The Commissioner Of Income-Tax, Ludhiana v. Ajay Kumar Mittal, J

IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITR No. 114 of 1999 Date of Decision: 9.9.2010 The Commissioner of Income-Tax, Ludhiana Versus Smt. Parkash Kaur and others ...Petitioner ...Respondents. CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:Mr. Rajesh Katoch, Central Govt. StandingCounsel for the petitioner. None for the respondent. AJAY KUMAR MITTAL, J. The controversy herein is basically between assessee,Chanan Singh and the Revenue pertaining to the assessment year1985-86. Chanan Singh having died, his legal heirs i.e. Parkash Kaur,wife and two daughters, namely, Parvinder Kaur and Jatinder Kaur areon record in his place. Reference in this judgment will, however, bemade by indicating assessee only. In this reference filed under Section 256(1) of the Income- tax Act, 1961 (for short “the Act’”) the Income Tax Appellate Tribunal,Amritsar Bench Amritsar, (in short “the Tribunal”) vide order dated26.3.1999, passed in Reference Application No. 142(ASR)/1998 arisingout of ITA No. 242(ASR/1992) at the instance of the Revenue, in ITR No. 114 of 1999-2- respect of assessment year 1985-86, has referred the followingquestion of law, for the opinion of this Court: “Whether on the facts and in the circumstances ofthe case, the Income-tax Appellate Tribunal was rightin law in not upholding the assessment of enhancedcompensation and interest received by the assesseeunder the general provisions of the Income-tax Act,even if the provisions of the section 45(5)(b) were notspecifically applicable?” In brief, the facts of the case are that some land of thefather of the assessee, Chanan Singh (deceased), now representedthrough his legal heirs, was acquired by Defence Authorities on4.2.1972. Compensation for the land was paid. At a later point of time,the amount of compensation was enhanced from Rs. 1,09,364/- to11,49,885/- plus solatium amounting to Rs. 2,99,970/- and interestamounting to Rs.21,67,552/-. The assessee received a sum of Rs.4,87,795/- on 28.5.1984. In response to notice issued under Section148 of the Act, return was filed showing an income of Rs. 3,800/-, underthe head “interest” on accrual basis. The assessing officer worked outthe capital gains on the receipt of enhanced compensation and madean addition of Rs. 2,89,678/-. The assessee aggrieved by the addition,preferred appeal before the Commissioner of Income-tax (Appeals) {inshort “CIT(A)”}. The CIT(A) held that sub-section (5) of Section 45 wasintroduced w.e.f. 1.4.1988 and it did not have retrospective effect, andthus, the assessing officer fell in error in making the addition for theassessment year 1985-86 under Section 45(5)(b). It further held in clear terms that since sub-section (5) was not on the statute book forthe assessment year 1985-86, the addition made to the tune of Rs.2,89,678/- on account of capital gain on the basis of enhancedcompensation received on 28.5.1984 could not be sustained. The CIT(A) accordingly deleted the addition made by the assessing officer. Sofar as the objection raised on behalf of the assessee that notice underSection 148 of the Act was invalid, the CIT(A) held that the same wasnot sustainable in law in view of the provisions of Section 292B of theAct. The Revenue filed appeal before the Tribunal. TheTribunal also did not agree with the submissions made by the Revenueand accordingly dismissed the appeal vide order dated 30.7.1998. We have heard learned counsel for the petitioner and haveperused the record. A perusal of the question referred shows that the amountreceived by the assessee had component of enhanced compensationand also of interest. The question referred requires answer to thefollowing issues:- (i)Whether the amount of enhanced compensationreceived is exigible to capital gain tax under theprovisions of the Act?received is exigible to capital gain tax under theprovisions of the Act? The Revenue filed appeal before the Tribunal. TheTribunal also did not agree with the submissions made by the Revenueand accordingly dismissed the appeal vide order dated 30.7.1998. We have heard learned counsel for the petitioner and haveperused the record. A perusal of the question referred shows that the amountreceived by the assessee had component of enhanced compensationand also of interest. The question referred requires answer to thefollowing issues:- (i)Whether the amount of enhanced compensationreceived is exigible to capital gain tax under theprovisions of the Act?received is exigible to capital gain tax under theprovisions of the Act? (ii)The method of accountancy adopted by theassessee.assessee. (iii)Whether the interest received is liable to be taxed inthe light of method of accountancy followed by theassessee?the light of method of accountancy followed by theassessee? Taking up the issue regarding taxability of enhancedcompensation, the legal position may be analyzed. Section 45 of the Act is attracted where there is a transferof a capital asset. Sub-section (1) thereof provides that any profits orgains arising on transfer of a capital asset is exigible to capital gain tax.In other words, in order to bring the income within the ambit of tax underthe head capital gains, some profits or gains must arise on the transferof capital asset. The ingredients for chargeability to capital gains taxare:- (i)the existence of a capital asset owned by theassessee,assessee, (ii)transfer of capital asset during the previous year, (iii)arising of profits or gains from such transfer, (iv)such profits or gains must accrue or arise to theassessee.assessee. In the present case, it is an admitted fact that the land wasacquired on 4.2.1972 relating to assessment year 1972-73. Now, the point that is to be adjudicated is whether thesubsequent amount which has been received in later year by theassessee as enhanced or additional compensation would be taxable ascapital gains relating to the year of acquisition/transfer of capital asseti.e. assessment year 1972-73 or in the year of receipt, viz. assessmentyear 1985-86. Learned counsel for the revenue referred to the provisionsof Section 45(5)(b) of the Act read with Explanation (ii) thereto, and in the alternative Section 155(7A) of the Act so as to bring the case of theassessee regarding receipt of enhanced compensation chargeable tocapital gains tax. We do not find any force in the contention of the learnedcounsel. Section 45(5)(b) of the Act relates to receipt of additional orenhanced compensation subsequent to the year of acquisition/transfer.According to it, the enhanced compensation is taxable in the year ofreceipt. Section 45(5) was inserted by Finance Act 1987 w.e.f 1.4.1988and, therefore, applies to assessment year 1988-89 and subsequentthereto. Reference may be made to Explanation (ii) as well which dealswith acquisition relating to period earlier to its insertion. Onlyharmonious construction that can be placed on it shall be that it appliesto those cases where the acquisition may be of earlier years but thecompensation is received subsequent to insertion of Section 45(5), i.e.after 1.4.1988. The said sub-section or the explanation, therefore, doesnot apply in the present case. Reference to Section 155(7A) is equally essential before itcan be finally concluded regarding taxability of receipt of enhancedcompensation in the present case. According to the said provision, theAssessing Officer could rectify any assessment where subsequentlyadditional or enhanced amount of compensation was received. Theperiod of four year was to be reckoned from the end of the previousyear in which the additional compensation or consideration wasreceived by the assessee. Sub-section (7A) was incorporated inSection 155 by Finance Act, 1978 retrospectively w.e.f. 1.4.1974 and ITR No. 114 of 1999-6- Reference to Section 155(7A) is equally essential before itcan be finally concluded regarding taxability of receipt of enhancedcompensation in the present case. According to the said provision, theAssessing Officer could rectify any assessment where subsequentlyadditional or enhanced amount of compensation was received. Theperiod of four year was to be reckoned from the end of the previousyear in which the additional compensation or consideration wasreceived by the assessee. Sub-section (7A) was incorporated inSection 155 by Finance Act, 1978 retrospectively w.e.f. 1.4.1974 and ITR No. 114 of 1999-6- was omitted by Direct Tax Laws (Amendment) Act, 1987 w.e.f.1.4.1998. The assessee would not be covered under this provision asthe assessment year involved is 1972-73 and further the assessee hadnot filed any return for the said year which could be rectified. Therefore,enhanced compensation would not be exigible to tax either in the yearof receipt, i.e. assessment year 1985-86 or in the year of acquisition/transfer of capital asset i.e. assessment year 1972-73. Adverting to second limb regarding interest, it may benoticed that there are two types of interest. One is awarded underSection 28 of the Land Acquisition Act,1894 (in short “1894 Act”) andthe other is under Section 34 of the 1894 Act. In so far as interestunder Section 28 of 1894 Act is concerned, the same partakes thecharacter of compensation and would be governed by the aforesaidprinciple for levy of capital gain tax as held in CIT v. Ghanshyam Dass,[2009] 315 ITR 1 by the Apex Court. However, for determining whetherinterest under Section 34 of 1894 Act is liable to be taxed in the year ofreceipt, the basic question for determination would be the method ofaccountancy which was being followed by the assessee. We examine the concerned provision first. Section 145 ofthe Act relates to method of accounting. Originally enacted, Section145 provided that income under the head “profits and gains of businessor profession” or “income from other sources” shall be computed inaccordance with the method of accounting regularly followed by anassessee. Accordingly the assessee was entitled to choose any one ofthe following system of accountancy:- (a) cash or receipts system; or (b) mercantile or accrual system; or (c) mixed or hybrid system. Under cash system of accountancy, the assessee is liableto pay tax on the income on the basis of cash receipts during the yearunder consideration whereas under the mercantile system ofaccountancy, the liability of an assessee is determined according toaccrual of the income relating to the assessment year in question.Hybrid system is mixed system of accountancy where the assessee forany particular source of income could adopt cash or mercantile systemof accounting, but in no case, he could employ for the part of thetransactions or events different system of accountancy relating to onesource of income. However, the amendment of Section 145 of the Act byFinance Act 1995 with effect from 1.4.1997 relating to assessment year1997-98 and subsequent years shall not affect the decision of thepresent case. In case, the assessee was following mercantile/accrualbasis, the same would be discernible from earlier years returns wherethe assessee would have shown the income on account of interest thatmight have accrued in those years. Otherwise, it shall be treated thatcash/receipt basis is the only method which is being adopted by theassessee. Even under hybrid system of accountancy, the assessee isrequired to follow either mercantile or cash system in respect of thissource of income. There is nothing on record to suggest that theassessee had been declaring interest income on yearly accrual basis,therefore, it shall be taken that the assessee had been following cash ITR No. 114 of 1999 system only. Once that is so, then the interest received during theassessment year 1985-86 cannot escape from income tax. ITR No. 114 of 1999 system only. Once that is so, then the interest received during theassessment year 1985-86 cannot escape from income tax. In view of the above, the reference is answered accordingly. (AJAY KUMAR MITTAL) JUDGE September 9, 2010rkmalik/gbs (ADARSH KUMAR GOEL) JUDGE