REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4401 OF 2009
(Arising out of S.L.P.(C) No.17640 of 2008)
Commissioner of Income-tax, Faridabad ... Appellant (s)
Versus
Ghanshyam (HUF) ... Respondent(s)
WITH
Civil Appeal No. 4402 of 2009 - Arising out of S.L.P. (C) No.17644 of
2008
Civil Appeal No. 4403 of 2009 - Arising out of S.L.P. (C) No.17643 of
2008
Civil Appeal No. 4404 of 2009 - Arising out of S.L.P. (C) No.17645 of
2008
Civil Appeal No. 4405 of 2009 - Arising out of S.L.P. (C) No.17642 of
2008
Civil Appeal No. 4406 of 2009 - Arising out of S.L.P. (C) No.17641 of
2008
Civil Appeal No. 4407 of 2009 - Arising out of S.L.P. (C) No.17647 of
2008
Civil Appeal No. 4408 of 2009 - Arising out of S.L.P. (C) No.17646 of
2008
Civil Appeal No. 4409 of 2009 - Arising out of S.L.P. (C) No.8350 of 2009
Civil Appeal No. 4410 of 2009 - Arising out of S.L.P. (C) No.8451 of 2008
Civil Appeal No. 4411 of 2009 - Arising out of S.L.P. (C) No.4832 of 2008
Civil Appeal No. 4412 of 2009 - Arising out of S.L.P. (C) No.4833 of 2008
Civil Appeal No. 4413 of 2009 - Arising out of S.L.P. (C) No.4834 of 2008
Civil Appeal No. 4414 of 2009 - Arising out of S.L.P. (C) No.4835 of 2008
Civil Appeal No. 4415 of 2009 - Arising out of S.L.P. (C) No.20657 of
2008
Civil Appeal No. 4416 of 2009 - Arising out of S.L.P. (C) No.20658 of
2008
Civil Appeal No. 4417 of 2009 - Arising out of S.L.P. (C) No.20659 of
2008
2
Civil Appeal No. 4418 of 2009 - Arising out of S.L.P. (C) No.7599 of
2009
Civil Appeal No. 4419 of 2009 - Arising out of S.L.P. (C) No.3054 of 2008
Civil Appeal No. 4420 of 2009 - Arising out of S.L.P. (C) No.3717 of 2009
Civil Appeal No. 4422 of 2009 - Arising out of S.L.P. (C) No.4174 of 2009
Civil Appeal No. 4423 of 2009 - Arising out of S.L.P. (C) No.31566 of
2008
Civil Appeal No. 4424 of 2009 - Arising out of S.L.P. (C) No.713 of 2009
Civil Appeal No. 4425 of 2009 - Arising out of S.L.P. (C) No.5300 of 2009
Civil Appeal No. 4426 of 2009 - Arising out of S.L.P. (C) No.6378 of 2009
JUDGMENT
S. H. KAPADIA, J.
1. Delay condoned.
2. Leave granted.
3. The controversy in the present batch of civil appeals pertains
to the interpretation of Section 45(5) of the Income-tax Act, 1961,
as it stood prior to 1.4.2004.
FACTS IN THE LEAD MATTER
Civil Appeal No. of 2009 - Arising out of S.L.P. (C)
No.17640 of 2008 - Commissioner of Income Tax, Faridabad
v. Ghanshyam (HUF).
4. Assessee received enhanced compensation on its lands being
acquired by Haryana Urban Development Authority (HUDA) as also
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interest thereon during the previous year relevant to assessment
year 1999-2000.
5. Assessee filed its return on income for the assessment year
1999-2000 in which he did not offer the amount of enhanced
compensation and the interest received thereon during the previous
year relevant to the assessment year for taxation, on the plea that
the amount of enhanced compensation received had not accrued to
the assessee during the year of receipt as the entire amount was in
dispute in appeal before the High Court which appeal stood filed by
the State against the order of the Reference Court granting
enhanced compensation. The amount was received by the assessee
in terms of the interim order of the High Court against the
assessee's furnishing security to the satisfaction of the executing
court. The interest received on enhanced compensation during the
previous year was also, according to the assessee, not chargeable to
tax on the same plea.
6. The A.O. did not accept the contentions of the assessee on the
ground that in terms of Section 45(5) of the Income-tax Act, 1961
("1961 Act", for short) enacted w.e.f. 1.4.88, the amount by which
compensation or consideration stood enhanced or further
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enhanced by the Court, is deemed income chargeable under the
head "Capital Gains" of the previous year in which the said amount
came to be received. The A.O. accordingly brought to tax the
amount of enhanced compensation of Rs.87,13,517/- received by
the assessee during the previous year relevant to the assessment
year 1999-2000. Similarly, interest on enhanced compensation of
Rs.1,47,575/- received by the assessee during the previous year
was also brought to tax in the year of receipt. The assessee filed
appeal against the order of the A.O. in which he reiterated the
above contention. Assessee also placed reliance on the judgment of
this Court in Commissioner of Income-tax, West Bengal-II v.
Hindustan Housing and Land Development Trust Ltd. - (1986)
161 ITR 524 (SC). CIT (A) came to the conclusion that since the
enhanced compensation received was in dispute in the pending
First Appeal, both, the enhanced compensation as well as the
interest thereon had not accrued to the assessee during the year of
receipt as the entire amount was in dispute in First Appeal and
that the assessee had received the said amount only against
security furnished to the satisfaction of the executing court. At this
stage, it may be mentioned that the amount of enhanced
compensation sought to be taxed under Section 45(5) of the 1961
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Act was Rs.87,13,517/- whereas the interest on enhanced
compensation which was also sought to be taxed was
Rs.1,47,575/-.
7. Aggrieved by the decision of the CIT(A), the Department
moved Income-tax Appellate Tribunal (ITAT) which following its
order upheld the order of the CIT(A) and dismissed the appeal of
the Department. Aggrieved by the decision of the Tribunal the
matter was carried in appeal to the High Court under Section 260A
of the 1961 Act. By the impugned judgment it has been held that
the case is squarely covered by the judgment of the Supreme Court
in the case of Hindustan Housing (supra). According to the High
Court, when the State is in appeal against the order of enhanced
compensation and interest thereon the receipt of additional
compensation and interest thereon was not taxable as income as
the said two items were disputed by the Government in appeal.
Consequently, the Department's appeal was dismissed by the High
Court, hence this civil appeal is filed by the Department.
ISSUE
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8. The short question to be decided in this batch of civil appeals
is : whether ITAT was right in ordering deletion of enhanced
compensation and interest thereon from the total income of the
assessee on the ground that the said two items, awarded by the
Reference Court, was under dispute in First Appeal before the High
Court.
Analysis of provisions of the 1961 Act
9. We quote hereinbelow Section 2(47) of the 1961 Act which
reads as under:
"2 - Definitions
In this Act, unless the context otherwise requires,-
(47) "transfer", in relation to a capital asset, includes,-
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof
into, or is treated by him as, stock-in-trade of a business
carried on by him, such conversion or treatment; [or]
(v) any transaction involving the allowing of the possession of
any immovable property to be taken or retained in part
performance of a contract of the nature referred to in Section
53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member
of, or acquiring shares in, a co-operative society, company or
other association of persons or by way of any agreement or any
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arrangement or in any other manner whatsoever) which has
the effect of transferring, or enabling the enjoyment of, any
immovable property.
Explanation.-For the purposes of sub-clauses (v) and (vi),
"immovable property" shall have the same meaning as in
clause (d) of Section 269UA."
10. We also quote hereinbelow Section 45(1) of the 1961 Act as it
stood prior to 1.4.2004 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."
11. We also quote hereinbelow Section 45(5) of the 1961 Act as it
stood prior to 1.4.2004 which reads as under:
"45 - Capital gains
(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
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"Capital gains" of the previous year in which such amount is
received by the assessee;"
12. We also quote hereinbelow Section 45(5) of the 1961 Act after
1.4.2004 which reads as under:
"45 - Capital gains
(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 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;
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(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 by us)
13. We also quote hereinbelow Section 155(16) of the 1961 Act
after 1.4.2004 which reads as under:
"PROCEDURE FOR ASSESSMENT
155. Other amendments
(16) Where in the assessment for any year, a capital gain arising 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, is computed by taking the compensation or
consideration as referred to in clause (a) or, as the case may be, the
compensation or consideration enhanced or further enhanced as
referred to in clause (b) of sub-section (5) of Section 45, to be the full
value of consideration deemed to be received or accruing as a result of
the transfer of the asset and subsequently such compensation or
consideration is reduced by any court, Tribunal or other authority, the
Assessing Officer shall amend the order of assessment so as to
compute the capital gain by taking the compensation or consideration
as so reduced by the court, Tribunal or any other authority to be the
full value of consideration; and the provisions of Section 154 shall, so
far as may be, apply thereto, and the period of four years shall be
reckoned from the end of the previous year in which the order
reducing the compensation was passed by the court, Tribunal or other
authority."
14. The following conditions need to be satisfied for taxing a
transaction as capital gains, viz., the subject-matter must be a
capital asset, the transaction must fall in the definition of
"transfer", there must be profit or loss called "Capital Gains" and
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that the taxpayer has claimed exemption in whole or in part by
complying with legal provisions (Like Section 54F).
15. Section 45(1) of the 1961 Act speaks about capital gains
arising out of "transfer" of a capital asset. The definition of the
expression "transfer" is contained in Section 2(47) of the 1961 Act.
It has very wide meaning. What is taxable under Section 45(1) of
the 1961 Act is "profits and gains arising from a transfer of a
capital asset" and the charge of income-tax on the capital gains is a
charge on the income of the previous year in which the transfer
took place. Capital gain(s) is an artificial income. It is created by
the 1961 Act. Profit(s) arising from transfer of capital asset is made
chargeable to income-tax under Section 45(1) of the 1961 Act.
From the scheme of Section 45, it is clear that capital gains is not
an income which accrues from day-to-day during a specific period
but it arises at fixed point of time, namely, on the date of the
transfer. In short, Section 45 defines capital gains, it makes them
chargeable to tax and it allots the appropriate year for such charge.
It also enacts a deeming provision. Section 48 lays down mode of
computation of capital gains and deductions therefrom.
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16. The question which arises for determination is - why was
Section 45(5) inserted by the Finance Act, 1987, w.e.f. 1.4.88?
Under Section 45(1), profits or gains arising from the transfer of a
capital asset effected in the previous year is taken to be the income
of the previous year in which the transfer took place and such
profits are chargeable to tax under the head "Capital Gains".
However, it was noticed that in cases where capital gains accrued
or arose by way of compulsory acquisition, the additional
compensation stood awarded in several stages by different
appellate authorities which necessitated rectification of the original
assessment at each stage. To provide for rectification of the
assessment of the year in which capital gains was originally
assessed, Section 155(7A) was also introduced. However, as stated
above, since additional compensation under the Land Acquisition
Act, 1894 was awarded in several stages multiple rectifications had
to be made to the original assessment which cause great difficulty
in carrying out the required rectification and in effecting the
recovery of additional demand. It was also noticed that repeated
rectifications of assessment on account of enhancement of
compensation by different courts often resulted in mistakes in
computation of tax. Therefore, with a view to remove these
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difficulties, the Finance Act 1987 inserted Section 45(5) to provide
for taxation of additional compensation in the year of receipt
instead of in the year of transfer of the capital asset. Accordingly,
additional compensation is treated as "deemed income" in the
hands of the recipient even if the actual recipient happens to be a
person different from the original transferor by reason of death, etc.
For this purpose, the cost of acquisition in the hands of the receiver
of the additional compensation is deemed to be nil. However, the
compensation awarded in the first instance would continue to be
chargeable as income under the head "Capital Gains", in the
previous year in which transfer took place. At this stage, it may be
noted, that, Section 45(1) stood further amended (w.e.f. 1.4.91) so
as to include reference to Section 54H and Section 45(5)(a) which,
as stated above, stood amended (w.e.f. 1.4.88). The scope and
effect of the above amendments made in Section 45, as also
insertion of Section 54H, by Finance Act 1991, has been elaborated
in the following portion of the Departmental Circular No.621 dated
19.12.91:
``Streamlining the provisions relating to exemption for roll-
over of capital gains-
Capital gains are deemed to be income of the
previous year in which the transfer giving rise to the
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gains takes place except where otherwise provided.
According in the case of compulsory acquisition of
assets, the capital gains included in the compensation,
as originally awarded, is charged to tax in the year in
which the transfer by way of compulsory acquisition
takes place, but additional compensation is brought to
tax only in the year in which it is received.
It has been brought to the notice of the
Government that in case of compulsory acquisition of
assets, at times there is a considerable gap between the
dates of acquisition and payment of compensation. The
result is that the existing provisions of capital gains
taxation operate harshly inasmuch as the affected
persons are unable to avail of the exemption for roll-
over of capital gains, within the specified time period
through investment in specified assets.
Section 45 of the Income-tax Act has, therefore,
been amended to provide that capital gains arising from
the transfer of the capital asset by way of compulsory
acquisition under any law shall be charged to tax in the
previous year in which the compensation is first
received.
This amendment takes effect retrospectively from
st
1 April, 1988.
Further, a new section 54H has been inserted in
the Income-tax Act, to provide that in cases where
compensation in respect of any asset acquired
compulsorily is received after the date of such transfer,
the period for investment in specified assets shall be
reckoned from the date of receipt of such compensation.
However, where the compensation was first received
before 1st April, 1991, and the period for making
investment in any specified asset has expired before 1st
October, 1991, such period shall stand extended up to
31st December, 1991.
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This amendment takes effect from the 1st day of
October, 1991."
17. The important point to be noted is that in the case of
compulsory acquisition of an asset, the capital gains in the
compensation, as originally awarded, is charged to tax in the year
in which the transfer by way of compulsory acquisition takes place,
but additional compensation is brought to tax only in the year in
which it is received.
18. Thus, Section 45(5) enacts overriding provisions and takes
care of a situation :
--where the capital gains 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 consideration for such transfer is
enhanced or further enhanced by any court, tribunal or
other authority.
In such a situation, the capital gain so arising is, for
and from assessment year 1988-89, to be dealt with as
under:-
(a) the capital gain computed with reference to--
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--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
is 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 is to be deemed to be
the income chargeable under the head "Capital gains" of
the previous year in which such amount is received by
the assessee.
Analysis of the provisions of L.A. Act, 1894
19. At the outset we quote hereinbelow Sections 23(1), 23(1A) and
23(2) of the 1894 Act which read as under:
"23 - Matters to be considered in determining compensation
(1) In determining the amount of compensation to be awarded for
land acquired under this Act, the court shall take into consideration--
first, the market-value of the land at the date of the publication of
the notification under section 4, sub-section (1);
secondly, the damage sustained by the person interested, by
reason of the taking of any standing crops or trees which may be
on the land at the time of the Collector's taking possession thereof;
thirdly, the damage (if any), sustained by the person interested, at
the time of the Collector's taking possession of the land, by reason
of severing such land from his other land;
fourthly, the damage (if any), sustained by the person interested,
at the time of the Collector's taking possession of the land, by
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reason of the acquisition injuriously affecting his other property,
movable or immovable, in any other manner, or his earnings;
fifthly, if, in consequence of the acquisition of the land by the
Collector, the person interested is compelled to change his
residence or place of business, the reasonable expenses (if any)
incidental to such change; and
sixthly, the damage (if any) bona fide resulting from diminution of
the profits of the land between the time of the publication of the
declaration under section 6 and the time of the Collector's taking
possession of the land.
(1A) In addition to the market value of the land above provided, the
Court shall in every case award an amount calculated at the rate of
twelve per centum per annum on such market-value for the period
commencing on and from the date of the publication of the notification
under section 4, sub-section (1), in respect of such land to the date of
the award of the Collector or the date of taking possession of the land,
whichever is earlier.
Explanation.-In computing the period referred to in this sub-
section, any period or periods during which the proceedings for the
acquisition of the land were held up on account of any stay or
injunction by the order of any court shall be excluded.
(2) In addition to the market-value of the land as above provided, the
court shall in every case award a sum of thirty per centum on such
market-value, in consideration of the compulsory nature of the
acquisition."
20. We also quote hereinbelow Section 28 of the 1894 Act which
reads as under:
"28. Collector may be directed to pay interest on excess
compensation. -
If the sum which, in the opinion of the court, the Collector ought to
have awarded as compensation is in excess of the sum which the
Collector did award as compensation, the award of the Court may
direct that the Collector shall pay interest on such excess at the rate of
[nine per centum] per annum from the date on which he took
possession of the land to the date of payment of such excess into
Court."
21. We also quote hereinbelow Section 34 of the 1894 which
reads as under:
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"34. Payment of interest.-
When the amount of such compensation is not paid or deposited on or
before taking possession of the land, the Collector shall pay the
amount awarded with interest thereon at the rate of nine per centum
per annum from the time of so taking possession until it shall have
been so paid or deposited.
Provided that if such compensation or any part thereof is not paid
or deposited within a period of one year from the date on which
possession is taken, interest at the rate of fifteen per centum per
annum shall be payable from the date of expiry of the said period
of one year on the amount of compensation or part thereof which
has not been paid or deposited before the date of such expiry."
22. Section 23(1A) was introduced in the 1894 Act to mitigate the
hardship caused to the owner of the land who is deprived of its
enjoyment by taking possession from him and using it for public
purpose, because of considerable delay in making the award and
offering payment thereof [See : Assistant Commissioner, Gadag
Sub-Division, Gadag v. Mathapathi Basavannewwa and others -
AIR 1995 SC 2492]. To obviate such hardship, Section 23(1A) was
introduced and the Legislature envisaged that the owner is entitled
to 12% per annum additional amount on the market value for a
period commencing on or from the date of publication of the
notification under Section 4(1) of the 1894 Act upto the date of the
award of the Collector or the date of taking possession of the land,
whichever is earlier. The additional amount payable under Section
23(1A) of the 1894 Act is neither interest nor solatium. It is an
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additional compensation designed to compensate the owner of the
land, for the rise in price during the pendency of the land
acquisition proceedings. It is a measure to offset the effect of
inflation and the continuous rise in the value of properties. [See:
State of Tamil Nadu and others etc. v. L. Krishnan and others
etc. - AIR 1996 SC 497]. Therefore, the amount payable under
Section 23(1A) of the 1894 Act is an additional compensation in
respect to the acquisition and has to be reckoned as part of the
market value of the land. Sub-section (1A) of Section 23 was
introduced by Land Acquisition (Amendment) Act, 1984. It
provides that in every case the Court shall award an amount as
additional compensation at the rate of 12% per annum on the
market value of the land for the period commencing on and from
the date of publication of the notification under Section 4(1) to the
date of the award of the Collector or to the date of taking
possession of the land, whichever is earlier. In other words sub-
section (1A) of Section 23 provides for additional compensation.
The said sub-section takes care of increase in the value at the rate
of 12% per annum.
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23. In addition to the market value of the land, as above provided,
the Court shall in every case award a sum of 30% on such market
value, in consideration of the compulsory nature of acquisition.
This is under Section 23(2) of the 1894 Act. In short, Section 23(2)
talks about solatium. Award of solatium is mandatory. Similarly,
payment of additional amount under Section 23(1A) is mandatory.
The award of interest under Section 28 of the 1894 Act is
discretionary. Section 28 applies when the amount originally
awarded has been paid or deposited and when the Court awards
excess amount. In such cases interest on that excess alone is
payable. Section 28 empowers the Court to award interest on the
excess amount of compensation awarded by it over the amount
awarded by the Collector. The compensation awarded by the Court
includes the additional compensation awarded under Section
23(1A) and the solatium under Section 23(2) of the said Act. This
award of interest is not mandatory but is left to the discretion of
the Court. Section 28 is applicable only in respect of the excess
amount, which is determined by the Court after a reference under
Section 18 of the 1894 Act. Section 28 does not apply to cases of
undue delay in making award for compensation [See: Ram Chand
& others etc v. Union of India & Ors. - 1994(1) SCC 44]. In the
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case of Shree Vijay Cotton & Oil Mills Ltd. v. State of Gujarat -
(1991) 1 SCC 262, this Court has held that interest is different
from compensation.
24. To sum up, interest is different from compensation. However,
interest paid on the excess amount under Section 28 of the 1894
Act depends upon a claim by the person whose land is acquired
whereas interest under Section 34 is for delay in making payment.
This vital difference needs to be kept in mind in deciding this
matter. Interest under Section 28 is part of the amount of
compensation whereas interest under Section 34 is only for delay
in making payment after the compensation amount is determined.
Interest under Section 28 is a part of enhanced value of the land
which is not the case in the matter of payment of interest under
Section 34.
25. It is clear from reading of Sections 23(1A), 23(2) as also
Section 28 of the 1894 Act that additional benefits are available on
the market value of the acquired lands under Section 23(1A) and
23(2) whereas Section 28 is available in respect of the entire
compensation. It was held by the Constitution Bench of the
Supreme Court in Sunder v. Union of India - (2001) 7 SCC 211,
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that "indeed the language of Section 28 does not even remotely
refer to market value alone and in terms it talks of compensation or
the sum equivalent thereto. Thus, interest awardable under
Section 28, would include within its ambit both the market value
and the statutory solatium. It would be thus evident that even the
provisions of Section 28 authorise the grant of interest on solatium
as well." Thus solatium means an integral part of compensation,
interest would be payable on it. Section 34 postulates award of
interest at 9% per annum from the date of taking possession only
until it is paid or deposited. It is a mandatory provision. Basically
Section 34 provides for payment of interest for delayed payment.
Taxability of additional compensation and interest
under Section 45(5) of the 1961 Act in the context
of the provisions of L.A. Act, 1894
26. The question before this Court is : whether additional amount
under Section 23(1A), solatium under Section 23(2), interest paid
on excess compensation under Section 28 and interest under
Section 34 of the 1894 Act, could be treated as part of the
compensation under Section 45(5) of the 1961 Act?
27. In the case of Hindustan Housing (supra) certain lands
belonging to the assessee-company, which was in the business of
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dealing in land and which maintained its account on mercantile
system, were first requisitioned and then compulsorily acquired by
the State Government. The Land Acquisition Officer awarded
Rs.24,97,249/- as compensation. On appeal the Arbitrator made
an award at Rs.30,10,873/- with interest at 5% from the date of
acquisition. Thereupon, the State preferred an appeal to the High
Court. Pending the appeal, the State Government deposited in the
Court Rs.7,36,691/- being the additional amount payable under
the award and the assessee was permitted to withdraw that
additional amount on furnishing a security bond for refunding the
amount in the event of the said Appeal being allowed. On receiving
the amount, the assessee credited it in its suspense account on the
same date. The question was : whether the additional amount of
Rs.7,24,914/- could be taxed as the income on the ground that it
became payable pursuant to the award of the Arbitrator. The
Tribunal held that the amount did not accrue to the assessee as its
income and was, therefore, not taxable in the assessment year
1956-57. The financial year in which the additional amount came
to be withdrawn ended on 31.3.56. It was held by this Court that
although award was made on 29.7.1955, enhancing the amount of
compensation payable to the assessee, the entire amount was in
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dispute in the appeal filed by the State. Therefore, there was no
absolute right to receive the amount at that stage. It was held that
if the Appeal was to be allowed in its entirety, the right to payment
of enhanced compensation would have fallen altogether. Therefore,
according to this Court, the extra amount of compensation of
Rs.7,24,914/- was not income arising or accruing to the assessee
during the previous year relevant to the assessment year 1956-57.
28. The question is : whether the judgment of this Court in
Hindustan Housing (supra) would apply to the present case which
arises under the Income-tax Act, 1961? At the outset, it may be
noted that the judgment of this Court in Hindustan Housing
(supra) was delivered on 29.7.86. It was prior to 1.4.88 when
Section 45(5) stood incorporated by Finance Act 1987 w.e.f. 1.4.88.
Further, the judgment of this Court in Hindustan Housing (supra)
has been given in respect of assessment year 1956-57 under the
Income-tax Act, 1922 whereas, in the present case, we are
concerned with the 1961 Act which defines the word "transfer" in
much wider sense under Section 2(47). Lastly, for the reasons
given hereinafter, particularly in the context of introduction of
Section 45(5) of the 1961 Act w.e.f.1.4.88 a totally new scheme
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stood introduced keeping in mind cases of compulsory acquisition
under the 1894 Act under which compensation is payable at
multiple stages and amounts stand withdrawn by the assessee-
claimants and used by the assessee(s) for several years, during
which litigation is pending. It is in the context of Section 45(5) that
we need to decide the year of taxability. It is significant to note that
Section 12B of 1922 Act did not contain specific reference to
compulsory acquisition as contained in Section 2(47) of the 1961
Act. Therefore, in our view, the judgment of this Court in
Hindustan Housing (supra) is not applicable to the present case.
29. From Section 45 it is clear that capital gains are not income
accruing from day to day. It is deemed income which arises at a
fixed point of time, viz, date of transfer. Section 45(5), newly
inserted by the Finance Act, 1987, w.e.f. 1.4.88 and subsequently
amended, retrospectively w.e.f. 1.4.88, by the Finance Act, 1991,
enacts overriding provision and takes care of a situation -
where the capital gains arise from the transfer of a
capital asset, being a transfer by way of compulsory
acquisition and the compensation for such transfer stands
enhanced in stages by any court, tribunal or authority. In
such a situation, the capital gains so arising is, for and from
assessment year 1988-89, has to be dealt with as under : -
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(i) the capital gains computed with respect to the
compensation awarded in the first instance would be
chargeable as Income under the head "Capital Gains" of
the previous year in which such compensation or part
thereof was first received; and
(ii) amount by which compensation or consideration
is enhanced or further enhanced by the court, tribunal
or authority is to be Deemed Income chargeable under
the head "Capital Gains" of the previous year in which
such amount is received by the assessee.
30. For the said purpose, the cost of acquisition is to be taken as
Nil [See: Explanation (i)]. Also, where the enhanced compensation
is received by any person, other than the transferor by reason of
the death of the transferor or for any reason, the amount of such
additional compensation or additional consideration is to be
deemed to be the income of the recipient of the previous year in
which such amount is received by him.
31. Two aspects need to be highlighted. Firstly, Section 45(5) of
the 1961 Act deals with transfer(s) by way of compulsory
acquisition and not by way of transfers by way of sales etc. covered
by Section 45(1) of the 1961 Act. Secondly, Section 45(5) of the
1961 Act talks about enhanced compensation or consideration
which in terms of L.A. Act 1894 results in payment of additional
compensation.
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32. The issue to be decided before us - what is the meaning of the
words "enhanced compensation/consideration" in Section 45(5)(b)
of the 1961 Act? Will it cover "interest"? These questions also
bring in the concept of the year of taxability.
33. It is to answer the above questions that we have analysed the
provisions of Sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act.
As discussed hereinabove, Section 23(1A) provides for additional
amount. It takes care of 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 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(1A) 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. It is true that "interest" is not
compensation. It is equally true that Section 45(5) of the 1961 Act
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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(1A) and solatium under Section 23(2) of
the 1961 Act forms part of enhanced compensation under Section
45(5)(b) of the 1961 Act. In fact, what we have stated hereinabove
is reinforced by the newly inserted clause (c) in Section 45(5) by the
Finance Act, 2003 w.e.f.1.4.2004. This newly added clause
envisages a situation 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)
of section 45(5) or, as the case may be,
-enhanced compensation or consideration referred to in
clause (b) of section 45(5),
and subsequently such compensation or consideration
is reduced by any court, Tribunal or other authority.
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34. In such a situation, 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. For giving effect to such
recomputation, the provisions of the newly inserted (w.e.f.
1.4.2004) section 155(16) by the Finance Act, 2003 (32 of 2003),
have been enacted.
35. It was urged on behalf of the assessee that Section 45(5)(b) of
the 1961 Act deals only with re-working, its object is not to convert
the amount of enhanced compensation into deemed income on
receipt. We find no merit in this argument. The scheme of Section
45(5) of the 1961 Act was inserted w.e.f. 1.4.88 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. 1.4.04
and Section 155(16) which refers to a situation of a subsequent
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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 re-
working 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
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. 1.4.04, 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)
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because the right to receive payment under the 1894 Act is not in
doubt. It is important to note that compensation, including
enhanced compensation/consideration under the 1894 Act, is
based on the full value of property as on date of notification under
Section 4 of that Act. When the Court/Tribunal directs payment of
enhanced compensation under Section 23(1A), or Section 23(2) or
under Section 28 of the 1894 Act it is on the basis that award of
Collector or the Court, under reference, has not compensated the
owner for the full value of the property as on date of notification.
36. 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
assessment years 1991-92 and 1992-93, possibly the proceedings
under the L.A. Act 1894 would have ended. In 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 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-`-vis interest under Section 34, additional
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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.
37. Subject to what is stated hereinabove, we allow the civil
appeal of the Department with no order as to cost.
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17644 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17643 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17645 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17642 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17641 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17647 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.17646 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.8350 of 2009
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.8451 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4832 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4833 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4834 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4835 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.20657 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.20658 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.20659 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.7599 of 2009
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.3054 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.3717 of 2009
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4174 of 2009
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.31566 of 2008
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.713 of 2009
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.5300 of 2009
Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.6378 of 2009
38. For the reasons given and also subject to what is stated
hereinabove in Civil Appeal No. of 2009 - Arising out of S.L.P.
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(C) No.17640 of 2008 - Commissioner of Income Tax, Faridabad v.
Ghanshyam (HUF), the civil appeals filed by the Department stand
allowed with no order as to costs.
.................................J.
(S.H. Kapadia)
................................J.
(AFTAB ALAM)
New Delhi;
July 16, 2009.
