Section 45/Income-tax Act

[2004] 141 Taxman 449 (Punj. & Har.)

High Court of Punjab and Haryana

A.R. Dahiya

v.

Assistant Commissioner of Income-tax

N.K. Sud and S.S. Grewal, JJ.

IT Appeal No. 60 of 2004

July 15, 2004

Once land is held to be not a capital asset in year in which
land was compulsorily acquired, question of additional
compensation to be assessed as capital gain
under section 45(5) does not arise

Section 45 of the Income-tax Act, 1961 - Capital gains - Compensation on compulsory acquisition - Assessment year 1994-95 - Whether when revenue, having accepted assessee’s claim that land was agricultural land not falling within definition of ‘capital asset’ in year when land was compulsorily acquired, cannot be permitted to treat it as a capital asset in year in which enhanced compensation has been received - Held, yes

Facts

The land of the assessee was acquired by the State Government and was granted compensation. Subsequently, the assessee, also received additional compensation on account of award made by the District Judge in 1993. While filing return for the assessment year 1994-95, the assessee claimed that the additional compensation was not liable to tax as it related to agricultural land. It was explained that the claim of exemption in respect of compensation determined by the Collector on the ground that the land being agricultural land, did not fall within the definition of capital asset under section 2(14), was accepted in the year of acquisition and no income on account of capital gains under section 45 was assessed. The Assessing Officer however, held that land of the assessee was not agricultural land and, therefore, the enhanced compensation was liable to be treated as capital gain under section 45(5). On appeal, the Commissioner (Appeals) held that the question whether the acquired land was agricultural or not, was to be determined in the year of its acquisition and since the land was acquired in the year 1983 and the revenue had accepted the claim of the assessee for exemption by treating it as agricultural land, it was not open to the revenue to reopen this question in a subsequent year when enhanced compensation was received. Accordingly, he reversed the findings of the Assessing Officer. On appeal, the Tribunal, set aside the order of the Commissioner (Appeals) and restored that of the Assessing Officer.

On appeal to the High Court :

Held

The provisions of section 45(5) are applicable to a case where a capital asset is transferred by way of compulsory acquisition and capital gain arises thereon. In other words, if at the time of transfer the asset does not fall within the definition of ‘capital asset’, there is no occasion to treat the enhanced compensation in a subsequent year as capital gain under section 45(5). It is further clear from clause (a) of sub-section (5) of section 45 that in the first instance, capital gain has to be assessed in the year in which compensation or part thereof is received. Thus, the question whether an asset is a capital asset or not, has to be determined in the year in which the asset is acquired or any compensation or part thereof is first received. In the instant case, the revenue had accepted the claim of the assessee in the year when compensation was first received that the same was not taxable as the land in question was agricultural land not falling within the definition of capital asset. Having accepted that claim, the revenue could not be permitted to reopen this question in a subsequent year and take a contrary view in respect of the same asset. Therefore, the assessee must succeed on this short ground alone. The revenue, having accepted the claim that the land in question was agricultural land not falling within the definition of ‘capital asset’ in the year when the land was compulsorily acquired, could not be permitted to treat it as a capital asset in the year in which enhanced compensation had been received. Once the land in question was held to be not a capital asset, the question of additional compensation to be assessed as capital gain under section 45(5) did not arise. [Para 11]

Accordingly, this appeal was allowed and finding of the Tribunal were reversed. The additional compensation was not assessable as capital gain under section 45(5)(b) in the assessment year 1994-95. [Para 12]

Amit Jhanji for the Appellant. A.S. Tewatia for the Respondent.

Judgment

N.K. Sud, J. - The assessee has filed this appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”), against the order of the Income-tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (for short “the Tribunal”), dated October 8, 2003, upholding the action of the Assessing Officer in treating the enhanced compensation of Rs. 16,55,566 received by the assessee as capital gains under section 45(5)(b) of the Act.

2. Before adverting to the dispute, the relevant facts may first be noticed :

Vide notifications dated December 12, 1983 and March 19, 1984, 9 kanals 7 marlas land of the assessee was acquired by the Haryana Government and vide award dated August 14, 1985, the assessee was granted a compensation of Rs. 4,69,709 at the rate of Rs. 55 per square yard. On a reference filed at the instance of the assessee, the District Judge vide his award dated October 14, 1992, enhanced the compensation to Rs. 250 per square yard. The State of Haryana challenged the enhancement made by the District Judge in appeal before this court, which was admitted. However, the prayer of the State Government for staying the disbursement of enhanced compensation was rejected and it was ordered that the compensation be disbursed to the claimant on his furnishing bank guarantee and adequate security. In compliance with the order of this court, the Land Acquisition Officer, Urban Estate, Panchkula, vide order dated April 9, 1993, gave compensation of Rs. 34,11,764 as under :

 

Rs.

Principal

16,55,566.45

Interest

17,55,353.85

Cat.

844.00

Total

34,11,764.30

TDS

1,96,600.00

Payable

32,15,164.00

3. While filing his return for the assessment year 1994-95, the assessee claimed that compensation of Rs. 16,55,566 was not liable to tax as it related to agricultural land. It was explained that the land was acquired in the year 1983. In that year, the assessee had claimed exemption in respect of compensation determined by the Collector on the ground that the land being agricultural land, did not fall within the definition of capital asset under section 2(14) of the Act and, thus, no capital gain under section 45 of the Act was attracted. This claim was accepted in the year of acquisition and no income on account of capital gains was assessed. Accordingly, it was claimed that the additional compensation received during the assessment year 1994-95 in respect of the same asset could not be treated as capital gain under section 45(5) of the Act. The Assessing Officer did not accept the explanation of the assessee and held that the land of the assessee was not agricultural land and, therefore, the enhanced compensation received by the assessee was liable to be treated as capital gain under section 45(5)(b) of the Act. Accordingly, he added the said amount to the total income of the assessee vide assessment order dated March 25, 1997.

4. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Chandigarh [for short “the CIT(A)”], who accepted the claim of the assessee that the land at the time of its acquisition in the year 1983 was agricultural land and, therefore, no capital gain had resulted on its acquisition. The Commissioner of Income-tax (Appeals) observed that it was an admitted fact that prior to acquisition of the said land, it was stated to be held as an agricultural land, which fact had not been controverted by the Assessing Officer in any manner. It was further observed that the Assessing Officer had not brought anything on record to prove that the land so acquired was used by the assessee for any business/commercial activity prior to its acquisition by the Haryana Government. It was also observed that there was nothing on record to show that the land so acquired originally fell within the area of any municipality or municipal limit. The Commissioner of Income-tax (Appeals) further held that the question whether the acquired land was agricultural or not, was to be determined in the year of its acquisition. Since the land was acquired in the year 1983 and the Revenue had accepted the claim of the assessee for exemption by treating it as agricultural land, it was not open to the Revenue to reopen this question in a subsequent year when enhanced compensation was received. Accordingly, he reversed the findings of the Assessing Officer that the additional compensation of Rs. 16,55,566 was required to be treated as capital gain under section 45(5)(b) of the Act.

5. Not satisfied with the order of the Commissioner of Income-tax (Appeals), the Revenue preferred an appeal before the Tribunal which, vide the impugned order dated October 8, 2003, has set aside the findings of the Commissioner of Income-tax (Appeals) and upheld the action of the Assessing Officer in treating the additional compensation as capital gain. The Tribunal examined the matter at length and held that as per the revenue records, the land was described as Gair Mumkin or Abi on which no cultivation was possible. It further observed that there was no evidence of cultivation by the assessee nor was any material placed on record to show that the assessee had declared any agricultural income from the same. It was further observed that the land was surrounded on all sides by commercial assets and even the assessee had, at one stage, applied for permission to construct a hotel on the same. Even during the acquisition proceedings, compensation was claimed as a commercial asset. Thus, it was held that the land in question was not agricultural land and was a capital asset within the meaning of section 2(14) of the Act. Accordingly, the action of the Assessing Officer in treating the enhanced compensation received during the year as capital gain under section 45(5)(b) of the Act was upheld.

6. Mr. Amit Jhanji, learned counsel for the appellant, contended that it was an admitted fact that the assessee had purchased the land in question as agricultural land. No material had been placed on record to show that he had at any stage changed its user from agricultural to non-agricultural. He further contended that merely because the land in question subsequently came to be surrounded by commercial buildings, cannot be a ground to hold that it ceased to be an agricultural land. He further contended that the question about the nature of the land stood concluded in the year of acquisition when the claim of the assessee about compensation received from the Land Acquisition Collector being exempt had been accepted. The land was not treated as a capital asset within the meaning of section 2(14) of the Act and, therefore, no capital gain was assessed in the hands of the assessee. Learned counsel, therefore, contended that it was not open to the Assessing Officer to redetermine this question in a subsequent year when enhanced compensation was received.

7. Mr. A.S. Tewatia, learned counsel for the Revenue, on the other hand, supported the order of the Tribunal. He did not controvert the fact that the assessee’s claim for exemption had been accepted in the year of acquisition and no capital gain was assessed in his hands.

8. We have carefully considered the contentions raised by counsel for the parties and have also perused the orders of the authorities below.

9. Income chargeable to tax as capital gain is defined in section 45(1) of the Act, which reads as under :

“45. Capital gains.—(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head ‘Capital gains’, and shall be deemed to be the income of the previous year in which the transfer took place.”

A perusal of the above shows that income under the head “Capital gain” arises on transfer of a “capital asset”. “Capital asset” has been defined in section 2(14) of the Act, which specifically excludes agricultural land in India, not being land situate—

“(iii)(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;”

10. It is not in dispute that in the year of acquisition, the assessee’s claim that its agricultural land did not fall within the ambit of capital asset and, therefore, the profit arising out of its acquisition was not capital gain within the meaning of section 45(1) of the Act, was accepted by the Revenue and no capital gain tax was levied. The question that arises for our consideration is as to whether in such a situation, enhanced compensation received by the assessee in the year under consideration falls within the ambit of section 45(5) of the Act or not. The said provision has been reproduced by the Tribunal in para 9 of its order and the same reads 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;

   (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.

Explanation.—For the purpose 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.” [Emphasis supplied]

11. A bare perusal of the above shows that the provisions of this section are applicable to a case where a capital asset is transferred by way of compulsory acquisition and capital gain arises thereon. In other words, if at the time of transfer the asset does not fall within the definition of “capital asset”, there is no occasion to treat the enhanced compensation in a subsequent year as capital gain under section 45(5) of the Act. It is further clear from clause (a) above that in the first instance, capital gain has to be assessed in the year in which compensation or part thereof is received. Thus, the question whether an asset is a capital asset or not, has to be determined in the year in which the asset is acquired or any compensation or part thereof is first received. In the present case, it is an undisputed fact that the Revenue had accepted the claim of the assessee in the year when compensation was first received that the same was not taxable as the land in question was agricultural land not falling within the definition of capital asset. Having accepted this claim, the Revenue cannot be permitted to reopen this question in a subsequent year and take a contrary view in respect of the same asset. This was the main plank of the order of the Commissioner of Income-tax (Appeals) who had set aside the addition made by the Assessing Officer. However, the Tribunal has totally overlooked this aspect of the matter. We are, therefore, satisfied that the assessee must succeed on this short ground alone. The Revenue, having accepted the claim that the land in question was agricultural land not falling within the definition of “capital asset” in the year when the land was compulsorily acquired, cannot be permitted to treat it as a capital asset in the year in which enhanced compensation has been received. Once the land in question is held to be not a capital asset, the question of additional compensation to be assessed as capital gain under section 45(5) of the Act does not arise. In this view of the matter, it is not necessary for us to go into any other question.

12. Accordingly, we allow this appeal and reverse the findings of the Tribunal on this issue and hold that the amount of Rs. 16,55,566 is not assessable as capital gain under section 45(5)(b) of the Act in the assessment year 1994-95. No costs.

nn