COMPENSATION ON COMPULSORY ACQUISITION OF LAND-NATURE OF SECTION 45(5)
1. Statutory provisions
According to section 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.
2. Scheme of section 45 (5)
By this provision a basic departure has been made m the assessment of capital gains resulting from compulsory acquisition. Before insertion of sub-section (5), the year of transfer was the only point from which the proceedings were to be started. Whether full amount of consideration was received or had accrued, capital gain was to be computed in the year of transfer. This provision in section 45(5) provides that where an award is made by the competent authority enhancing the compensation or the same is further enhanced thereafter by the court, the enhanced amount of compensation is to be taxed in the year of its receipt and the same is not to be related back to the year of transfer.
3. Effective date of transfer
This controversy is on finally settled by the Supreme Court decision in G.M. Omarkhan Vs. Addl. CIT (1992) 196 ITR 269 (SC) wherein it has been held that in view of section 7(2) of Requisitioning and Acquisition Act of Immovable Property, 1952, the date of publication of the notification for acquisition was the date when the property vested absolutely in the government and that was the date of transfer for the purposes of capital gain. In this case, the acquisition was made on 27.2.1970. Publication of the formal order in the Official Gazette was made on 13.3.1970. The date of transfer was held to be the 13.3.1970, the date of the notice in Official Gazette.
In CIT Vs. Shiv Chand Satnam Paul (1998) 229 ITR 745 (P&H) : (1997) 6 SITC 279 (P&H), land acquisition proceedings were taken up by the government in 1970 but possession of land was taken in September 1971 when compensation amount was awarded to assessee. On the question whether the Tribunal was right in law in holding that capital gain arose in the assessment year 1971-72 and not in the assessment year 1972-73, it was held that under section 45 of the Income-tax Act, 1961, tax on capital gains arises from a transfer of capital asset effected in the previous year. Transfer of the capital asset in the present case took place in September 1971 after the compensation was paid and possession taken by the government which falls in the assessment year 1972-73. Therefore, the transfer took place in the year 1972-73 and the land would be deemed to have vested in the government in that year. The Tribunal was held to be clearly in error in holding that transfer of the land took place in the assessment year 1971-72 in which year the notifications under sections 4 and 17 of the Act of 1894 were issued.
4. Pending of state's appeal-Accrual of enhanced compensation
In a case decided by the Bombay Bench of the Tribunal in Jehangir P. Vizifdar Vs. ITO (1992) 42 ITD 67 (Bom-Trib) certain bonds belonging to the assessee were compulsorily acquired. The District Judge allowed an additional compensation on 21.4.1988. The state appealed against this award. The award amount was deposited in court and the assessee was permitted to withdraw 50 per cent of this decretal amount on furnishing bank guarantee. The question for determination before the Tribunal Bench was whether the additional compensation still accrued to the assessee in the assessment year 1989-90.
The Tribunal observed that although the assessee was permitted to withdraw 50 per cent of the decretal amount such withdrawal was not unconditional and the same was only subject of furnishing, a bank guarantee of the equivalent amount to the satisfaction of the court. The liberty granted to the assessee to withdraw 50 percent of the decretal amount did not confer upon them an absolute right to receive the same at that stage.
On the point of accrual of the additional compensation, the Bench observed that the amount of additional compensation cannot be said to have become payable to the assessee on its grant by the Distt. Court's order. The words `previous year in which such amount is received by the assessee' appearing in clause (b) of sub-section (5) of section 45 clearly mean the assessment year in which such amount is received by the assessee unclouded and unshadowed. Till such time the appeal filed by the State Government was not decided, the dispute raised by the government real and substantial; there was no absolute right available to the assessee to withdraw the sum half of which was in fact permitted to be withdrawn as per the High Court's order but only on furnishing a bank guarantee to the satisfaction of the court's registrar.
As to significance of the word received in section 45(5)(b) the Tribunal observed that insofar as the eligibility of the original amount of compensation to tax is concerned, the same has been treated differently by the Legislature. The word used in section 45(5)(a) in that regard is not `received'. They are `first received'. As against this, the word used in clause (b) of sub-section (5) of section 45 is `received' alone. There is a reason and a valid one for the use of these two different words at two places. Against the grant of original compensation on a land being against no appeal is provided by the State against the award of the land acquisition officer or the land acquisition collector or by whatever other name the first such authority is known. Only the person whose land is acquired can file an appeal. It would mean that as far as the original compensation is concerned, this will certainly be received/become receivable by the affected party, whether it does or does not prefer any appeal. If it does prefer an appeal it could be enhanced but under no circumstances it could be reduced. Therefore, this original compensation becomes final. But as already stated above, the additional compensation is on a totally different footing. Here both the assessee as well as the government have got an equal right to agitate its award before the High Court. It is in this context that the Legislature appears to have used the word `received' in clause (b) of sub-section (5) of section 45. So received would mean when it has become finally receivable or the same is received unconditionally.
The Bench on the facts of the case held that therefore, on the facts and in the circumstances of the case the assessee is right in claiming that the enhanced compensation was not payable to them despite the District Court's order dated 21.4.1988 and the withdrawal of half of this amount as per the High Court's order had also no impact on the nature of the receipt as the issue of granting additional compensation was in serious jeopardy due to the State Governments filing an appeal before the High Court. It is only as per this order that the bank guarantee filed by the assessee at the time of the withdrawal of 56% of the additional compensation stood discharged.
5. Interim payment-Taxability of
In Chief CIT Vs. Smt. Shantarra (2004) 267 ITR 67 (Karn) the Karnataka High court held that the sum of Rs. 8 lakhs was received by the assessee, not as enhanced Compensation, but as payments in pursuance of interim orders of the High Court and the Supreme Court, by furnishing security to the satisfaction of the court, pending determination of the additional compensation. Only when the Reference court determines the compensation and such determination becomes final, the amount received in pursuance of the interim order will be appropriated against the compensation finally determined and will become income chargeable under the head `capital gains'. On the other hand, if the enhanced compensation to be determined is less than the sum of Rs. 8 lakhs received by the respondent in pursuance of interim orders, the respondent will have to refund the excess amount received by her. If for any reason, the Reference court determines the compensation at the same rate determined by the land acquisition officer (though improbable but theoretically possible), the entire sum of Rs. 8 lakhs will have to be refunded by the respondent. Therefore, the mere fact that some amounts have been received by furnishing security in pursuance of interim orders, pending final determination, will not make the amounts received by respondent, `compensation' or `consideration' that can be subjected to tax under section 45(5)(b).
Section 45(5)(b) will be attracted only when the assessee receives the `enhanced compensation', in pursuance of a final award/order of a court, Tribunal or other authority increasing the compensation. If any amount is received after stay of the award, in pursuance of any interim order, as a payment subject to the final result, it will not be an amount received as `enhanced compensation' contemplated under section 45(5)(b), but only an interim payment received subject to final decision. It will attract section 45(5)(b) only when the final decision is rendered.
Section 45(5)(b) shifts the date of `income' from the date of acquisition and from the date of determination of compensation by a Court/Tribunal/authority, to the date of receipt of the compensation in pursuance of an enhancement by the Court/Tribunal/authority. Two conditions have to be satisfied for applicability of section 45(5)(b). (i) There should be enhancement of compensation by a Court/Tribunal/authority, (ii) The assessee should receive payment of such enhanced compensation. When the award of the reference court enhancing the compensation is stayed and an interim payment is ordered as condition of such stay or otherwise and is paid, pending final decision, neither of the two conditions are satisfied. The amount received in pursuance of an interim order by furnishing security, not being an amount payable in pursuance of an enforceable order or decree increasing the compensation, cannot be considered as receipt of enhanced compensation.
6. Some more Judicial pronouncements
In Gulab Sundri Bapna Vs. Dy. CIT (2001) 79 ITD 455 (Del-Trib) the government came up in appeal against the enhancement made by the District Judge thus jeopardising the enhancement. Now the fate of the enhancement already received by the assessee got disturbed, the finality, in respect of which became dependent on the outcome of the final judicial pronouncement. It was held that, till then it could not be said that the assessee had "received" the enhancement within the meaning of section 45(5) entitling the revenue to charge tax thereon. Unless the enhanced compensation is received without any embargo, leaving thereby no scope or likelihood of the return, the same cannot be said to fall within the scope of section 45(5). This case is not referred to in the judgment.
The case under consideration is that of accrual of income and, on a similar issue, the Apex Court in CIT Vs. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 324 (SC) has held that additional compensation awarded by the arbitrator cannot be said to accrue in the year of award when the amount awarded is disputed by the government by filing appeal.
In CIT Vs. Hindustan Housing & Land Development Trust (1986) 161 ITR 524 (SC), the Supreme Court held:
"In the present case, although the award was made by the arbitrator on 24.7.1955, enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs. 7,36,691 deposited by the State Government on 25.4.1956, without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at the stage. If the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether."
In CIT Vs. A.B.V. Gowda (1986) 157 ITR 697 (Karn). The Karnataka High Court held as follows:
"A mere claim to income without an enforceable i.e.,right thereto cannot therefore, be regarded as an accrued income for the purpose of Income Tax Act."