The Commissioner Of Income Tax, Pune v. Mr. Purshottam B. Khutale And Ors. (Satara

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX REFERENCE NO. 160 OF 1993 The Commissioner of Income Tax, Pune. ...Applicant Versus Mr. Purshottam B. Khutale and Ors. (Satara). ...Respondent Mr. Vimal Gupta, for the Applicant. Mr. S.N. Inamdar, Senior Advocate with Mr. Mihir C. Naniwadekar for the Respondent. CORAM: DR.D.Y. CHANDRACHUD & A.V. POTDAR, JJ. March 16, 2012. P.C :- 1. The Income Tax Tribunal has referred the following questions of law under Section 256 (1) of the Income Tax Act, 1961 :- (1)Whether on the facts and in the circumstances of the case and in law the Tribunal erred in holding that the provisions of Sec. 45(5) of the Income Tax Act, 1961 were not applicable to the assessee's case ; (2) Whether on the facts and in the circumstances of the case, the Tribunal erred in holding that the provisions, of the Sec. 45(5) of the Income Tax Act, 1961, were not applicable on he ground that the availability of the remedy under Sec. 153(3) (ii) would be a rigorous course and the availability of such a remedy would not mean that the assessee should go through such a course, though available to him ; (3)Whether on the facts and in the circumstances of the case and in law the Tribunal erred in holding that provisions of Sec. 45(5) of the Income Tax, 1961, were not applicable also on the ground that the High Court had stayed the order of the District Court awarding the additional compensation, when in fact the High Court has directed the appellant i.e. the Government of Maharashtra to deposit the entire amount under decree within a period of five weeks and stayed the execution proceedings of the decree above in the trial court and had not stayed the award and when the assessee has received the amount of additional compensation by withdrawing the same from the court. 2.These questions arise out of a consolidated Order passed by the Tribunal on 25 November, 1992 in several references which pertained to Assessment year 1989-90. The same issue is involved in all matters. 3) The assessees were co-owners of agricultural lands in Satara which were acquired by the Government of Maharashtra by a notification dated 22 January, 1982. An award of compensation was made in the amount of Rs. 2,54,765/- on 25 February, 1983, in respect of the lands owned by the assessees jointly. The assessees offered the compensation for capital gains tax. The Reference Court enhanced the compensation on 23November, 1987 by awarding additional compensation in the amount of Rs. 22,13,008/-. The Judgment of the Reference Court was challenged before this Court, by the Government of Maharashtra. On 28 June, 1988, this Court passed an interim order and stayed the execution of the decree, subject to the deposit of additional compensation awarded by the Reference Court in Court. The assessees were permitted to withdraw the amount deposited against furnishing bank guarantees. The assessees furnished a bank guarantee of the United Western Bank Limited, Satara and withdrew the amount deposited in Court. Each of the assessees received an amount of Rs. 1,47,553/- and interest thereon of Rs. 7,882/- pertaining to Assessment Year 1989-1990. Thought the assessees did not show this sum as their income for the purpose of capital gains tax, in the foot note they had shown the said amount for computation. The Assessing Officer included the above amounts in the total income by applying the provisions of Section 45(5) of the Income Tax Act, 1961. The CIT (A) agreed to the view of the Assessing Officer and confirmed the assessment. In appeal, the Tribunal relied upon the decision of the Supreme Court in CIT v/s Hindustan Housing and Land Development Trust Limited [1] and following that decision held that the additional compensation does not accrue when the amount awarded was disputed by the Government by filing an appeal before the High Court. 4)Now in the present case, the assessees received the compensation during the Accounting period relevant to Assessment Year 1989-1990. Parliament introduced the provisions of Section 45(5) of the Income Tax Act, 1961 by the Finance Act of 1987 with effect from 1 April, 1988. Prior to the insertion of the provisions of Section 45(5), the Supreme Court had held in its Judgment in Commissioner of Income-Tax, West Bengal-II v/s. Hindustan Housing and Land Development Trust Limited[2] that there is a distinction between cases where the right to receive payment is in dispute and where it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and only the quantification remains to be carried out. Subsequent to the introduction of Section 45(5), the Supreme Court has now settled the controversy in its decision in Commissioner of Income- Tax v/s. Ghanshyam (HUF)[3] . Explaining the effect of the provisions of Section 45(5), the Supreme Court held as follows :- “The scheme of section 45(5) of the 1961 Act was inserted with effect from April 1, 1988, 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 2(1986) 161 ITR 524 3(2009) 315 ITR 1 receipt basis. Our above understanding is supported by insertion of clause (c) in section 45(5) with effect from April 1, 2004, 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 reworking 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 the 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. 5)Consequently, where the capital gain arises from the transfer of a capital asset, being a transfer by way of a compulsory acquisition and the compensation is enhanced in stages by any court/tribunal/authority : (i) The Capital Gain computed with reference to the compensation awarded in the first instance, would be chargeable as income under the head of 'Capital gains' of the previous year in which such compensation or part thereof, was first received ; and (ii) The amount by which the compensation or consideration is enhanced or further enhanced by the court, tribunal or authority, is deemed to be the income chargeable under the head of 'Capital gains' of the previous year in which such amount is received by the assessee ; 8/11 5)Consequently, where the capital gain arises from the transfer of a capital asset, being a transfer by way of a compulsory acquisition and the compensation is enhanced in stages by any court/tribunal/authority : (i) The Capital Gain computed with reference to the compensation awarded in the first instance, would be chargeable as income under the head of 'Capital gains' of the previous year in which such compensation or part thereof, was first received ; and (ii) The amount by which the compensation or consideration is enhanced or further enhanced by the court, tribunal or authority, is deemed to be the income chargeable under the head of 'Capital gains' of the previous year in which such amount is received by the assessee ; 8/11 6)Moreover, the amendment to the provisions of Section 45(5)(c) which is inserted with effect from 1 April, 2004, by the Finance Act of 2003 takes care of a situation where subsequently such compensation or consideration is reduced by any court, tribunal or authority, in which event such compensation shall be recomputed by taking the compensation or consideration so reduced to be the full value of the consideration. Correspondingly, there was also an amendment by the introduction of the provisions of Section 155(16) by the Finance Act of 2003. 7)In view of the decision of the Supreme Court in Ghanshyam (HUF ) (Supra) the questions of law rendered would have to be resolved in terms thereof. 8)However, Counsel appearing on behalf of the assessees has submitted that this Court should also follow the concluding directions which were issued by the Supreme Court in its decision in Ghanshyam (HUF ) (Supra) which are as follows :- “ 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 the assessment years 1991-92 and 1992-93, possibly the proceedings under the Land Acquisition Act, 1894, would have ended. In a 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 the 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-a-vis 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.” 9)In the present case, the Assessment Year in question to which the reference relates is Assessment Year 1989-1990. We find merit in the contention that the reasons which weighed with the Supreme Court, while issuing the aforesaid directions would apply to the present batch of references which relate to Assessment Year 1989-1990. As a matter of fact, the Court has been informed by Counsel appearing on behalf of the Assessee that the order of the Reference Court enhancing the compensation by an amount of Rs. 22,13,008/- dated 23 November, 1987, was set aside by a Division Bench of this Court by a Judgment dated 11 July, 2001 rendered in First Appeal No. 353 of 1989 (Satara City Municipal Council v/s. The State of Maharashtra & Ors.) The Learned Senior Counsel states that following the Order of remand the Reference Court rendered a fresh decision determining the compensation payable, against which the assessees are in appeal before this Court. while issuing the aforesaid directions would apply to the present batch of references which relate to Assessment Year 1989-1990. As a matter of fact, the Court has been informed by Counsel appearing on behalf of the Assessee that the order of the Reference Court enhancing the compensation by an amount of Rs. 22,13,008/- dated 23 November, 1987, was set aside by a Division Bench of this Court by a Judgment dated 11 July, 2001 rendered in First Appeal No. 353 of 1989 (Satara City Municipal Council v/s. The State of Maharashtra & Ors.) The Learned Senior Counsel states that following the Order of remand the Reference Court rendered a fresh decision determining the compensation payable, against which the assessees are in appeal before this Court. 10) Following the decision of the Supreme Court in Ghanshyam (HUF ) (Supra), we answer the questions referred, in the affirmative, in favour of the Revenue and against the Assessees. However, in terms of the concluding directions issued by the Supreme Court, as noted earlier, the recomputation on the basis of the Judgment, will not be done in respect of Assessment Year 1989-1990. The amount, it is clarified shall be chargeable to tax and shall be brought to tax by way of Capital Gains in the Assessment Year corresponding to the Accounting Year in which the amount is received by the Assessees. 11)The Reference is accordingly disposed of. There shall be no order as to costs. (DR.D.Y. CHANDRACHUD, J.) (A.V. POTDAR, J.)