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Friday, September 19, 2014

Income Tax Act - Section 45(5) - compensation of land under sec.23 , 23 A, 28 & 34 of L.A.Act by brothers as legal heirs for the land of father - whether all the brothers can be considered as AoP and whether interest is also taxable and payable by spread over the period - A.O. held that the brothers as AoP not individuals & held that taxable is payable by the date of receipt of interest - High court consider them as Individuals but not A.o.P. and held that it should be spread over from the date of dispossession to till the date of actual payment - Apex court held that since the property came from inheritance but not by formation in to association of persons - the question of Association of Persons not applicable - for the second point - interest is not taxable as it is derived from business - so the interest paid under sec.34 of LA Act is not taxable but the interest paid under Sec.28 is a part of compensation and is liable to be taxed - tax is payable whenever received but not for a spread over period - allowed the appeal = CIVIL APPEAL NO(S). 8103/2009 COMMR.OF INCOME TAX,RAJKOT Appellant(s) VERSUS GOVINDBHAI MAMAIYA Respondent(s) = 2014 - Sept. Month - http://judis.nic.in/supremecourt/filename=41908

 Income Tax Act - Section 45(5)  - compensation of land under sec.23 , 23 A, 28 & 34 of L.A.Act by brothers as legal heirs for the land of father - whether all the brothers can be considered as AoP and whether interest is also taxable and payable by spread over the period - A.O. held that the brothers as AoP not individuals & held that taxable is payable by the date of receipt of interest - High court consider them as Individuals but not AoP. and held that it should be spread over from the date of dispossession to till the date of actual payment - Apex court held that since the property came from inheritance but not by formation in to association of persons - the question of Association of Persons not applicable - for the second point - interest is not taxable as it is derived from business - so the interest paid under sec.34 of LA Act is not taxable but the interest paid under Sec.28 is a part of compensation and is liable to be taxed - tax is payable whenever received but not for a spread over period - allowed the appeal = 

The respondents are three brothers.  Their father  died  leaving
the land admeasuring 17 acres and 11 gunthas to the three brothers  and  two
other  persons  who  relinquished  their  rights  in  favour  of  the  three
brothers.  A part  of  this  bequeathed  land  was  acquired  by  the  State
Government and compensation was paid for it.  On  appeal,  the  compensation
amount was enhanced  and  additional  compensation  alongwith  interest  was
awarded.

3.           The  respondents  filed  their  return  of  income   for   each
assessment years claiming the status of 'individual'. 
 Two  questions  arose for consideration before the Assessing Officer. 
One was as to whether  these
three brothers could file  separate  returns  claiming  the  status  of  the
'individual' or they were to be treated as 'Association of  Persons'  (AoP).

Second question was regarding the taxability of  the  interest  on  enhanced
compensation and this interest which was received in a particular  year  was
to be assessed in the year of receipt or it could be spread over the  period
of time.=

Assessing Officer had passed the assessment order by treating  their  status
as that of a AoP.  The Assessing Officer had  also  refused  to  spread  the
interest income over the years and treated it as  taxable  in  the  year  of
receipt.  
Ultimately, the High Court has decided that these persons  are  to
be given the status of 'individual' and assessed accordingly and not as  AoP
and that the interest  income  is  to  be  spread  over  from  the  year  of
dispossession of land, that is the assessment year 1987-88 till the year  of
actual payment which was received in the assessment year 1999-2000  applying
the principles of accrual of income.   
It  is  in  this  backdrop  that  the
Revenue has approached this Court  challenging  the  decision  of  the  High
Court.=
  In the present case, the admitted  facts  are  that  the  property  in
question which was acquired by the Government, came to  the  respondents  on
inheritance from their father i.e. by the operation  of  law.  
Furthermore,
even the income which is earned in the form of interest is  not  because  of
any business venture of the three assessees but it is the result of the  act
of the Government  in  compulsorily  acquiring  the  said  land.
 In  these
circumstances, the case is squarely covered by the  ratio  of  the  judgment
laid down in Meera & Company (supra) inasmuch as it is not a case where  any
“Association of Persons” was formed by  volition  of  the  parties  for  the
purpose of generation of income.  
This basic test to  determine  the  status of AoP is absent in the present case.

7.    Insofar as the second question is concerned, that is also  covered  by
another judgment of this Court in Commissioner of Income Tax, Faridabad  vs.
Ghanshyam (HUF) reported in (2009) 8 SCC  412,  albeit,  in  favour  of  the
Revenue.
In that case, the court drew distinction
between  the  “interest” earned under Section 28 of the  Land  Acquisition  Act  and  the  “interest” which is under Section 34  of  the  said  Act.   
The  Court  clarified  that
whereas compensation given to the assessee of the  land  acquired  would  be
'income', the  enhanced compensation/consideration becomes income by  virtue
of Section 45(5)(b) of the Income Tax Act.  
The  question  was  whether  it
will cover “interest” and if so, what would be the year of taxability.  
The
position in this respect is explained in paras 49 and  50  of  the  judgment
which make the following reading:

“49. As discussed  hereinabove,
Section  23(1-A)  provides  for  additional
amount.  It takes care of the increase in the value at the rate of  12%  per
annum.
Similarly, under Section 23(2) of the 1894 Act there is a  provision
for solatium which also  represents   part  of  the  enhanced  compensation.
Similarly, Section  28  empowers  the  court  in  its  discretion  to  award
interest on the excess  amount  of  compensation  over  and  above  what  is
awarded by the Collector.
 It includes additional amount under Section 23(1-
A) and solatium under Section 23(2) of the said  Act.  
Section  28  of  the
1894 Act applies only in respect of the  excess  amount  determined  by  the
court after reference under Section 18 of the 1894  Act.  
It  depends  upon
the claim, unlike interest under section 34 which depends on undue delay  in
making the award.

50. It is true that “interest” is not  compensation.   
It  is  equally  true
that Section  45(5)  of  the  1961  Act  refers  to  compensation.  
But  as
discussed hereinabove, we have to go by  the  provisions  of  the  1894  Act
which awards “interest” both as an accretion  in  the  value  of  the  lands
acquired and interest for undue delay.
Interest  under  Section  28  unlike
interest under Section 34 is an accretion to the value, hence it is  a  part
of enhanced compensation  or  consideration  which  is  not  the  case  with
interest under Section 34 of the 1894 Act.  
So also additional amount  under
Section 23 (1-A) and solatium under Section 23(2)  of  the  1961  Act  forms
part of enhanced compensation under Section 45(5)(b) of the 1961 Act.

8.          It is clear from the above that whereas interest  under  Section
34 is not treated as a part of income subject to tax,
the  interest  earned
under Section 28, which  is  on  enhanced  compensation,  is  treated  as  a
accretion to the value and therefore, part of the enhanced  compensation  or
consideration making it exigible to tax.
After  holding  that  interest  on
enhanced compensation under Section 28 of 1894 Act  is  taxable,  the  Court
dealt with the other aspect namely,
the  year  of  tax  and  answered  this
question by holding that it has to be tested on receipt basis,  which  means
it would be taxed in the year in which it is received.  
It would  mean  that
converse position i.e. spread over of this interest on accrual basis is  not
permissible.  
Here  again,  we  would  like  to  reproduce  the  discussion
contained in paras 53 and 54 which  gives the  rational  in  coming  to  the
said conclusion.  Paras 53 and 54 read as under:

“53.  The scheme of Section 45(5) of the 1961 Act was inserted  w.e.f.  1-4-
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
receipt basis.
Our above understanding is supported by insertion of  clause
(c) in Section 45(5) w.e.f. 1-4-2004 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.

54. 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.  We may clarify that  even  before  the
insertion of Section 45(5)(c)  and  Section  155(16)  w.e.f.  1-4-2004,  the
receipt of enhanced compensation under Section 45(5)(b) was taxable  in  the
year of receipt which is only reinforced by insertion of clause (c)  because
the right to receive payment under the 1894 Act is not in doubt.”

0.    In view of the above discussion, we allow these appeals  in  part  and
set aside that portion of the impugned judgment of the  High  Court  whereby
spread over of the interest received under section 28 of the  1894  Act,  on
the enhanced income is allowed with the direction that it would be taxed  in
the year in which such interest on enhanced compensation was received.

2014 - Sept. Month - http://judis.nic.in/supremecourt/filename=41908

                                                           Non-Reportable
                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL  NO(S). 8103/2009

COMMR.OF INCOME TAX,RAJKOT                         Appellant(s)

                                VERSUS

GOVINDBHAI MAMAIYA                                 Respondent(s)


WITH
CIVIL APPEAL No. 8104/2009
CIVIL APPEAL No. 8105/2009
CIVIL APPEAL No. 8106/2009
CIVIL APPEAL No. 8107/2009
CIVIL APPEAL No. 8108/2009
CIVIL APPEAL No. 8109/2009
CIVIL APPEAL No. 8110/2009


                               J U D G M E N T


A.K. SIKRI, J.


            The question of law that arises for consideration in  all  these
appeals  which  are  filed  by  the  Commissioner  of  Income  Tax,   Rajkot
(hereinafter referred to as the 'Revenue') is common.   The  respondents  in
all these appeals are  also  common.   The  three  respondents  (hereinafter
referred to as the 'assessee') are brothers.  The issue raised is  identical
in all these appeals which pertains to different assessment years  and  that
is the reason that there are eight appeals  before  us.   For  the  sake  of
convenience, we will refer to the facts emerging from the records  of  Civil
appeal No.8103 of 2009.

2.          The respondents are three brothers.  Their father  died  leaving
the land admeasuring 17 acres and 11 gunthas to the three brothers  and  two
other  persons  who  relinquished  their  rights  in  favour  of  the  three
brothers.  A part  of  this  bequeathed  land  was  acquired  by  the  State
Government and compensation was paid for it.  On  appeal,  the  compensation
amount was enhanced  and  additional  compensation  alongwith  interest  was
awarded.

3.           The  respondents  filed  their  return  of  income   for   each
assessment years claiming the status of 'individual'.  Two  questions  arose
for consideration before the Assessing Officer. One was as to whether  these
three brothers could file  separate  returns  claiming  the  status  of  the
'individual' or they were to be treated as 'Association of  Persons'  (AoP).
Second question was regarding the taxability of  the  interest  on  enhanced
compensation and this interest which was received in a particular  year  was
to be assessed in the year of receipt or it could be spread over the  period
of time.

4.          Without going into the detail as to how this question  traversed
and decided by one  forum  to  other,  suffice  it  is  to  state  that  the
Assessing Officer had passed the assessment order by treating  their  status
as that of a AoP.  The Assessing Officer had  also  refused  to  spread  the
interest income over the years and treated it as  taxable  in  the  year  of
receipt.  Ultimately, the High Court has decided that these persons  are  to
be given the status of 'individual' and assessed accordingly and not as  AoP
and that the interest  income  is  to  be  spread  over  from  the  year  of
dispossession of land, that is the assessment year 1987-88 till the year  of
actual payment which was received in the assessment year 1999-2000  applying
the principles of accrual of income.   It  is  in  this  backdrop  that  the
Revenue has approached this Court  challenging  the  decision  of  the  High
Court.

5.    Insofar as the treatment of  the  respondents  giving  the  status  of
'individual' and assessing on that basis is concerned, the issue is no  more
res integra.  Learned counsel for the Revenue candidly and  fairly  conceded
that this aspect stands conclusively determined by  various  judgments.   It
would be suffice to refer to  the  judgment  of  this  Court  in  Meera  and
Company, Ludhiana vs.  Commissioner  of  Income  Tax,  Punjab,  J  &  K  and
Chandigarh, Patiala reported in (1997) 4 SCC  677.   After  taking  note  of
some previous judgments on  this  issue,  the  Court  summed  up  the  legal
position in paras 19 and 20 which are reproduced below::
“19. In the case of CIT v. Indira Balkrishna, AIR 1960 SC 1172,  this  Court
held that "association of persons" meant an  association  in  which  two  or
more persons joined in a common purpose  or  common  action.  As  the  words
occurred in a section which imposed a tax on income,  the  association  must
be one the object of which was to produce  income,  profits  or  gains.   In
that case, the co-widows of a Hindu governed  by  Mitakshara  law  inherited
his estate which consisted of immovable properties, shares, money  lying  in
deposit and a share in a registered firm. The Appellate Tribunal found  that
they had not exercised their right to separate  enjoyment  and  that  except
for jointly receiving the dividends from the shares and  the  interest  from
the deposits, they had done no act which had helped to produce income.  This
Court held that the co-widows succeeded as co-heirs to  the  estate  of  the
deceased husband. It was held that since the widows had an  equal  share  in
the income from immovable properties, Section 9(3) of the Indian Income  Tax
Act, 1922 will apply. So far as other incomes were concerned, it was held:

"Coming back to the facts found by the Tribunal, there is  no  finding  that
the three widows have combined  in a joint  enterprise  to  produce  income.
The only finding is that they have not exercised  their  right  to  separate
enjoyment, and except for receiving the dividends and interest  jointly,  it
has been found that they have done  no  act  which  has  helped  to  produce
income in respect of the shares and deposits. On these  findings  it  cannot
be held that the three widows had the status of an  association  of  persons
within the meaning of section 3 of the Indian Income Tax Act."

20.   The meaning of "an association of persons" was also examined  by  this
Court in the case of G. Murugesan & Brothers v. CIT, (1973) 4  SCC  211.  It
was held in that case that an association of persons could  be  formed  only
when two or more  individuals  voluntarily  combined  together  for  certain
purposes. Volition on the part of the members  of  the  association  was  an
essential ingredient. It was further held that even a minor could  join  "an
association of persons" if his lawful guardian gave his consent. The  income
in that case arose under two heads  -  house  property  and  dividends  from
shares. The question before this  Court  was  whether  the  dividend  income
should be assessed in the hand of an association of persons or  individuals.
One Sinnamani Nadar executed  a  settlement  deed  in  favour  of  his  four
grandsons. The property covered by the settlement deed comprised of a  house
property which had been let out and some shares. The donees  were  to  enjoy
the income of  these  properties  during  their  lifetime.  Thereafter,  the
properties were to devolve on their children. In that case, it  was  pointed
out that Income Tax return  was  filed  in  the  status  of  association  of
persons prior to the assessment year 1959-60 to 1962-63,  the  returns  were
submitted as individuals specifically  stating  that  the  donees  were  not
functioning as an association of persons.”

6.    In the present case, the admitted  facts  are  that  the  property  in
question which was acquired by the Government, came to  the  respondents  on
inheritance from their father i.e. by the operation  of  law.   Furthermore,
even the income which is earned in the form of interest is  not  because  of
any business venture of the three assessees but it is the result of the  act
of the Government  in  compulsorily  acquiring  the  said  land.   In  these
circumstances, the case is squarely covered by the  ratio  of  the  judgment
laid down in Meera & Company (supra) inasmuch as it is not a case where  any
“Association of Persons” was formed by  volition  of  the  parties  for  the
purpose of generation of income.  This basic test to  determine  the  status
of AoP is absent in the present case.

7.    Insofar as the second question is concerned, that is also  covered  by
another judgment of this Court in Commissioner of Income Tax, Faridabad  vs.
Ghanshyam (HUF) reported in (2009) 8 SCC  412,  albeit,  in  favour  of  the
Revenue.  In that case, the court drew distinction  between  the  “interest”
earned under Section 28 of the  Land  Acquisition  Act  and  the  “interest”
which is under Section 34  of  the  said  Act.   The  Court  clarified  that
whereas compensation given to the assessee of the  land  acquired  would  be
'income', the  enhanced compensation/consideration becomes income by  virtue
of Section 45(5)(b) of the Income Tax Act.   The  question  was  whether  it
will cover “interest” and if so, what would be the year of taxability.   The
position in this respect is explained in paras 49 and  50  of  the  judgment
which make the following reading:

“49. As discussed  hereinabove,  Section  23(1-A)  provides  for  additional
amount.  It takes care of the increase in the value at the rate of  12%  per
annum.  Similarly, under Section 23(2) of the 1894 Act there is a  provision
for solatium which also  represents   part  of  the  enhanced  compensation.
Similarly, Section  28  empowers  the  court  in  its  discretion  to  award
interest on the excess  amount  of  compensation  over  and  above  what  is
awarded by the Collector.  It includes additional amount under Section 23(1-
A) and solatium under Section 23(2) of the said  Act.   Section  28  of  the
1894 Act applies only in respect of the  excess  amount  determined  by  the
court after reference under Section 18 of the 1894  Act.   It  depends  upon
the claim, unlike interest under section 34 which depends on undue delay  in
making the award.

50. It is true that “interest” is not  compensation.   It  is  equally  true
that Section  45(5)  of  the  1961  Act  refers  to  compensation.   But  as
discussed hereinabove, we have to go by  the  provisions  of  the  1894  Act
which awards “interest” both as an accretion  in  the  value  of  the  lands
acquired and interest for undue delay.  Interest  under  Section  28  unlike
interest under Section 34 is an accretion to the value, hence it is  a  part
of enhanced compensation  or  consideration  which  is  not  the  case  with
interest under Section 34 of the 1894 Act.  So also additional amount  under
Section 23 (1-A) and solatium under Section 23(2)  of  the  1961  Act  forms
part of enhanced compensation under Section 45(5)(b) of the 1961 Act.”

8.          It is clear from the above that whereas interest  under  Section
34 is not treated as a part of income subject to tax,  the  interest  earned
under Section 28, which  is  on  enhanced  compensation,  is  treated  as  a
accretion to the value and therefore, part of the enhanced  compensation  or
consideration making it exigible to tax.  After  holding  that  interest  on
enhanced compensation under Section 28 of 1894 Act  is  taxable,  the  Court
dealt with the other aspect namely,  the  year  of  tax  and  answered  this
question by holding that it has to be tested on receipt basis,  which  means
it would be taxed in the year in which it is received.  It would  mean  that
converse position i.e. spread over of this interest on accrual basis is  not
permissible.   Here  again,  we  would  like  to  reproduce  the  discussion
contained in paras 53 and 54 which  gives the  rational  in  coming  to  the
said conclusion.  Paras 53 and 54 read as under:

“53.  The scheme of Section 45(5) of the 1961 Act was inserted  w.e.f.  1-4-
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
receipt basis.  Our above understanding is supported by insertion of  clause
(c) in Section 45(5) w.e.f. 1-4-2004 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.

54. 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.  We may clarify that  even  before  the
insertion of Section 45(5)(c)  and  Section  155(16)  w.e.f.  1-4-2004,  the
receipt of enhanced compensation under Section 45(5)(b) was taxable  in  the
year of receipt which is only reinforced by insertion of clause (c)  because
the right to receive payment under the 1894 Act is not in doubt.”


0.    In view of the above discussion, we allow these appeals  in  part  and
set aside that portion of the impugned judgment of the  High  Court  whereby
spread over of the interest received under section 28 of the  1894  Act,  on
the enhanced income is allowed with the direction that it would be taxed  in
the year in which such interest on enhanced compensation was received.


                                             .........................J.
                                             [ J. CHELAMESWAR ]




                                             …........................J.
                                             [ A.K. SIKRI ]
NEW DELHI
SEPTEMBER 04, 2014

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