M/S.KADUNA HOSPITALITY P. LTD,COCHIN vs. THE ITO, COCHIN

Per George George K, JM

This appeal at the instance of the assessee is directed against the order

of the CIT(A)-I, Kochi dated 25/10/2016. The relevant assessment year is

2013-14.

On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) -1 has:- 1. failed to appreciate that the Notification dated 10th January 2008 issued by the Government of Kerala and the subsequent possession of the land acquired by the Land Acquisition Officer on 24th November 2008 relevant to AY 2009-10, was challenged by the appellant as illegal and void ab initio before the Hon'ble High Court of Kerala and therefore the said date could not be taken as the date of transfer, on account of acquisition of the plot and therefore no capital gain/loss can be said to have accrued in the AY 2009-10;

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appellant before the Hon'ble High Court of Kerala, which was withdrawn only on 2nd June 2011 i.e. in AY 2012-13, at best, the acquisition can be said to be effective from AY 2012-13 and accordingly the compensation may be held to be taxable in AY 2012-13, after allowing the deduction for cost of acquisition against the same; 8. without prejudice to the above, should have appreciated that even if the learned Assessing Officer was of the opinion that the tax consequences in respect of original acquisition, relates back to the year of acquisition, after withdrawal/disposal of Writ Petition by the appellant, post determination of compensation by the Court, the learned Assessing Officer should have worked out the tax consequence i.e. gain or loss on account of original acquisition for AY 2009-10 along with the assessment for AY 2013-14 and should have allowed short term capital loss of AY 2009-10 to be carried forward and set off against the gain assessable for AY 2013-14 (on account of grant of solatium and interest); 9. the learned Commissioner of Income Tax (Appeals)-I was not justified, in not directing the Assessing Officer to grant set off of unabsorbed depreciation of earlier years under section 32(2), amounting to Rs.5,67,2047-, against the short term capital gain for AY 2013-14;.

The appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves to leave or add, alter, delete or modify all or any of the above grounds of appeal.

grounds the assessee has raised the issue that only the amount of

enhanced compensation received during the relevant AY can be brought to

tax u/s. 45(5)(b) of the Act. According to the learned AR only

Rs.97,56,627/- is received in the assessment year 2013-14. It is contended

that the Assessing Officer also brought to tax the sum of Rs.2,03,33,836/- received during the previous year relevant to the assessment year 2014-15,

in the thecurrent assessment year, namely 2013-14.

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The assessee is a private limited company. It is engaged in hospitality

business. For the assessment year 2013-14, the return of income was filed

on 21/09/2013 declaring loss of Rs.35,58,854/-. The assessment was taken

up for scrutiny by issuance of notice u/s. 143(2) of the Act. In the course

of scrutiny assessment, the Assessing Officer noticed that the assessee-

company had declared net gains on land acquisition amounting to

Rs.38,48,650/- and interest income amounting to Rs.1,09,03,339/-. The

short term capital gains (STCG) and the interest income declared by the

assessee are as follows:

(i) Short Term Capital Gains Compensation received on land acquisition Rs.1,91,87,124.00 Add: Advances received Rs. 25,35,526.00 Total Rs.2,17,22,650.00 Less: Purchase cost Rs.1,78,74,000.00

Net Short Term Capital Gains Rs. 38,48,660.00

Interest Income Rs.1,09,03,339.00 (ii)

4.1 It was noticed by the Assessing Officer that the assessee had received

enhanced compensation of land value including solatium and interest as detailed

below during the relevant AY, namely AY 2013-14:

LAR 27/09 Rs. 8,35,885.92 LAR 24/09 Rs.1,08,40,697.00 LAR 25/09 Rs.1,84,13,879.89 Total receipts Rs.3,00,90,462.80

4.2 The Assessing Officer also noticed that the impugned land was taken

possession by Land Acquisition Officer in the AY 2009-10 and compensation

was paid amounting to Rs.25,35,526/-. The Assessing Officer was of the view

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that when the amount of Rs.25,35,526/- was received as initial compensation in

the assessment year 2009-10, the assessee ought to have calculated STCG for

the assessment year 2009-10 and set off the loss, if any, against the additional/

enhanced compensation that was to be received in the subsequent years.

Therefore, the Assessing Officer was of the view that the total amount received

in the assessment year 2013-14 ought to have been brought to tax in the same

year.

4.3 To the above proposal, the assessee filed objections. It was contended

by the assessee that short term capital gains has arisen only in the current

assessment year, namely AY 2013-14 and no capital gains had accrued in the

assessment year 2009-10. It was argued that under the Land Acquisition Act,

1894, no compensation can be fixed below the market value of the property. It

was stated that compensation paid initially amounting to Rs.25,35,526/- is far

below the purchase cost and therefore, no capital gain/loss could arise in the AY

2009-10. It was submitted by the assessee that for the financial year relevant

to the assessment year 2009-10, in the accounts of the assessee, the value of

the land compulsorily acquired was transferred to the current assets with

Rs.25,35,526/- received shown as “advance received” and the balance of

Rs.1,53,38,474/- shown as “amount receivable”. According to the assessee the

assessment of capital gains/losses on the basis of compensation that is void in

law renders such assessment as null and void. It was further submitted that the

land acquisition proceedings were challenged in writ petition before the Hon'ble

Kerala High Court and the issue was sub-judice in the AY 2009-10.

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4.4 The Assessing Officer, after duly considering the assessee’s objections

held that though the assessee had challenged the land acquisition proceedings

before the Hon'ble High Court in writ petition, the Single Judge of the Hon'ble

High Court had dismissed the writ petition. It was further observed by the

Assessing Officer that the appeal filed before the Division Bench of the Hon'ble

High Court was withdrawn by the assessee in the year 2011. The Assessing

Officer was of the view that when the assessee had received initial

compensation of Rs.25,35,526/- in the assessment year 2009-10 and possession

was taken over, the STCG has arisen in the AY 2009-10. Thereafter, the

Assessing Officer held that out of the total enhanced compensation received

during AY 2013-14, a sum of Rs.1,09,03,339/- received for solatium and interest

should be taxed under the head ‘income from other sources’ and the balance of

Rs.1,91,87,132/- should be taxed as STCG. Since the assessee had offered

short term capital gains of Rs.38,48,650/- for the assessment year 2013-14, the

same was given credit and the balance amount of Rs.1,53,38,482/-

(Rs.1,91,87,132 - Rs.38,48,650) was assessed by the Assessing Officer as net

short term capital gains that arose in the hands of the assessee for the relevant

assessment year 2013-14.

before the first appellate authority. The CIT(A) rejected the contentions of the

assessee and confirmed the computation of short term capital gains made by

the Assessing Officer.

Tribunal. As regards the issue raised in the main grounds, the Ld. AR reiterated

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the submissions made before the income tax authorities. As regards the

additional grounds, the contentions raised by the Ld. AR read as follows:

1 “3 cents of land belonging to your Appellant was acquired for the Kalamassery - Vallarpadam National Highway by a Notification u/s 4(1) of the Land Acquisition Act, 1894 dated 10-01-2008

2 The total compensation awarded and payments received are as under,

AdditionaAdditiona LAR No. Original Advance Interest Received Total Compensation – along with Compensation l compensation received on additional received for land received on 12/12/2008 compensation including interest 09/02/2013, vide Sub-Court 07/06/2013 and Order 19/06/2013 vide Sub-Court Order

Rs. Rs. Rs. Rs.

LA 27/09 70,431 533,109 302,739 906,279

LA 24/09 921,713 6,962,936 3,961,551 11,846,200

LA 25/09 1,543,381 11,691,079 6,639,049 19,873,510

Total 2,535,526 19,187,124 10,903,339 32,625,989

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3 The additional compensation has been received/credited on the following dates,

Date Particulars Rs. Sub total Previous Year ended

12-12-2008 Bank 2,266,269 TDS 269,257 2,535,526 31-03-2009

09-02-2013 Bank 9,756,627 9,756,627 31-03-2013

07-06-2013 Bank 752,298

19-06-2013 Bank 16,572,491

09-06-2013 TDS 3,009,047 20,333,836 31-03-2014 Total 32,625,989 32,625,989

Copy of the Bank Statement and Form 26AS are enclosed as Annexure A and B. 5. Section 45(5) of the Income Tax Act, 1961 dealing with the charge to Capital Gains is as under, 45 (5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law. or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :— (a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as income under the head “Capital gains” of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received ; and (b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head "Capital gains" of the previous year in which such amount is received by the assessee : Provided that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head "Capital gains" of the previous year in which the final order of such court, Tribunal or other authority is made; (c) 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) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, 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.

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Explanation,—For the purposes of this sub-section,— (i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil: (ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head "Capital gains", of such other person. 5- In view of the charging section 45(5) (b), only a sum of Rs.9,756,627/- of the enhanced compensation is assessable in the Assessment Year 2013-14. However, the Assessing Officer has been brought to tax the sum of Rs.20,333,836/- received during the previous year relevant to assessment year 2014-15 also to tax in the assessment year 2013-14, which is contrary to and in violation of the express provisions contained in section 45(5)(b) of the Income Tax Act, 1961 rendering such assessment null and void. 6. In view of the above provision with regard to section 45(5)(b) and considering the Grounds of Appeal originally filed before the Hon'ble Income Tax Appellate Tribunal it is prayed that the Assessment Order for the AY 2013-14 be rectified for the purpose of; a. Limiting the quantum of Short Term Capital Gain assessable for the AY 2013-14 in accordance with law and facts to only Rs.9,756,627/- and b. By virtue of the express provisions contained in section 48(ii) of the Income tax Act to allow a sum of Rs.9,756,627/- to deducted from the above Short Term Capital Gain by way of Cost of Acquisition and suitable rectification be made in the Assessment Order for the AY 2013-14 and refund and interest due to the assessee be computed and paid representing the excess tax paid/deducted at source and interest due on refund in respect of the AY 2013-14.

authorities.

TheThe acquisition of the impugned property which has given rise to short term

capital gains was purchased by the assessee company vide Sale Deed No.

694/07 dated 26/09/2007. The purchase price for the said property mentioned

in deed is Rs. 1,78,74,000/-. The notification for acquisition of the said property

was issued u/s. 4(1) of the Land Acquisition Act, 1894 on 10/01/2008. The

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possession of the land was taken by the Land Acquisition Officer on 24/11/2008.

In view of the land acquisition, the assessee was paid a compensation of

Rs.25,35,526/- which was received in the AY 2009-10. The assessee challenged

the land acquisition proceedings by filing writ petition before the Hon'ble High

Court of Kerala. In the writ petition it is stated that land acquisition proceedings

is not for public purpose and the acquisition was not under the correct Act.

Therefore, the acquisition is void. However the writ petition was dismissed vide

Single Bench judgment dated 06/10/2008 in W.P.(C) No. 7608 of 2008. The

assessee had filed appeal against the dismissal of the writ petition before the

Division Bench of the Hon'ble High Court of Kerala. However, the same was

withdrawn by the assessee on 02/06/2011 (judgment dated 02/06/2011 in

W.P.(C) No. 2395/2008). As mentioned earlier, undisputedly the possession of the said land waswas taken over by the Land Acquisition Officer on 24/11/2008,

i.e. isin the AA.Y. 2009-10. In pursuant to the possession of land taken over by

the Land Acquisition Officer, the assessee was paid compensation of

Rs.25,35,526/-. When possession of the land is taken by the Land Acquisition

Officer and compensation is paid, however, inadequate it may be, there is

transfer within the terms of section 2(47) of the I.T. Act and the assessee ought

to have filed the return of income disclosing capital gains/losses. The assessee

was very much aware of the receipt of initial compensation. The judgment

dated 09/03/2010 of III Addl. Sub Judge, Ernakulam also mentioned that as per

Award No. 97/2008, following amounts were given as compensation to the

assessee-company:

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Rs. 9,37,871/- for LAR 24/09 Rs.15,27,932/- for LAR 25/09 Rs. 67,723/- for LAR 27/09 Rs.25,35,526/-

8.1 When the impugned land belonging to the assessee was acquired by

issuing land acquisition notification u/s. 4(1) and the possession was taken over

during the assessment year, 2009-10, the liability to capital gains/losses has

definitely arisen only in the assessment year 2009-10, as per the terms of sec.

2(47) of the I.T. Act. The failure of the assessee to compute the capital

gains/losses and carry forward the same to be set off against the enhanced

compensation that is to be received in the subsequent year is an error on the

part of the assessee. Therefore, we hold that the assessee is liable for short

term capital gains in the assessment year 2009-10.

8.2 Having held that the assessee is liable for short term capital gains in the

assessment year 2009-10, let us now examine whether the assessee is entitled

to deduct the cost of acquisition against the enhanced compensation that was

received in the relevant assessment year, namely AY 2013-14. It is clear on

the facts of the instant case that the assessee has received compensation for

the sales of the lands acquired as under:

(i) Rs. 25,35,526/- being the initial compensation (received in the first instance) in the A.Y. 2009-10.

(ii) Rs. 3,00,90,462.80/- as the additional compensation ordered by the Hon'ble Sub-Court in the impugned A.Y. 2013-14.

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From literal reading of Section 45(5)(a) of the Act, it is clear that the assessee

ought to have declared the compensation of Rs.25,35,526/- awarded in the first

instance in its Return of Income for the AY 2009-10 as its taxable income

chargeable under the head ‘Capital gains’ of the previous year (being A.Y. 2009-

10) in which such amount is received. The above position would apply

irrespective of whether the consideration received was full or in part. Likewise,

the additional compensation of Rs.3,00,90,462.80/- received by the assessee in

A.Y.2013-14 consequence to the Hon'ble Sub Court’s order would be deemed to

be the income chargeable under the head ‘Capital gains” of the said AY as per

Section 45(5)(b). Explanation 1 to Section 45(5)(b) states that the cost of

acquisition needed to be taken to be nil, which strengthens the position of the revenuerevenue that any cost of acquisition would be deemed to have been

considered and adjusted in the computation of Capital Gains in such earlier

assessment years in which the compensation (or part thereof) was received in

the first instance. Hence, the cost of acquisition to be considered and adjusted

against the amount of Rs.3,00,90,462.80/- being the additional compensation

received in the impugned AY 2013-14 would need to be taken as Rs. ‘nil’.

Therefore, in view of Explanation 1 to Section 45(5)(b), the cost of acquisition

cannot be allowed as deduction against the enhanced compensation received in

the current assessment year, namely AY 2013-14, since it is deemed to have

been allowed in year of receipt of initial compensation by the assessee.

8.3 In Ground No. 9, the assessee has stated that the CIT(A) ought to have

directed the Assessing Officer to grant set off of unabsorbed depreciation u/s.

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32(2) of the Act amounting to Rs.5,67,204/- against the short term capital gains

for the assessment year 2013-14. We notice that the issue raised in this ground

does not arise out of the order of the CIT(A), as there is no adjudication of the

issue by the first appellate authority. Before the Tribunal also the assessee’s

Counsel has not raised any arguments on this ground, hence this ground is not

adjudicated.

8.4 As regards, additional grounds, it is the claimed by the assessee that only

a sum of Rs.97,56,627/- alone is received during the previous year relevant to

the assessment year 2013-14. According to the learned AR, the initial

compensation and the additional/enhanced compensation that are received for

the year ending 31/03/2009, 31/03/2013 and 31/03/2014, are as follows:

Date Particulars Rs. Sub total Previous Year ended

12-12-2008 Bank 2,266,269 TDS 269,257 2,535,526 31-03-2009

09-02-2013 Bank 9,7,56,627 9,7,56,627 31-03-2013

07-06-2013 Bank 752,298 19-06-2013 Bank 16,572,491

09-06-2013 TDS 3,009,047 20,3,33,836 31-03-2014 Total 32,625,989 32,625,989

8.5 Section 45(5)(b) clearly states that enhanced compensation shall deemed

to be the income chargeable to “capital gains” of the previous year in which the

said amount is received by the assessee. The assessee has filed bank

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statement and Form 26AS as Annexure A and B along with additional grounds of

appeal. On perusal of the same, it is quite discernable that the amount of

Rs.2,03,33,836/- was received by the assessee only during the previous year

ending 31/03/2014. Hence the same cannot be brought to tax in view of the

express provision u/s. 45(5)(b) of the Act. However, we notice that in the

assessment order as well as the appellate order, it is stated that the assessee

has received the enhanced compensation on 26/12/2012, 14/02/2013 and

28/01/2013 (i.e. in AY 2013-14). Since there is conflict in the facts, in the

interest of justice and equity, we are of the view that the matter needs to be

restored to the file of the Assessing Officer. Accordingly, the additional grounds

and the evidence furnished alongwith the same are restored to the file of the

Assessing Officer. The Assessing Officer, on examination of the evidence shall

only bring to tax the enhanced/additional compensation that is received by the

assessee during the assessment year 2013-14. The Assessing Officer shall

dispose off the matter after affording reasonable opportunity of hearing to the

assessee. It is ordered accordingly. Hence the additional ground raised is

allowed for statistical purposes.

statistical purposes as indicated above.

sd sd/- sd/- (P.K. BANSAL) (AbbGEORGE GEORGE K.) VICE PRESIDENT JUDICIAL MEMBER Dated:…23/10/2017 GJ Copy to:

15 I.T.A.No.500/Coch/2016

By order

(ASSISTANT REGISTRAR) ITAT, COCHIN BENCH