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Facts
The assessee received compensation for compulsory acquisition of hotel building and land. He claimed long-term capital gain and deduction under Section 54D for construction of new property. The AO disallowed the deduction as it was not completed within the stipulated time and the amount was not deposited in the Capital Gain Scheme Account. The CIT(A) upheld the disallowance.
Held
The Tribunal found that the AO and CIT(A) did not examine the issue of exemption under the RFCTLARR Act and Circular No. 36/2016 in detail. The eligibility for deduction under Section 54D was also not properly examined.
Key Issues
Whether the compensation received for compulsory acquisition of land is exempt under the RFCTLARR Act and CBDT Circular No. 36/2016, and if the deduction under Section 54D is allowable.
Sections Cited
250, 143(3), 54D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This appeal is filed by the assessee against the order passed by the National Faceless Appeal Centre (NFAC), Delhi, dated 28.12.2024 for the Assessment Year 2017-18. The appeal arises out of the order passed under section 250 of the Income Tax Act, 1961, against the assessment order dated 25.12.2019 passed u/s 143(3) of the Act by the ACIT, Circle – 6(2)(1), Bangalore.
The assessee is an individual. He filed his return of income for the A.Y. 2017-18 declaring a total income of ₹1,78,07,880.00 only. The assessee was carrying on business in the name of M/s Sri Arunodaya Residence. He also earned income from capital gains.
During assessment proceedings, the Assessing Officer (AO) noticed that the assessee had received compensation from the Government of Karnataka for compulsory acquisition of his hotel building and land. The assessee had claimed long-term capital gain of ₹1,65,51,367.00 only. He also claimed deduction under section 54D of ₹3,18,28,120 and construction cost of ₹1 crore.
The AO disallowed the deduction of ₹1 crore claimed as cost of construction. According to the AO, the amount was utilized only after the due date of filing of return. The assessee had not deposited the amount in the Capital Gain Scheme Account before the due date. Also, he could not prove that the construction was completed within three years from the date of acquisition. Therefore, the AO added ₹1 crore to the total income of the assessee as long-term capital gain.
The assessee filed an appeal before the NFAC. In the appellate proceedings, the assessee raised a new contention. He claimed that the compensation received from the Government was exempt under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) and Circular No. 36/2016 dated 25.10.2016 issued by CBDT.
The ld. CIT(A), however, held that no evidence was submitted to show that the land was acquired under the RFCTLARR Act. The assessee was given multiple opportunities but did not produce any supporting . documents. Hence, the ld. CIT(A) upheld the disallowance of ₹1 crore made by the AO and dismissed the appeal.
6.1 Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.
The Ld. AR before us contended that the total compensation of ₹9.23 crores received by the assessee was for compulsory acquisition of land by the Government of Karnataka for public infrastructure. The Ld. AR contends that this amount is fully exempt under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act). The Ld. AR emphasized that the exemption is further supported by CBDT Circular No. 36/2016 dated 25.10.2016, which clarifies that compensation received under the RFCTLARR Act is not taxable. The ld. CIT(A) erred in stating that documentary proof of the compensation being covered under the RFCTLARR Act was not furnished. In fact, such proof was attached to the written submissions dated 08.08.2023, filed in response to the hearing notice dated 27.06.2023. The Ld. AR referred to supportive judgments from various High Courts, including the Jurisdictional Karnataka High Court, affirming that compensation under the RFCTLARR Act is not taxable: o Vellara Francis Thomas v. Union of India (2024) 162 taxmann.com 68 (Kar) o C. Nanda Kumar v. Union of India (2017) 396 ITR 21 (AP) o Viswanathan M. v. Chief Commissioner of Income Tax Dept. (2020) 274 Taxman 411 (Kerala).
It was also submitted that the ld. CIT(A) failed to follow a binding decision of the Bangalore ITAT in the case of Raghu Belagodu (HUF) v. Pr. CIT, dated 27.08.2024, where similar compensation was held to be exempt. The Ld. AR prays that the appeal be allowed in the interest of justice, considering the legal and factual submissions made.
On the other hand, the learned Departmental Representative (DR) relied on the findings of the AO and ld. CIT(A). It was submitted that the assessee had failed to prove that the land was acquired under the RFCTLARR Act. The disallowance was rightly made because the investment in construction was not completed in time, nor was the amount deposited in the Capital Gain Scheme Account. There was no error in the order of the lower authorities.
We have considered the assessment order, the order of the ld. CIT(A), and the submissions placed before us. The main issue in this appeal relates to the exemption of capital gain under the RFCTLARR Act and allowability of deduction under section 54D of the Act for construction of new property.
10.1 The assessee has now relied on CBDT Circular No. 36/2016 dated 25.10.2016 which provides that compensation received for compulsory acquisition under the RFCTLARR Act is not chargeable to tax under the Income Tax Act. The assessee contends that the land/building acquired by the Government falls under the said Act and hence the entire capital gain is exempt. The assessee also filed a revised computation of income.
10.2 However, we find that both the AO and the ld. CIT(A) did not examine this aspect in detail. The ld. CIT(A) has dismissed the claim solely on the ground that the assessee did not file evidence, though the assessee claimed such documents were attached. Thus, in the interest of justice and fair play, we are of the view that the matter needs to be reconsidered. The issue whether the compensation was received under the RFCTLARR Act and whether the Circular No. 36/2016 applies, should be properly verified. Similarly, the eligibility of deduction under section 54D should also be examined afresh considering the decisions relied upon by the assessee. In view of the above, we set aside the order passed by the ld. CIT(A) and restore the matter back to the file of the learned CIT(A) for fresh adjudication after giving the assessee proper opportunity to produce all necessary evidence and supporting documents. The ld. CIT(A) shall also consider CBDT Circular No. 36/2016 and any judgments to be relied upon by the assessee.
10.3 The assessee is directed to cooperate and furnish all required information. The ld. CIT(A) shall pass a reasoned and speaking order in accordance with law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.