PARAS AND SHUBHAM CHAUDHARY LEGAL HEIR OF KANHAIYA LAL,PANCHKULA vs. ITO, WARD 2, PANCHKULA

The assessee Shri Kanhaiya Lal has received the compensation in the Accounting Year relevant to assessment year 2007-08. Thus, issue arose whether interest received u/s 28 as a consequential statutory benefit is taxable in the hands of the assessee or not ? The AO was of the view that it is taxable and accordingly, taxed it.

Appeal to the ld.CIT (Appeals) did not bring any relief to the assessee.

Before us, ld. counsel for the assessee submitted that interest received u/s 28 of the Land Acquisition Act 1894 is not interest as construed under the Income Tax Act, rather the Land Acquisition Act contemplated this interest as a part of the compensation. This A.Y.2007-08 4 aspect has been interpreted by the Hon'ble Supreme Court in the case of CIT Faridabad Vs Ghanshyam, HUF reported in 315 ITR page 1. He drew our attention towards paragraph No. 19 to 36 of this judgement. The ld. counsel for the assessee, thereafter, made reference to certificates issued by Land Acquisition Collector whereby it has been provided that this compensation was received by the assessee u/s 28 of the Land Acquisition Act, 1894.

The ld. Sr.DR, on the other hand, was unable to controvert the contention of ld. counsel for the assessee.

We have duly considered the rival contentions and gone through the record carefully. In the case of CIT Faridabad Vs Ghanshyam, HUF, Hon'ble Supreme Court has construed the meaning and interpreted Section 28 of Land Acquisition Act as well as Section 45(5) of the Income Tax Act and propounded that as per Section 28 of Land Acquisition Act, the interest is part of enhanced value of the land, hence to be treated at par with the compensation/enhanced compensation. We take note of Section 28 of the Land Acquisition Act which reads as under :

In addition to the market value of the land, as above provided, the Court shall in every case award a sum of 30% on such market value, in consideration of the compulsory nature of acquisition. This is under Section 23(2) of the 1894 Act. In short, Section 23(2) talks about solatium. Award of solatium is mandatory. Similarly, payment of additional amount under Section 23(1A) is mandatory. The award of interest under Section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount. In such cases interest on that excess alone is payable. Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the Court includes the additional compensation awarded under Section 23(1A) and the solatium under Section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount, which is determined by the Court after a reference under Section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in A.Y.2007-08 7 making award for compensation [See: Ram Chand & others etc v. Union of India & Ors. - 1994(1) SCC 44]. In the case of Shree Vijay Cotton & Oil Mills Ltd. v. State of Gujarat - (1991) 1 SCC 262, this Court has held that interest is different from compensation.

To sum up, interest is different from compensation. However, interest paid on the excess amount under Section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under Section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under Section 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34.

It is clear from reading of Sections 23(1A), 23(2) as also Section 28 of the 1894 Act that additional benefits are available on the market value of the acquired lands under Section 23(1A) and 23(2) whereas Section 28 is available in respect of the entire compensation. It was held by the Constitution Bench of the Supreme Court in Sunder v. Union of India - (2001) 7 SCC 211, that "indeed the language of Section 28 does not even remotely refer to market value alone and in terms it talks of compensation or the sum equivalent thereto. Thus, interest awardable under Section 28, would include within its ambit both the market value and the statutory solatium. It would be thus evident that even the provisions of Section 28 authorise the grant of interest on solatium as well." Thus solatium means an integral part of compensation, interest would be payable on it. Section 34 postulates award of interest at 9% per annum from the date of taking possession only until it is paid or deposited. It is a mandatory provision. Basically Section 34 provides for payment of interest for delayed payment. Taxability of additional compensation and interest under Section 45(5) of the 1961 Act in the context of the provisions of L.A. Act, 1894”

Let us take into consideration the facts of the assessee’s case. When the ld. Land Acquisition Collector announced the Award, bearing No. 12 dated 10.12.2002, he determined the market value @ Rs.6 lacs per acre and granted 30% solatium for compulsory acquisition of the land. This Rs.6 lacs has been enhanced by the Addl. District Judge on a reference u/s 18 of the Land Acquisition A.Y.2007-08 8 Act at Rs.440/- per sq.yd. and there are roughly 4850 sq.yard of land in an acre. If this rate is applied on the area, then District Court granted compensation @ Rs.21,34,000/- per acre, plus statutory benefits i.e. Solatium, Interest etc. as against Rs.6 lacs granted by the Land Acquisition Collector. In order to compensate the assessee, interest u/s 28 has also been granted which provides that Land Acquisition Collector would pay interest on such excess compensation @ 9% per annum from the date it took possession of the land to the date of payment of such excess, thus on the difference of Rs.21,40,000/- minus (-) Rs.6 lacs, interest was required to be calculated @ 9% from the date of possession till the payment. The Hon'ble Supreme Court construed this interest u/s 28 of the Land Acquisition Act considered towards insufficiency of compensation in comparison of value of land. This interest u/s 28 is not for delay in making payment, rather to compensate a land owner qua lower compensation granted by the Land Acquisition Collector. Thus, the alleged interest u/s 28 granted to the assessee deserves to be treated as compensation and not simpliciter interest as construed by the Income Tax Department u/s 2(28A) of the Income Tax Act. A.Y.2007-08 9 10.1 There is no dispute with regard to the fact that this amount is taxable in the year of receipt as contemplated in Section 45(5). This has also been decided by the Hon'ble Supreme Court in the case of Shri Ghanshyam, HUF in paragraph No. 29 to 36. Such finding of the Hon'ble Supreme Court read as under : “29. From Section 45 it is clear that capital gains are not income accruing from day to day. It is deemed income which arises at a fixed point of time, viz, date of transfer. Section 45(5), newly inserted by the Finance Act, 1987, w.e.f. 1.4.88 and subsequently amended, retrospectively w.e.f. 1.4.88, by the Finance Act, 1991, enacts overriding provision and takes care of a situation - where the capital gains arise from the transfer of a capital asset, being a transfer by way of compulsory acquisition and the compensation for such transfer stands enhanced in stages by any court, tribunal or authority. In such a situation, the capital gains so arising is, for and from assessment year 1988-89, has to be dealt with as under : - (i) the capital gains computed with respect to the compensation awarded in the first instance would be chargeable as Income under the head "Capital Gains" of the previous year in which such compensation or part thereof was first received; and (ii) amount by which compensation or consideration is enhanced or further enhanced by the court, tribunal or authority is to be Deemed Income chargeable under the head "Capital Gains" of the previous year in which such amount is received by the assessee.

For the said purpose, the cost of acquisition is to be taken as Nil [See: Explanation (i)]. Also, where the enhanced compensation is received by any person, other than the transferor by reason of the death of the transferor or for any reason, the amount of such additional compensation or additional consideration is to be deemed to be the income of the recipient of the previous year in which such amount is received by him.

Two aspects need to be highlighted. Firstly, Section 45(5) of the 1961 Act deals with transfer(s) by way of compulsory acquisition and not by way of transfers by way of sales etc. covered by Section 45(1) of the 1961 Act. Secondly, Section 45(5) of the 1961 Act talks about enhanced compensation or consideration which in terms of L.A. Act 1894 results in payment of additional compensation.

The issue to be decided before us - what is the meaning of the words "enhanced compensation/consideration" in Section 45(5)(b) of the A.Y.2007-08 10 1961 Act? Will it cover "interest"? These questions also bring in the concept of the year of taxability.

It is to answer the above questions that we have analysed the provisions of Sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act. As discussed hereinabove, Section 23(1A) provides for additional amount. It takes care of increase in the value at the rate of 12 % per annum. Similarly, under Section 23(2) of the 1894 Act there is a provision for solatium which also represents part of enhanced compensation. Similarly, Section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under Section 23(1A) and solatium under Section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under Section 18 of the 1894 Act. It depends upon the claim, unlike interest under Section 34 which depends on undue delay in making the award. It is true that "interest" is not compensation. It is equally true that Section 45(5) of the 1961 Act refers to compensation. But as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards "interest" both as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28 unlike interest under Section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under Section 34 of the 1894 Act. So also additional amount under Section 23(1A) and solatium under Section 23(2) of the 1961 Act forms part of enhanced compensation under Section 45(5)(b) of the 1961 Act. In fact, what we have stated hereinabove is reinforced by the newly inserted clause (c) in Section 45(5) by the Finance Act, 2003 w.e.f.1.4.2004. This newly added clause envisages a situation where in the assessment for any year,- -the capital gain arising from the transfer of a capital asset is computed by taking the- -compensation or consideration referred to in clause (a) of section 45(5) or, as the case may be, -enhanced compensation or consideration referred to in clause (b) of section 45(5), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority.

In such a situation, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration. For giving effect to such recomputation, the provisions of the newly inserted (w.e.f. 1.4.2004) section 155(16) by the Finance Act, 2003 (32 of 2003), have been enacted.

It was urged on behalf of the assessee that Section 45(5)(b) of the 1961 Act deals only with re-working, its object is not to convert the amount of enhanced compensation into deemed income on receipt. We A.Y.2007-08 11 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. 1.4.04 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 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.

Having settled the controversy going on for last two decades, we are of the view that in this batch of cases which relate back to assessment years 1991-92 and 1992-93, possibly the proceedings under the L.A. Act 1894 would have ended. In number of cases we find that proceedings under the 1894 Act have been concluded and taxes have been paid. Therefore, by this judgment we have settled the law but we direct that since matters are decade old and since we are not aware of what has happened in Land Acquisition Act proceedings in pending appeals, the recomputation on the basis of our judgment herein, particularly in the context of type of interest under Section 28 vis-`-vis A.Y.2007-08 12 interest under Section 34, additional compensation under Section 23(1A) and solatium under Section 23(2) of the 1894 Act, would be extremely difficult after all these years, will not be done.”

It was contended before us that Section 2(14) provides the definition of Capital Asset. It excluded agriculture land where A.Y.2007-08 13 agriculture activities are being carried out. But if the agriculture land falls within the ambit of 8 Kms. of the Municipal Limit, as provided in the definition, then it would not be excluded from the ambit of Capital Asset and on transfer of such a capital asset, capital gain would be taxable in the hands of the assessee. The land of the assessee falls within the ambit of 8 Kms., therefore, on compulsory acquisition of this land, capital gain will be taxable upon the assessee. However, the compensation has been received by the assessee after incorporation of Section 10(37) of the Act, hence, assessee is entitled for the benefit of this Section and the alleged interest received by him u/s 28 of the Land Acquisition Act, 1894, which are treated at par with the enhanced compensation, is not to be charged for compensation. It will fall within the ambit of exemption provided u/s 10(37).

In View of the above, appeal of the assessee is allowed and addition is deleted.

In the result, appeal of the assessee is allowed.