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

In response to the show-cause notice dated 24/12/2019, the assessee,\nShri Ranjitsinh Narsinh Vaghela, submitted a detailed reply on 25/12/2019.\nThe assessee contended that the interest received or receivable on\ncompensation amounts is not chargeable to tax as it forms an integral part of\nthe compensation awarded by the Hon'ble Civil Court. In support of this\ncontention, the assessee referred to the following:\n• Tribunal Decision in Urvi Chirag Sheth (ITA No. 630/Ahd/16; 70\ntaxmann.com 33): In this case, the Ahmedabad Tribunal held that\n Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n7\ninterest received on compensation in a motor accident claim is part of\nthe compensation itself and, hence, is not taxable as \"income from other\nsources.\"\n• Gujarat High Court Decision in the case of Movaliya Bhikhubhai\nBalabhai v. ITO (Special Civil Application No. 17944 of 2015): The\nHon'ble Gujarat High Court held that interest on compensation\nawarded for land acquisition forms part of the compensation and is not\nsubject to Tax Deducted at Source (TDS).\n• Circular from Revenue Department of Gujarat State: The assessee\nfurnished a copy of the circular issued by the Gujarat Revenue\nDepartment, which directed that no TDS should be deducted on\ninterest paid on compensation as it forms a part of the compensation.\n2.

The assessee argued that the Fixed Deposits (FDs) in question were\nmaintained in the name of the Hon'ble Civil Court and not directly by the\nassessee. The interest accrued was not a personal earning but was received\nby the assessee as part of the overall compensation after the conclusion of the\ncourt proceedings. The assessee cited Explanation to Section 10(37) of the Act\nto assert that the expression \"compensation or consideration\" includes any\ncompensation or enhanced consideration awarded by any court, tribunal, or\nauthority and stated that the interest awarded on delayed payment of\ncompensation should be treated as part of the compensation exempt under\nSection 10(37) of the Act.\n2.

The AO acknowledged that the compensation and interest amounts\nwere deposited by the Hon'ble Civil Court in the form of Fixed Deposits (FDs)\nand subsequently paid to the assessee after the final judgment. However, the\nAO held that the interest accrued on FDs is not part of the compensation but\nconstitutes \"income from other sources\" under Section 56 of the Act. The AO\nnoted that the payment of additional compensation was deposited in the\n Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n8\ncourt on 10/01/2006 and that the dispute over ownership delayed the release\nof funds. The interest accrued on these FDs during the period 07/02/2006 to\n19/09/2011 was deemed as a separate income stream arising from the deposit\nand not as compensation for delayed payment. The AO held that the interest\nearned on FDs cannot be considered as compensation under Section 10(37) of\nthe Act and thus is taxable. The AO determined that the total interest\ncomponent of Rs.7,11,37,986/- (Rs.4,24,12,321/- for Survey No. 56/1 and Rs.\n2,87,25,665/- for Survey No. 56/2) should be added to the assessee's total\nincome as \"undisclosed interest income.\" The assessment was completed\nunder Section 144 read with Section 147 of the Act, treating the return of\nincome filed after the issuance of notice under Section 148 as non-compliant\ndue to delayed filing.\n3.\nThe assessee preferred an appeal before CIT(A) who passed an order\ndismissing the appeal. The CIT(A) observed that the reopening under Section\n148 was valid as the Assessing Officer (AO) obtained the necessary approval\nfrom the Principal Commissioner of Income Tax (PCIT) and had reason to\nbelieve that an income of Rs.4,32,36,000/- had escaped assessment. Hence,\nthe CIT(A) dismissed the objection as the reopening was as per law. The\nCIT(A) held that the AO's failure to propose the specific addition in the initial\nreasons recorded did not invalidate the proceedings. The addition related to\nFD interest of Rs.7,11,37,986/- emerged from facts disclosed during the\nreassessment. The CIT(A) further observed that the amounts deposited by the\nCivil Court were kept in fixed deposits (FDs) to earn interest until the dispute\nover ownership of land was resolved. The CIT(A) concluded that the interest\nearned on the FDs is distinct from the compensation awarded and constitutes\n\"income from other sources\" under Section 56 of the Act. The CIT(A) referred\nITA No. 451/Ahd/2024\nRanjitsinh Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n9\nto the provisions of Section 10(37), which exempts capital gains arising from\nthe compulsory acquisition of agricultural land, including any compensation\nor consideration enhanced by courts. However, the CIT(A) held that the\ninterest on FDs made by the Civil Court does not qualify as \"compensation or\nenhanced consideration\" under the section's Explanation. The CIT(A) noted\nthat the provisions of Sections 28 and 34 of the Land Acquisition Act, 1894,\nonly apply to statutory interest paid on delayed compensation, not to interest\nearned on FDs.\n4.\nAggrieved by the order of CIT(A), the assessee is in appeal before us\nwith following grounds of appeal:\n1. In the facts and circumstances of the case as well as law on the subject, the learned\nCIT(A) has erred in confirming initiation of re-assessment proceedings beyond the\nperiod of four years from the end of the assessment year.\n2. On the facts and circumstances of the case as well on the subject, the learned CIT(A)\nhas erred in confirming the action of Assessing Officer in continuing reassessment\nproceedings even when he has neither proposed any addition in show cause notice\nnor made any addition on the grounds stated in reasons recorded for re-opening.\n3. On the facts and circumstances of the case as well on the subject, the learned CIT(A)\nhas erred in confirming the addition of Rs.7,11,37,986/- on account of interest\nreceived on bank deposits made out of additional compensation received without\nconsidering that it is a part of consideration on account of compulsory acquisition,\nand it shall be exempt u/s 10(37) of the Act. 6,19,27,00 4.\n4. Alternatively, on the facts and circumstances of the case as well on the subject, the\nlearned CIT(A) has erred in confirming the addition of Rs.7,11,37,986/- u/s 56 of\nthe Act on account of interest received on bank deposits made out of additional\ncompensation received without providing benefit of 50% as per section 57(iv) of the\nAct.\n5. It is therefore prayed that the addition made by the assessing officer may please be\ndeleted.\n6. Appellant craves leave to add, alter or delete any grounds) either before or in the\ncourse of hearing of the appeal.\nITA No. 451/Ahd/2024\nRanjitsinh Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n10\n4.

First we deal with the grounds challenging the re-opening of the\nassessment u/s 147\n5.\nDuring the course of hearing before us on 03-12-2024, the Authorized\nRepresentative (AR) of the assessee stated that the as per the reasons recorded\n Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n11\nfor initiating the proceedings u/s 147 of the Act talks about the quantum of\nRs.4,32,36,000/-, however the addition notice issued by the AO is amounting\nto Rs.7,11,37,986/-, therefore the assessment is not on the basis of reasons of\nreopening. The AR of the assessee also contended that the reassessment\nproceedings initiated beyond four years from the end of the relevant\n assessment year are time-barred and, therefore, invalid.\n6. The Departmental Representative (DR) submitted that the assessee had\nnot filed a return of income for the relevant assessment year. Information\nregarding the receipt of Rs.4,32,36,000/- was received from the\nDDIT(Investigation), Ahmedabad. The AO recorded reasons based on this\ninformation and issued a notice under Section 148 of the Act. The DR argued\nthat the failure to file a return itself amounts to non-disclosure of material\nfacts. The DR also argued that the addition of Rs.7,11,37,986/- arose directly\nfrom the inquiry related to the compensation and deposits and therefore there\nis a difference in the amounts recorded in the reasons for re-opening and\nactual assessment.\n7.\nWe have carefully considered the submissions of both the AR of the\nassessee and the DR, along with the facts of the case, applicable legal\nprovisions, and judicial precedents. As per the legal framework the\nReassessment can be initiated if the AO has \"reason to believe\" that income\nchargeable to tax has escaped assessment. When reassessment is initiated\nafter four years from the end of the relevant assessment year, it must be\ndemonstrated that the assessee failed to disclose fully and truly all material\nfacts necessary for assessment. As per the settled principles of law, the\nreassessment must be based on the reasons recorded for reopening, but\nITA No. 451/Ahd/2024\nRanjitsinh Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n12\nadditions that flow naturally from the inquiry related to the recorded reasons\ncan be made. We note that since the assessee did not file a return of income,\nthe AO had no information about the substantial receipts during the year.\nThe AO's belief that income chargeable to tax had escaped assessment was\nbased on credible information from the investigation. We find that the\nfailure to file a return amount to non-disclosure of material facts necessary\nfor assessment. As per settled law, even if the AO obtains information from\nexternal sources, the reassessment proceedings remain valid if they are based\non new facts that the assessee failed to disclose. We also observe that while\nthe reasons for reopening referred to Rs.4,32,36,000/-, the inquiry revealed\nthat Rs.7,11,37,986/- was interest income accrued on FDs created from the\ncompensation amount. Since this discovery was directly linked to the\nreassessment inquiry, the addition was incidental to the primary reason and\nnot a new issue unrelated to the recorded reasons. We are guided by the\nprinciple that the AO has the jurisdiction to reassess not only the income\nmentioned in the reasons recorded but also related components that emerge\nduring the course of inquiry. We hold that the reassessment proceedings\nwere validly initiated as the interest income of Rs.7,11,37,986/- as added by\nthe AO arose from the compensation-related inquiry. The failure of the\nassessee to file a return and disclose material facts justified the initiation of\nproceedings beyond four years.\n7.

The DR placed on record the assessment order of the one of the original\nland owner Shri Baldevbhai Thakor (PAN: AKOPT 4919 K) who claimed\nexemption u/s 10(37) and interest received on fixed deposits amounting to\nRs.2,87,25,665/- was added as income from other sources u/s.56 on\nprotective basis. The DR stated that both the parties have claimed exemption\n Narsinh Vaghela vs. ITO\nAsst. Year: 2012-13\n15\nu/s 10(37) of the Act, therefore it is important to reconcile the amounts and\ndecide the nature of income in respective hands.\n9. We have carefully considered the submissions of both the AR of the\nassessee and the DR, as well as the relevant records and orders of the AO and\nthe CIT(A). The AR contended that the interest accrued on the fixed deposits\nmaintained by the Principal Civil Judge formed part of the compensation\nawarded for the compulsory acquisition of agricultural land and was exempt\nunder Section 10(37) of the Act. The AR relied on several judicial decisions\nand submitted supporting documents, including the judgments of the Civil\nCourt and the Hon'ble Gujarat High Court. The AR also requested that if the\ninterest is held taxable, the AO should grant a 50% deduction under Section\n57(iv) of the Act.\n9.

In contrast, the DR argued that the interest represented \"income from\nother sources\" under Section 56 and pointed out that the compensation\nalready included statutory interest for delayed payment. The DR also\nhighlighted discrepancies in the reconciliation of the compensation and\ninterest amounts and placed on record the assessment order of a co-owner,\nShri Baldevbhai Thakor (PAN: AKOPT 4919K), where a similar interest\namount was added on a protective basis.\n9.

We are not expressing any opinion on the merits of the assessee's claim\nfor exemption under Section 10(37) of the Act or the alternate claim for a\ndeduction under Section 57(iv) of the Act at this stage. The AO is directed to:\n1. Verify the reconciliation of the compensation and interest amounts,\nincluding the cash withdrawals by the original landowner and their\nsubsequent distribution to the assessee and other parties.\n2. Assess the nature and taxability of the amounts received by the\nultimate recipient in accordance with the provisions of the Act.\n3. Ensure that there is no double taxation by cross verifying the\nassessments of the co-owners and reconciling their respective claims.\n9.