(16) w.e.f. 1.4.04,

the receipt

of enhanced

(12 of 16) [ITA-143/2012] compensation under Section 45(5)(b) was taxable in the year of receipt which is only reinforced by insertion of Clause (c) because the right to receive payment under the 1894 Act is not in doubt. It is important to note that compensation, including enhanced compensation/consideration under the 1894 Act, is based on the full value of property as on date of notification under Section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under Section 23(1A), or Section 23(2) or under Section 28 of the 1894 Act it is on the basis that award of Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification.” 8. 250 ITR759 (AP) wherein it has been held as under:- “2. We have given the facts of the case somewhat in detail only because we have find that the question is not happily framed. The question, which needed to be answered, is "Whether the assessing officer has to wait till the final disposal by the final Court in an acquisition matter before the interest accrued is taxed?" Therefore, we [ITA-143/2012] case, if the judgment enhancing the compensation in favour of the assessee is reversed by the Supreme Court, then the assessee, even after payment of the tax on the accrued interest, would not be remediless. He can always seek the refund of the tax so paid, by making appropriate application for rectification of the assessment. The Tribunal relied on judgment in Smt. Sankari Manickyamma (1 supra) that obviously stands reversed in view of the judgment of the Supreme Court judgment in Rama Bai (2 supra).”

(14 of 16) [ITA-143/2012] “After considering the orders of the AO and ld. CIT(A) we find that ld. CIT(A) has rightly deleted both the additions. As per District Curt order, Award was given in favour of the assessee for Rs.91,20,054/-. This award contains two items i.e. Rs.30,46,914/- for work+Rs.60,24,042/- for interest. It is a matter of fact that this award was awarded by District Court for a dispute of contract work which was related to assessment year 1981-82. The entire order of the District Court is challenged before the Hon’ble High Court. Copy of the award given by District Court as well as copy of petition filed by the Rajasthan Government before the Hon’ble High Court are placed on record. We further noted that even the AO himself admitted at page 4 of his order that the dispute is before Hon’ble High Court and it has been observed by AO that it will take years together and for this reason this income cannot be said that is not assessable in the year under consideration. It has been further mentioned by AO himself that if the Hon’ble High Court decided the issue against the assessee, then the assessee can seek relief in the year of decision. All these facts are mentioned in the order of the AO at page 4 as mentioned above. This is undisputed fact that entire award given by District Court has been challenged before the Hon’ble Rajasthan High Court which is pending and the ld. CIT(A) has examined this fact extensively and then only has held that neither any trading addition can be made nor any addition can be made on account of interest. For this purpose reliance is placed on the decision of Hon’ble Apex Court in case of Hindustan Housing and Land Development Trust Ltd, 161 ITR 524 (SC). For the sake of further clarification, the interest component is not the assessee has earned any interest income on account of principal award received by assessee which was deposited in the bank and interest income has accrued to the assessee. In fact, the District Court award was for Rs.91 lacs or odd which included the interest on the principal and this entire award has been challenged by the Rajasthan Government before the Hon’ble Rajasthan High Court. Therefore, the (15 of 16) [ITA-143/2012] matter is under dispute. Since the matter is under dispute, no addition can be made in the year under consideration in the hands of the assessee as held by the Hon’ble Apex Court (supra). In view of these facts and circumstances and in view of the detailed reasoning given by the ld. CIT(A), we confirm his order.”

(16 of 16) [ITA-143/2012] or consideration is reduced by any court, Tribunal or other authority, the Assessing Officer shall amend the order of assessment so as to compute the capital gain by taking the compensation or consideration as so reduced by the court, Tribunal or any other authority to be the full value of consideration; and the provisions of section 154 shall, so far as may be, apply thereto, and the period of four years shall be reckoned from the end of the previous year in which the order reducing the compensation was passed by the court, Tribunal or other authority.”