RANJITSINH NARSINH VAGHELA,GANDHINAGAR vs. THE INCOME TAX OFFICER, WARD-3, GANDHINAGAR

The assessee did not file his return of income for the AY 2012-13, claiming that his total income was below the taxable limit and there was no requirement to file the return. The AO received information from the Deputy Director of Income Tax (Investigation) [DDIT (Inv.)], Ahmedabad, that the assessee had received cash of Rs.4,32,36,000/- during the Financial Year (FY) 2011-12 relevant to AY 2012-13. This income had not been reported in any return of income. Based on this credible information, the AO formed the belief that income chargeable to tax had escaped assessment. Consequently, the AO reopened the assessment under section 147 of the Act and issued a notice under section 148 of the Act on 28/03/2019. In response to the notice under section 148, the assessee filed his return of income on 22/05/2019, declaring total income of Rs.1,40,764/-. The assessee also claimed exemption of Rs.6,22,38,075/- under section 10(37) of the Act on account of compensation received for the compulsory acquisition of agricultural land situated at Survey Nos. 56/1 and 56/2, Dholakuva, Gandhinagar.

1. Shri Abhraji Ataji Thakor, Shri Baldevji Ataji Thakor, and Shri Ambaji Ataji Thakor (Thakor Brothers) were in possession of agricultural land situated at Survey Nos. 56/1 and 56/2, Dholakuva, Gandhinagar. These properties were inherited from their forefathers and used for agricultural purposes. The land was compulsorily acquired by the Government of Gujarat for the purpose of capital assets. The owners of the land were made to believe that after the acquisition, they would be granted compensation. However, as Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13

2. The ownership dispute between the Thakor Brothers and Shri Ranjitsinh Narsinh Vaghela resulted in the compensation amount being deposited with the Principal Senior Civil Judge, Gandhinagar who in turn kept the amount in two fixed deposits of Rs.8,22,25,640/- and Rs.6,71,34,537/- on 19-09-2011. Later the court resolved the dispute and distributed the amounts kept in fixed deposits along with accrued interest among the parties. The amounts distributed by the court are:

3. The AO issued a show cause notice to the assessee, referring to the compensation received and the related interest component, which was detailed as under: 1. Compensation in respect of Survey No. 56/1: o Fixed Deposit (FD) Amount: Rs. 8,22,25,640/-. o Withdrawal by Hon'ble Civil Court: Rs. 12,62,82,922/-. o Bank Interest Component: Rs. 4,40,57,282/- (accrued for the period 07/02/2006 to 19/09/2011). o Amount Paid to the Assessee: Rs. 7,91,57,001/-. o Taxable Portion of Interest: The AO observed that the proportionate interest attributable to the compensation amounting to Rs. 4,24,12,321/- [(Rs. 4,40,57,282/- * 100) / Rs. 8,22,25,640/-] is taxable under the provisions of the Income Tax Asst. Year : 2012-13

Compensation in respect of Survey No. 56/2: o Fixed Deposit (FD) Amount: Rs. 6,71,34,537/-. o Withdrawal by Hon'ble Civil Court: Rs. 9,70,16,199/-. o Bank Interest Component: Rs. 2,98,81,662/- (accrued for the period 07/02/2006 to 19/09/2011). o Amount Paid to the Assessee: Rs. 6,45,37,382/-. o Taxable Portion of Interest: The AO noted that the proportionate interest attributable to the compensation amounting to Rs. 2,87,25,665/- [(Rs. 2,98,81,662/- * 100) / Rs. 6,71,34,537/-] is taxable. 3. Summary of Total Interest Considered for Addition: The AO summarized that the total interest component received by the assessee during the relevant financial year amounts to Rs. 7,11,37,986/- (Rs. 4,24,12,321/- + Rs. 2,87,25,665/-).

4. The AO noted that this interest was part of the compensation fixed deposits and requested the assessee to explain why the said amount of Rs. 7,11,37,986/- should not be added to the assessee's total income as taxable interest. The assessee was called upon to furnish their reply or explanation in this regard before the proposed addition was finalized.

5. In response to the show-cause notice dated 24/12/2019, the assessee, Shri Ranjitsinh Narsinh Vaghela, submitted a detailed reply on 25/12/2019. The assessee contended that the interest received or receivable on compensation amounts is not chargeable to tax as it forms an integral part of the compensation awarded by the Hon'ble Civil Court. In support of this contention, the assessee referred to the following: • Tribunal Decision in Urvi Chirag Sheth (ITA No. 630/Ahd/16; 70 taxmann.com 33): In this case, the Ahmedabad Tribunal held that Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13

6. The assessee argued that the Fixed Deposits (FDs) in question were maintained in the name of the Hon'ble Civil Court and not directly by the assessee. The interest accrued was not a personal earning but was received by the assessee as part of the overall compensation after the conclusion of the court proceedings. The assessee cited Explanation to Section 10(37) of the Act to assert that the expression "compensation or consideration" includes any compensation or enhanced consideration awarded by any court, tribunal, or authority and stated that the interest awarded on delayed payment of compensation should be treated as part of the compensation exempt under Section 10(37) of the Act.

7. The AO acknowledged that the compensation and interest amounts were deposited by the Hon'ble Civil Court in the form of Fixed Deposits (FDs) and subsequently paid to the assessee after the final judgment. However, the AO held that the interest accrued on FDs is not part of the compensation but constitutes "income from other sources" under Section 56 of the Act. The AO noted that the payment of additional compensation was deposited in the Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13

The assessee preferred an appeal before CIT(A) who passed an order dismissing the appeal. The CIT(A) observed that the reopening under Section 148 was valid as the Assessing Officer (AO) obtained the necessary approval from the Principal Commissioner of Income Tax (PCIT) and had reason to believe that an income of Rs. 4,32,36,000/- had escaped assessment. Hence, the CIT(A) dismissed the objection as the reopening was as per law. The CIT(A) held that the AO's failure to propose the specific addition in the initial reasons recorded did not invalidate the proceedings. The addition related to FD interest of Rs.7,11,37,986/- emerged from facts disclosed during the reassessment. The CIT(A) further observed that the amounts deposited by the Civil Court were kept in fixed deposits (FDs) to earn interest until the dispute over ownership of land was resolved. The CIT(A) concluded that the interest earned on the FDs is distinct from the compensation awarded and constitutes "income from other sources" under Section 56 of the Act. The CIT(A) referred Asst. Year : 2012-13

Aggrieved by the order of CIT(A), the assessee is in appeal before us with following grounds of appeal: 1. In the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming initiation of re-assessment proceedings beyond the period of four years from the end of the assessment year.

On the facts and circumstances of the case as well on the subject, the learned CIT(A) has erred in confirming the action of Assessing Officer in continuing reassessment proceedings even when he has neither proposed any addition in show cause notice nor made any addition on the grounds stated in reasons recorded for re-opening.

On the facts and circumstances of the case as well on the subject, the learned CIT(A) has erred in confirming the addition of Rs. 7,11,37,986/- on account of interest received on bank deposits made out of additional compensation received without considering that it is a part of consideration on account of compulsory acquisition, and it shall be exempt u/s 10(37) of the Act. 6,19,27,00 4. 4. Alternatively, on the facts and circumstances of the case as well on the subject, the learned CIT(A) has erred in confirming the addition of Rs. 7,11,37,986/- u/s 56 of the Act on account of interest received on bank deposits made out of additional compensation received without providing benefit of 50% as per section 57(iv) of the Act.

It is therefore prayed that the addition made by the assessing officer may please be deleted.

Appellant craves leave to add, alter or delete any grounds) either before or in the course of hearing of the appeal. Asst. Year : 2012-13

1. It is pertinent to note that the Bench after hearing to the parties noted its observation vide its order-sheet entry dated 26-09-2024, which is reproduced here for the sake of clarity – Heard both the parties. It transpires that during the impugned year the assessee had received an amount of Rs. 21 crores (approx.) in cash. The same was stated to be in the nature of compensation received for compulsory acquisition of land by the Government. It was a dispute relating to the ownership of land to whom the compensation was due between three co-owners as one party and the assessee the to the dispute. That the compensation primarily was of the amount of Rs. 14 crores odd, which, pending settlement of the dispute, the Principal Civil Judge had deposited in a FD, in a bank account. That subsequent to settlement of the dispute, interest of Rs.7 crores accrued on it; thus, a total amount of Rs.21 crores became payable on the land acquired by the Government to the owner of the land. It was pointed out that this amount of Rs.21 crores was paid by cheque by the Principal Civil Judge to the three co-owners to in turn pay the amount in cash to the assessee who, it was stated, was decided to be the true owner the course of hearing, it was pointed out to the ld. Counsel for the assessee that if the assessee was found to be the true owner of the land, then why was the amount of compensation paid by the Principal Civil Judge to the three other co-owners when ideally it should have been paid directly to the assessee. Neither the ld. Counsel for the assessee nor the ld. DR had any clue or idea about the reason for doing so. This fact is very pertinent for determining the true nature of the amount received by the assessee in cash, since his contention is that the amount received by way of compensation and the interest accrued thereon also acquired the colour of compensation and hence If the amount the nature of compensation, then ideally the Principal Civil Judge should have given it, in the first place, directly to the correct owner identified. Therefore, this fact needs to be clarified before proceeding with the adjudication of the taxability of the interest portion of the amount received by the assessee in cash. Adjourned to 30th October, 2024 with the direction to both the parties to clarify the fact noted by us above.

2. First we deal with the grounds challenging the re-opening of the assessment u/s 147

During the course of hearing before us on 03-12-2024, the Authorized Asst. Year : 2012-13

The Departmental Representative (DR) submitted that the assessee had not filed a return of income for the relevant assessment year. Information regarding the receipt of Rs.4,32,36,000/- was received from the DDIT(Investigation), Ahmedabad. The AO recorded reasons based on this information and issued a notice under Section 148 of the Act. The DR argued that the failure to file a return itself amounts to non-disclosure of material facts. The DR also argued that the addition of Rs.7,11,37,986/- arose directly from the inquiry related to the compensation and deposits and therefore there is a difference in the amounts recorded in the reasons for re-opening and actual assessment.

We have carefully considered the submissions of both the AR of the assessee and the DR, along with the facts of the case, applicable legal provisions, and judicial precedents. As per the legal framework the Reassessment can be initiated if the AO has "reason to believe" that income chargeable to tax has escaped assessment. When reassessment is initiated after four years from the end of the relevant assessment year, it must be demonstrated that the assessee failed to disclose fully and truly all material facts necessary for assessment. As per the settled principles of law, the reassessment must be based on the reasons recorded for reopening, but Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13

1. Accordingly, both Ground Nos. 1 and 2 of appeal challenging the validity of the reassessment proceedings are dismissed. Asst. Year : 2012-13

During the course of hearing before us, the AR explained the facts and circumstances and placed on records the copy of order of Revenue Department, copy of Civil Court Judgement for entitlement of compensation, judgement of Hon’ble Civil Judge for additional compensation, copy of Karar Dad, letter of Executive Engineer, Gandhinagar dated 07-12-2005 and 31-01-2006 and Order of Hon’ble Gujarat High Court dated 25-07-2011 (F.A. 3615 and 3616 of 2005). The AR contended that the interest accrued on the fixed deposits (FDs) maintained by the Principal Civil Judge was part and parcel of the compensation awarded for the compulsory acquisition of land by the Government. Since the compensation amount was deposited in FDs due to the legal dispute over ownership, the accrued interest also acquired the same character as the compensation itself. Therefore, the interest portion should be treated as compensation and exempt under Section 10(37) of the Act. The AR reiterated the reliance of assessee on Sections 28 and 34 of the Land Acquisition Act, which provide for statutory interest on delayed compensation payments.

1. From the documents submitted by the assessee before lower authorities, the DR pointed out that the power of attorney was given in the name of the father of assessee to fight the disputed land the ownership of the land never changed. The DR also pointed out that the dispute was relating to the ownership of the land and that has no relation with the amount of compensation. The compensation awarded by the court already included the interest component due to delay in payment and therefore the amount of compensation, including interest due to delay, kept in the FDs by the Court Asst. Year : 2012-13

2. While going through the orders of AO and CIT(A) we noted that the total compensation was paid to the original landowner by the court and the original landlord withdrew the cash and paid to the assessee. It was also observed that the distribution of amount of compensation totalling to Rs.14,93,60,177/- as paid by the Court to the parties are not coming out properly and are not getting reconciled with the orders of both AO and CIT(A). Therefore, the hearing seeking clarification was fixed on 03-01-2025 which was adjourned to 10-01-2025. During the clarification hearing the AR agreed that the reconciliation is not coming out from the order of AO properly however the assessee can prepare the reconciliation and present the same. In our considerate opinion such reconciliation provided by the assessee will have to be verified by the AO and commented upon therefore it will be fit to remand the matter back to the AO for fresh assessment after taking into consideration the reconciliation as provided by the assessee. The AR did not object to the same and stated that a specific direction may be given to the AO that if the interest is treated as taxable under Section 56, a deduction of 50% of the interest should be allowed under Section 57(iv) of the Act.

3. The DR placed on record the assessment order of the one of the original land owner Shri Baldevbhai Thakor (PAN: AKOPT 4919 K) who claimed exemption u/s 10(37) and interest received on fixed deposits amounting to Rs.2,87,25,665/- was added as income from other sources u/s.56 on protective basis. The DR stated that both the parties have claimed exemption Asst. Year : 2012-13

We have carefully considered the submissions of both the AR of the assessee and the DR, as well as the relevant records and orders of the AO and the CIT(A). The AR contended that the interest accrued on the fixed deposits maintained by the Principal Civil Judge formed part of the compensation awarded for the compulsory acquisition of agricultural land and was exempt under Section 10(37) of the Act. The AR relied on several judicial decisions and submitted supporting documents, including the judgments of the Civil Court and the Hon’ble Gujarat High Court. The AR also requested that if the interest is held taxable, the AO should grant a 50% deduction under Section 57(iv) of the Act.

1. In contrast, the DR argued that the interest represented "income from other sources" under Section 56 and pointed out that the compensation already included statutory interest for delayed payment. The DR also highlighted discrepancies in the reconciliation of the compensation and interest amounts and placed on record the assessment order of a co-owner, Shri Baldevbhai Thakor (PAN: AKOPT 4919K), where a similar interest amount was added on a protective basis.

2. We note that the orders of the AO and CIT(A) do not clearly explain the distribution of the total compensation of Rs.14,93,60,177/- and its reconciliation with the amounts withdrawn and distributed among the parties involved. The flow of funds—particularly the cash withdrawn by the original landowner and the manner in which it was handed over to the Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13

3. Given the complexities and the need for proper verification of the reconciliation submitted by the assessee, we are of the view that a fresh assessment is necessary to address these issues comprehensively.

4. We are not expressing any opinion on the merits of the assessee's claim for exemption under Section 10(37) of the Act or the alternate claim for a deduction under Section 57(iv) of the Act at this stage. The AO is directed to:

Verify the reconciliation of the compensation and interest amounts, including the cash withdrawals by the original landowner and their subsequent distribution to the assessee and other parties. 2. Assess the nature and taxability of the amounts received by the ultimate recipient in accordance with the provisions of the Act. 3. Ensure that there is no double taxation by cross verifying the assessments of the co-owners and reconciling their respective claims.

5. The AO shall provide the assessee with a fair opportunity to present all relevant details and submissions. Accordingly, the order of the CIT(A) is set aside, and the matter is restored to the AO for a fresh assessment.

Other grounds are generic in nature and, hence, not adjudicated. Asst. Year : 2012-13

In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. Order pronounced in the Open Court on 15th January, 2025 at Ahmedabad. (T.R. SENTHIL KUMAR) JUDICIAL MEMBER अहमदाबाद/Ahmedabad, िदनांक/Dated 15/01/2025

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