SMT. LAKSHMAMMA,SHIVAMOGGA vs. THE INCOME TAX OFFICER, WARD- 3, SHIVAMOGGA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE-PRESIDENT AND SHRI A.K.GARODIA, ACCOUNTANT MEMBER

ITA No.1387/Bang/2019 Assessment year : 2015-16 Smt. Lakshmamma, Vs. The Income Tax Officer, Purdal Road, Ward-3, Gadikoppa, Shivamogga-577 201 Shivamogga-577 205 PAN No: AKKPL 6281 A APPELLANT RESPONDENT Appellant by : Shri.Tata Krishna, Advocate Respondent by : K.R.Narayana, JCIT (DR) Date of hearing : 19.11.2019 Date of Pronouncement : 22.11.2019 O R D E R Per N.V. Vasudevan, Vice-President This is an appeal filed by the revenue against the order dated 26.3.2019 of the CIT(Appeals), Davangere, relating to assessment year 2015-16.

The facts and circumstances under which this appeal arise for 2. consideration are that the Assessee owned Agricultural lands measuring 6.8 Acres in Malligenahalli, Kasaba Hobli, Shivamogga Taluk which was compulsorily acquired by the Special Land Acquisition Officer [hereinafter referred to as “the SLAO”], under the provisions of the Land Acquisition Act, 1894 vide Notification dated 22.9.2000. Aggrieved by the award as originally passed awarding compensation for the land acquired by the Govt.,

ITA No. 1387/Bang/2019 Page 2 of 12

the Assessee had filed a reference for enhanced compensation before Civil Judge & CJM Shimoga in LAC No.119/2014. who awarded vide order dated 17.11.2012 awarded enhanced compensation. On further appeal by the Assessee the Hon’ble Karnataka High Court further enhanced the compensation in MFA No.10207 (LAC) dated 10.7.2014. The enhanced compensation received by the Assessee of Rs.7,79,69,881/- was claimed as exempt u/s.10(37) of the Act. The details of enhanced compensation received by the Assessee was as follows:

SL. NO. PARTICULARS AMOUNT 1. Net Land Value Rs. 1,85,89,828/- SA @ 30% u/S.23(2) 2. Rs.59,94,381/- AMV @ 12% U/s.23(1A) 3. Rs.78,81,745/- Interest U/s.28 @ 9% 4. Rs.28,94,936/- Interest U/s.28 @ 15% 5. Rs.4,29,08,481/- Court Cost 6. Rs.510/- Total Rs.7,79,69,881/-

Under the provisions of section 10(37) of the Income-Tax Act, 1961 4. [“the Act”] enhanced compensation received on acquisition of agricultural lands is exempt. The provisions of section 10(37) of the Act reads as follows:-

“Section 10(37): Capital Gain on compulsory acquisition of urban Agricultural Land: In the case of an assessee, being an

ITA No. 1387/Bang/2019 Page 3 of 12

individual or a Hindu individual family, any income chargeable under the head” Capital gain” arising from the transfer of agricultural land, shall be exempted, where : 1. Such land is situate in any area referred to in, item (a) or item (b) of sub-clause (iii) of clause (14) of Section 2 2. Such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual, or a parent of his 3. Such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India 4. Such income has arisen from the compensation or consideration for such transfer received by such assesses on or after the 1st day of April, 2004. 5. It may be noted in this connection that exemption is available only if compulsory acquisition has taken place on or after 1-4-2004. Exemption is also available if acquisition has taken place before 1-4-2004 but compensation has been received on or after 1-4-2004. For the purposes of this clause, the expression, compensation or consideration” includes the compensation or consideration enhanced or further enhanced by any court, tribunal or other authority.

The assessee claimed that interest received by him on enhanced 6. compensation is nothing but compensation and therefore even for the interest portion received, was eligible for exemption u/s. 10(37) of the Act. The Assessee relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Ghanshyam (HUF) (2009) 8 SCC 912 in support of his claim that interest paid on enhanced compensation is akin to enhanced

ITA No. 1387/Bang/2019 Page 4 of 12

compensation. The AO, however, was of the view that interest on enhanced compensation was chargeable to tax under the provisions of section 57(iv) r.w.s. 56(2)(viii) r.w.s. 145A(b) of the Act. These provisions read as follows:-

“Deductions. 57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :— (i) …………….. (ii) …………… (iii) ………………. (iv) in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section.”

“Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :— (i) …………………….. to (vii) …………………….. (viii) income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A;”

Method of accounting in certain cases. “145A. Notwithstanding anything to the contrary contained in section 145,— (a) ………………

ITA No. 1387/Bang/2019 Page 5 of 12

(b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.”

The AO rejected the claim of exemption u/s. 10(37) of the Act and 7. held that interest is chargeable to tax in the year of receipt, irrespective of the period for which the interest is calculated. The AO held that as per the provisions of section 56(2)(viii) of the I.T.Act, 1961 inserted w.e.f. 01-04- 2010, income by way of interest received on compensation or on enhanced compensation shall be chargeable to tax under the head " Income from Other Sources" and clause (b) of Section 145A specifies the year of accounting of this income as the year in which it is received. Section 56(2)(viii) is unambiguous on this issue and includes interest of any nature and kind without making any distinction of interest received under different provisions of the Land Acquisition Act, 1894. Hence, the interest income in question cannot be considered as compensation or enhanced compensation and not eligible for exemption u/s.10(37) of the Act.

The CIT(Appeals) did not accept the plea of the Assessee and 9. confirmed the order of the AO. Hence this appeal by the Assessee before the Tribunal.

ITA No. 1387/Bang/2019 Page 6 of 12

Before CIT(A), the Assessee contended that interest awarded u/s. 28 10. of the Land Acquisition Act, 1894 partook the character of compensation for land acquired and fell within the ambit of section 10(37) of the Act and to that exempt was exempt. The Assessee relied on the decision of the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra) and further submitted that the provisions of section 57(iv) r.w.s. 56(2)(viii) r.w.s. 145A(b) of the Act were not applicable for interest on enhanced compensation as interest was in the nature of enhanced compensation and not interest.

Aggrieved by the aforesaid orders of the CIT(Appeals), the Assessee 11. has preferred the present appeals before the Tribunal.

We have heard the rival submissions of the ld. DR, who relied upon 12. the order of the AO and reiterated the stand of the revenue as contained in the grounds of appeal filed before the Tribunal which is a reiteration of the stand taken by the AO in the order of Assessment. The learned counsel for the Assessee reiterated contentions put forth before the revenue authorities relied on the decision of the Hon’ble Gujarat High Court in the case of in Movaliya Bhikhubhai Balabhai v. Income-tax Officer-TDS-1-Surat [2016] 70 taxmann.com 45 (Guj).

We have considered the rival submissions. It is not disputed by the 13. AO that the land acquired was agricultural land and the conditions laid down u/s. 10(37)(i) to (iv) are applicable to the land which is in question which was compulsorily acquired. It is also not in dispute that the interest in question was interest awarded u/s. 28 of the Land Acquisition Act, 1894. In the given circumstances, we are of the view that the decision of the Hon’ble

ITA No. 1387/Bang/2019 Page 7 of 12

Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai (supra) will be applicable to the facts of the present case.

In Movaliya Bhikhubhai Balabhai v. Income-tax Officer-TDS-1- 14. Surat [2016] 70 taxmann.com 45 (Gujarat), the Hon’ble Gujarat High Court had to deal with the nature of the interest awarded u/s.28 of the Land Acquisition Act, 1894. The facts of the case before the Hon’ble Gujarat High Court was that the petitioner's agricultural lands came to be acquired under the provisions of the Act of 1894 for the public purpose of the Ozat-2 Irrigation Scheme. The award passed by the Collector came to be challenged by the petitioner before the learned Principal Senior Civil Judge, Junagadh (hereinafter referred to as the "Reference Court"), who by an order dated 20th March, 2011 awarded additional compensation of Rs. 5,01,846/- in favour of the petitioner together with other statutory benefits. Pursuant to such award, the second respondent calculated the amount payable to the petitioner and in terms of the statement showing the amount of compensation to be deposited in the court, computed an amount of Rs. 20,74,157/- as payable to the petitioner by way of interest under section 28 of the Act of 1894. The petitioner made an application under section 197(1) of the Income Tax Act, 1961 (Act) for deciding the tax liability of interest and to issue a certificate as to NIL tax liability. The application was rejected on the ground that the interest amount on the delayed payment of compensation and enhanced value of compensation is taxable as per the provisions of section 57(iv) read with sections 56(2)(viii) and 145A(b) of the Act under the head income from other sources. Being aggrieved by such order, the Assessee filed writ petition before Hon’ble Gujarat High Court. The question before the Court was whether interest awarded u/s.28 of the Act of 1894 is akin to compensation and chargeable to tax u/s.45(5) of the

ITA No. 1387/Bang/2019 Page 8 of 12

Act or under the head “Income from other sources” u/s.57(iv) read with Sec.56(2)(viii) and 145A(b) of the Act. The Hon’ble Gujarat High Court held that interest under section 28 of the Act of 1894 is an accretion to compensation and forms part of the compensation and, therefore, exigible to tax under section 45(5) of the Act. In coming to the aforesaid conclusion, the Hon’ble Gujarat High Court followed the decision of Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) [2009] 182 Taxman 368, wherein it was held that interest under section 28 of the Act of 1894 is part of the amount of compensation whereas interest under section 34 thereof is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of the enhanced value of the land which is not the case in the matter of payment of interest under section 34. On the applicability of the provisions of Sec.57(iv) read with 56(2)(viii) and Sec.145A(b) of the Act, the Hon’ble Gujarat High Court held, :-

“Section 145A of the I.T. bears the heading "Method of accounting in certain cases". Section 145A(b) provides that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Clause (viii) of sub-section (2) of section 56 of the I.T. Act provides for income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A which is chargeable as income from other sources. The first respondent Income Tax Officer seeks to tax the interest received by the petitioner under section 28 of the Act of 1894 as income from other sources under section 56(2)(viii) read with section 145A(b) of the I.T. Act. In the opinion of this court, in the light of the law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra), the interest received under section 28 of the Act of 1894 would not fall within the ambit of the expression "interest" as envisaged under section 145A(b) of the I.T. Act, inasmuch as, the Supreme Court in the above decision has held

ITA No. 1387/Bang/2019 Page 9 of 12

that interest under section 28 of the Act of 1894 is not in the nature of interest but is an accretion to the compensation and, therefore, forms part of the compensation.” It was argued on behalf of the Revenue before the Hon’ble Gujarat 15. High Court that the decision of Hon’ble Supreme Court in the case of Ghanshyam (HUF) was rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability cases pertaining to AY 2010-11 and afterwards. Such an argument was repelled by the Hon’ble Gujarat High Court as follows:

“11. It has been vehemently contended on behalf of the first respondent that the above decision has been rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability to the facts of the present case. The scope and effect of the substitution (with effect from 1st April, 2010) of section 145A, as also amendment made in section 56(2) by Act 33 of 2009 have been elaborated in the following portion of the departmental circular No. 5/2010, dated 3.6.2010, as follows: "Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation.- 46.1 The existing provisions of Income Tax Act, 1961, provide that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources", shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further the Hon'ble Supreme Court in the case of Smt. Rama Bai v. CIT (1990) 84 CTR (SC) 164 : (1990) 181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to the taxpayers.

ITA No. 1387/Bang/2019 Page 10 of 12

46.2 With a view to mitigate the hardship, section 145A is amended to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it was received, irrespective of the method of accounting followed by the assessee. 46.3 Further, clause (viii) is inserted in sub-section (2) of the section 56 so as to provide that income by way of interest received on compensation or enhanced compensation referred to in clause (b) of section 145A shall be assessed as "income from other sources" in the year in which it is received. 46.4 Applicability. - This amendment has been made applicable with effect from 1st April, 2010, and it will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years." Thus, the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)'s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR 400/[1991] 54 Taxman 496 whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the words "interest received on compensation or enhanced compensation" in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)'s case (supra).” The Hon’ble Gujarat High Court finally concluded, as follows: 16.

“13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression "interest" as contemplated in section 145A of the I.T. Act. The first respondent - Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the I.T. Act to the petitioner for non-deduction of tax at source, inasmuch as,

ITA No. 1387/Bang/2019 Page 11 of 12

the petitioner is not liable to pay any tax under the head "income from other sources" on the interest paid to it under section 28 of the Act of 1894. 14. The petitioner had earlier challenged the communication dated 9th February, 2015 whereby its application for a certificate under section 197 of the I.T. Act had been rejected, and subsequently, tax on the interest payable under section 28 of the Act of 1894 has already been deducted at source. Consequently, the challenge to the above communication has become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 forms part of the compensation and not interest, the second respondent was not justified in deducting tax at source under section 194A of the I.T. Act in respect of such amount. The petitioner is, therefore, entitled to refund of the amount wrongly deducted under section 194A of the I.T. Act.” 17. In the light of the aforesaid decision of the Hon’ble Gujarat High Court and in the light of the admitted factual position in the present case, we are of the view that the Assessee is entitled to exemption u/s. 10(37) of the Act on the interest received u/s. 28 of the Land Acquisition Act, 1894. We therefore direct the AO to allow the claim of the Assessee in this regard.

Pronounced in the open court on this 22nd day of November, 2019.

Sd/- Sd/- ( A.K.GARODIA) ( N.V. VASUDEVAN) Accountant Member Vice-President Bangalore, Dated, the 22nd day of November, 2019. */NS/

ITA No. 1387/Bang/2019 Page 12 of 12

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar ITAT, Bangalore.