THE DCIT (INT.TAXA.), VADODARA vs. SHRI AJOY KANAIYALAL KHANDHERIA, VADODARA

"ी टी.आर. से""ल कुमार, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम!। ] ] BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं /ITA No.451/Ahd/2024 िनधा"रण वष" /Assessment Year : 2012-13 Ranjitsinh Narsinh Vaghela The Income Tax Officer बनाम/ 3337, Nr. Palaiya Mahakali Ward-3 v/s. Mandir Gandhinagar Pethapur, Gandhinagar Gandhinagar – 382 610 "थायी लेखा सं./PAN: AFEPV 3269 D (अपीलाथ$/ Appellant) (%& यथ$/ Respondent) Assessee by : Shri Hardik Vora, Advocate Revenue by : Shri R.N. Dsouza, CIT-DR सुनवाई की तारीख/Date of Hearing : 10/01/2025 घोषणा की तारीख /Date of Pronouncement: 15/01/2025 आदेश/O R D E R

PER MAKARAND V. MAHADEOKAR, AM:

The brief facts relating to land and its dispute are summarized below form the order of AO – 2.1. 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 the compensation was not forthcoming, they filed a legal suit before the Hon’ble High Court to obtain compensation for the land acquired by the Government of Gujarat. For filing this legal petition before the Hon’ble High Court, Shri Abhraji Ataji Thakor, Shri Baldevji Ataji Thakor, and Shri Ambaji Ataji Thakor executed a Power of Attorney (POA) in favour of Shri Narsinh Shivsinh Vaghela (father of the assessee, Shri Ranjitsinh Narsinh Vaghela). After a prolonged legal battle, the issue was settled in favour of the Thakor Brothers. However, in the meantime, a dispute arose between the Thakor Brothers and the POA holder, Shri Ranjitsinh Narsinh Vaghela (assessee). The Land Acquisition Department was also made a party to the dispute. The Thakor Brothers contended that Shri Ranjitsinh Narsinh Vaghela had misused the POA before the Hon’ble High Court, which complicated the matter. Subsequently, on 25/11/2004, Shri Abhraji Ataji Thakor, Shri Baldevji Ataji Thakor, and Shri Ambaji Ataji Thakor filed a petition before the Hon’ble Civil Judge (CD), Gandhinagar, seeking resolution (Samadhan Pursish). As part of the settlement, a document titled 'KararDad' was executed before the Hon’ble Civil Court. As per the ‘KararDad,’ the Thakor Brothers acknowledged that Shri Narsinh Shivsinh Vaghela, the father of Shri Ranjitsinh Narsinh Vaghela (assessee), was the owner of the land bearing Survey Nos. 56/1 and 56/2, situated at Dholakuva, Gandhinagar. This was based on the fact that the land was claimed to have been sold by the forefathers of the Thakor Brothers to Shri Narsinh Shivsinh Vaghela. The Hon’ble Gujarat High Court, vide order dated 07/05/2005, enhanced the compensation for the land to Rs.3,500 per sq. meter and directed the government to pay Additional compensation of Rs.3,385 per sq. meter, Solatium at 30% on the additional compensation, and Interest at 12% on the additional compensation. As per the order of Hon’ble Gujarat High Court, Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 the Executive Engineers, Capital Project Division No. 2, Gandhinagar, provided the calculation of total compensation on 10-01-2006, including solatium and interest, amounted to Rs.10,06,95,355/- paid by cheque dated 07/12/2005, and Rs.4,86,64,822/- by cheque dated 10/01/2006. The total compensation deposited with the Principal Senior Civil Judge, Gandhinagar, was Rs.14,93,60,177/-. The Detail are tabulated as below:

Total L.R.C. No. 1 06/04 36/04 Survey No. 2 56/1 56/2 Area in Sq. M. 3 11,020 9,004 Add. Amount 4 3,73,29,780 3,04,78,540 6,78,08,320 Awarded by Court (Rs. 3385 per Sq. M.) Solatium 30% 5 1,11,98,934 91,43,562 2,03,42,496 12% Interest 6 69,06,009 56,38,530 1,25,44,539 (15/04/2002 to 31/10/2003, 18.5 months) 5,54,34,723 4,52,60,632 10,06,95,355 Total Amount (Add + 7 Solatium + Interest) 9% Interest 8 49,89,125 40,73,457 90,62,582 (18/04/2002 to 17/04/2003) 15% Interest 9 1,66,30,416 1,35,78,189 3,02,08,605 (18/04/2003 to 17/04/2005, 2 Years) 15% Interest (227 days, 10 51,71,376 42,22,259 93,93,635 18/04/2005 to 30/11/2005) Total of Interest (9% + 11 2,67,90,917 2,18,73,905 4,86,64,822 15% + 15%) Total Amount (Column 12 8,22,25,640 6,71,34,537 14,93,60,177 7 + 11) Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 2.2. 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:

Amount Kept in FDs Rs. 8,22,25,640 6,71,34,537 14,93,60,177 Redemption Value of FDs Rs. 12,62,82,922 9,70,16,199 22,32,99,121 Interest Accrued and Rs. 4,40,57,282 2,98,81,662 7,39,38,944 Received 2.3. 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.

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 Act, 1961. Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 6 2. 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/-).

2.4. 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.

2.5. 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 interest received on compensation in a motor accident claim is part of the compensation itself and, hence, is not taxable as "income from other sources." • Gujarat High Court Decision in the case of Movaliya Bhikhubhai Balabhai v. ITO (Special Civil Application No. 17944 of 2015): The Hon'ble Gujarat High Court held that interest on compensation awarded for land acquisition forms part of the compensation and is not subject to Tax Deducted at Source (TDS). • Circular from Revenue Department of Gujarat State: The assessee furnished a copy of the circular issued by the Gujarat Revenue Department, which directed that no TDS should be deducted on interest paid on compensation as it forms a part of the compensation.

2.6. 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.

2.7. 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 court on 10/01/2006 and that the dispute over ownership delayed the release of funds. The interest accrued on these FDs during the period 07/02/2006 to 19/09/2011 was deemed as a separate income stream arising from the deposit and not as compensation for delayed payment. The AO held that the interest earned on FDs cannot be considered as compensation under Section 10(37) of the Act and thus is taxable. The AO determined that the total interest component of Rs. 7,11,37,986/- (Rs. 4,24,12,321/- for Survey No. 56/1 and Rs. 2,87,25,665/- for Survey No. 56/2) should be added to the assessee’s total income as "undisclosed interest income." The assessment was completed under Section 144 read with Section 147 of the Act, treating the return of income filed after the issuance of notice under Section 148 as non-compliant due to delayed filing.

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.

2. 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.

3. 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.

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

6. Appellant craves leave to add, alter or delete any grounds) either before or in the course of hearing of the appeal. Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 4.1. 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.

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

7.1. Accordingly, both Ground Nos. 1 and 2 of appeal challenging the validity of the reassessment proceedings are dismissed. Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 On the Grounds relating to Merits (Ground Nos. 3 and 4):

8.1. 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 Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 was distributed by the court holds the character of interest and not compensation.

8.2. 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.

8.3. 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 Ranjitsinh Narsinh Vaghela vs. ITO Asst. Year : 2012-13 u/s 10(37) of the Act, therefore it is important to reconcile the amounts and decide the nature of income in respective hands.

9.1. 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.

9.2. 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 assessee—requires detailed verification. The question of the taxability of the amounts in the hands of the ultimate recipient must also be examined to ensure the correct determination of taxable income.

9.3. 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.

9.4. 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:

1. 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.

9.5. 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.