ISSUE FOR CONSIDERATION
Section 45(5) of
the Income-tax Act provides for taxability of the capital gains arising from
(i) the transfer of a capital asset by way of compulsory acquisition under any
law, or (ii) on a transfer the consideration for which was determined or
approved by the Central Government or the Reserve Bank of India, or (iii)
compensation or consideration which is enhanced or further enhanced by any
court, tribunal or other authority. Inter alia, clause (b) of section
45(5) provides for the taxability of the enhanced compensation or consideration
as awarded by a court, tribunal or other authority as deemed capital gains in
the previous year in which such enhanced compensation or consideration is
received by the assessee.
Section 10(37)
exempts the capital gains arising to an individual or an HUF from the transfer
of agricultural land by way of compulsory acquisition where the compensation or
consideration or the enhanced compensation or consideration is received on or
after 1st April, 2004 subject to fulfilment of other conditions as
specified therein. Further, section 96 of the Right to Fair Compensation and
Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013
exempts the compensation received for compulsory acquisition of land under
defined circumstances (except those made u/s 46 of that Act) from the levy of
income tax. This exemption provided under the RFCTLARR Act is available
irrespective of whether the land acquired compulsorily is agricultural or
non-agricultural land.
In the case of land
acquired under the Land Acquisition Act, 1894 the person whose land has been acquired,
if aggrieved by the amount of compensation originally granted to him, may
require the matter to be referred to the Court u/s 18 of the 1894 Act for the
re-determination of the amount of the compensation. The Court may enhance the
amount of compensation payable to the claimant and also direct the authority
concerned to pay interest on the enhanced amount of compensation and also
interest for the delay caused in payment of the compensation otherwise ordered.
Section 28 of the 1894 Act empowers the Court to award interest at its
discretion on the excess amount of compensation awarded by it over the amount
originally awarded. Section 34 of that Act also provides for the liability of
the land acquisition authority concerned to pay interest, which is, however,
totally different from the interest referred to in section 28. The interest
payable u/s 34 is for the delay in paying the awarded compensation and it is
mandatorily payable.
A controversy had
arisen with respect to the nature of the interest received by the assessee on
the amount of enhanced compensation as per the directions of the Court in
accordance with the provisions of section 28 of the 1894 Act and the year of
taxation thereof which was settled by the Supreme Court in the case of CIT
vs. Ghanshyam (HUF) [2009 315 ITR 1] by holding that the interest
granted u/s 28 of the 1894 Act was an accretion to the value and, hence, it was
a part of the enhanced compensation which was taxable as capital gains u/s
45(5). Subsequent to the decision, the Finance (No. 2) Act, 2009 inserted
clause (viii) in section 56(2) and clause (iv) in section 57 and section 145A/B
to specifically provide for taxability of interest received on compensation or
enhanced compensation as income from other sources and for deduction of 50% of
the interest amount.
This set of
amendments in sections 56(2), 57, 145A and later in 154B has given a rise to a
fresh controversy about the head of taxation under which the interest in
question awarded u/s 28 of the 1894 Act is taxable: whether such interest was
taxable under the head ‘capital gains’ or ‘income from other sources’ and
whether what is termed as interest under the said Act be treated differently
under the Income-tax Act.
The Gujarat High
Court has taken a view that the interest granted u/s 28 of the 1894 Act
continues to be taxable as capital gains in accordance with the decision of the
Supreme Court in the case of Ghanshyam (HUF) (Supra) even after
the set of amendments to tax ‘interest’ as income from other sources. As a
corollary, tax ought not to have been deducted on that amount of interest u/s
194A. As against this, the Punjab & Haryana High Court has held that
interest granted u/s 28 of the 1894 Act needs to be taxed as income from other
sources in view of the specific provision contained in section 56(2)(viii) in
this regard and, therefore, the assessee was not entitled to the exemption from
tax under provisions of section 10(37) of the Act.
THE MOVALIYA BHIKHUBHAI BALABHAI CASE
The issue first
came up for consideration of the Gujarat High Court in the case of Movaliya
Bhikhubhai Balabhai vs. ITO (2016) 388 ITR 343.
In this case, the
assessee was awarded additional compensation in respect of his land along with
the other benefits under the 1894 Act. Pursuant to this award passed by the
Reference Court, the authorities concerned inter alia determined the
amount of Rs. 20,74,157 as interest payable u/s 28 of that Act. Against this
interest, the amount of TDS to be deducted as per section 194A was also shown
in the relevant statement issued to the assessee. The assessee made an
application in Form No. 13 u/s 197(1) for issuing a certificate for Nil tax
liability. But the application was rejected on the ground that the interest
amount on the delayed payment of compensation and enhanced value of
compensation was taxable as per the provisions of section 56(2)(viii) read with
sections 57(iv) and 145A(b). The assessee approached the High Court by filing a
petition against the rejection of his application.
Before the High
Court, the assessee relied upon the decision of the Supreme Court in the case
of Ghanshyam (HUF) (Supra) and claimed that interest u/s 28 was,
unlike interest u/s 34 of the 1894 Act, an accretion in value and regarded as a
part of the compensation itself which was not the case with interest u/s 34.
Therefore, when the interest u/s 28 of the 1894 Act was to be treated as part
of compensation and was liable to capital gains u/s 45(5), such amount could
not be treated as income from other sources and, hence, no tax could be
deducted at source by considering the same to be interest. Reliance was also
placed on the decisions of the Punjab & Haryana High Court in the cases of Jagmal
Singh vs. State of Haryana rendered in Civil Revision No. 7740 of
2012 on 18th July, 2013 and Haryana State Industrial
Development Corpn. Ltd. vs. Savitri rendered in Civil Revision
No. 2509 of 2012 on 29th November, 2013, wherein it was held
that there was no requirement of deducting tax at source from the amount of
interest determined to be payable u/s 28 of the Land Acquisition Act.
It was argued on
behalf of the Revenue that the A.O. was justified in rejecting the application
of the assessee in view of the specific provision contained in sub-clause
(viii) of section 56(2) providing that income by way of interest received on
compensation or on enhanced compensation referred to in clause (b) of section
145A was chargeable to income tax under the head ‘income from other sources’.
It was submitted that the interest on enhanced compensation u/s 28 of the 1894
Act being in the nature of enhanced compensation, was deemed to be the income
of the assessee in the year in which it was received as provided in section
145A and had to be taxed as per the provisions of section 56(2)(viii) as income
from other sources. As regards the decision of the Supreme Court in the case of
Ghanshyam (HUF), it was submitted that it was rendered prior to
the amendment in the I.T. Act whereby clause (b), which provided that interest
received by an assessee on compensation or on enhanced compensation, as the
case may be, shall be deemed to be income in the year in which it is received,
came to be inserted in section 145A of the Act and, hence, would not have any
applicability in the facts of the present case.
The Revenue relied
upon the decisions of the Punjab & Haryana High Court in the case of CIT
vs. Bir Singh (HUF) ITA No. 209 of 2004 dated 27th October, 2010
which was later followed in the case of Hari Kishan vs. Union of India
[CWP No. 2290 of 2001 dated 30th January, 2014]; Manjet Singh (HUF)
Karta Manjeet Singh vs. Union of India [2016] 65 taxmann.com 160; and
of the Delhi High Court in the case of CIT vs. Sharda Kochhar [2014] 49
taxmann.com 120.
The High Court
extensively referred to the decision of the Supreme Court in the case of Ghanshyam
(HUF) wherein various provisions of the 1894 Act were analysed vis-à-vis
the provisions of the Income-tax Act. On the basis of this decision, the High
Court reiterated that there was a vital difference between the interest payable
u/s 28 and the interest payable u/s 34 of the 1894 Act. 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. This award
of interest is not mandatory but is left to the discretion of the court. It was
further held that section 28 is applicable only in respect of the excess amount
which is determined by the court and it does not apply to cases of undue delay
in making award for compensation. The interest u/s 34 is only for delay in
making payment after the compensation amount is determined. Accordingly, the
Supreme Court had held that interest u/s 28 of the 1894 Act was an accretion to
compensation and formed part of the compensation and was, therefore, exigible
to tax u/s 45(5). The decision in the case of Ghanshyam (HUF) was
followed by the Supreme Court in a later case, that of CIT vs. Govindbhai
Mamaiya [2014] 367 ITR 498.
Insofar as the provisions of section 57(iv) read with section
56(2)(viii) and section 145A(b) were concerned, the High Court held that the
interest received u/s 28 of the 1894 Act would not fall within the ambit of the
expression ‘interest’ as envisaged u/s 145A(b) inasmuch as the Supreme Court in
the case of Ghanshyam (HUF) had held that interest u/s 28 of the
1894 Act was not in the nature of interest but was an accretion to the
compensation and, therefore, formed part of the compensation. Further, a
reference was made to CBDT Circular No. 5/2010 dated 3rd June, 2010
wherein the scope and effect of the amendment made to section 56(2) and also to
section 145A were explained. It was clarified in the said circular that undue
hardship had been caused to the taxpayers as a result of the Supreme Court’s
decision in the case of Smt. Rama Bai vs. CIT (1990) 181 ITR 400
wherein it was held that arrears of interest computed on delayed or enhanced
compensation shall be taxable on accrual basis. It was to mitigate this
hardship that section 145A was amended to provide that the interest received by
an assessee on compensation or enhanced compensation shall be deemed to be his
income for the year in which it was received, irrespective of the method of
accounting followed by the assessee. By relying upon this clarification, the
High Court held that the amendment by the Finance (No. 2) Act, 2009 was not in
connection with the decision of the Supreme Court in the Ghanshyam (HUF)
case but was brought in to mitigate the hardship caused to the assessee on
account of the decision of the Supreme Court in the case of Rama Bai
(Supra).
The High Court did
not agree with the view adopted by the other High Courts in the cases which
were relied upon by the Revenue as it was contrary to what had been held in the
decision of the Supreme Court in Ghanshyam (HUF). The High Court
held that the deduction of tax at source u/s 194A from the amount of interest
granted u/s 28 of the 1894 Act was not justified.
MAHENDER PAL NARANG’S CASE
The issue recently
came up for consideration before the Punjab & Haryana High Court in the
case of Mahender Pal Narang vs. CBDT (2020) 423 ITR 13.
In this case, land
of the assessee was acquired during the previous years relevant to the
assessment years 2007-08 and 2008-09 for the compensation determined by the
acquisition authorities which was challenged by the assessee and the
corresponding enhanced compensation was received on 21st March,
2016. The assessee filed his income-tax return for the assessment year 2016-17
treating the interest received u/s 28 of the 1894 Act as income from other
sources and claimed deduction of 50% as per section 57(iv). Thereafter, the
assessee filed an application u/s 264 claiming that the interest was wrongly
offered as income from other sources, whereas the same was required to be
treated as part of the enhanced compensation under the head capital gains and
the gains were to be exempted from taxation u/s 10(37). However, the revisional
authority rejected the application. The assessee then filed a writ petition
before the High Court against the said rejection order passed u/s 264.
The assessee
contended before the High Court that the interest received as part of the
additional compensation was in the nature of compensation that was not taxable
u/s 10(37) and further argued that the provisions of section 10(37) have
remained unchanged, though sections 56(2)(viii) and 57(iv) had been inserted by
the Finance (No. 2) Act, 2009 with effect from 1st April, 2010. The
amendments were brought in to remove the hardships created by the decision of
the Supreme Court in the case of Rama Bai (Supra) as explained by
Circular No. 5 of 2010. It was contended that the nature of interest u/s 28 of
the 1894 Act would remain that of compensation even after the amendments. The
assessee also relied upon the decision of the Supreme Court in CIT vs.
Ghanshyam (HUF) as well as of the Gujarat High Court in Movaliya
Bhikhubhai Balabhai vs. ITO (Supra).
The High Court
referred to the provisions of sections 45(5), 56(2)(viii) and 57(iv) as well as
the decision of the Supreme Court in CIT vs. Ghanshyam (HUF).
After dealing with them, it was held that the scheme with regard to
chargeability of interest received on compensation and enhanced compensation
had undergone a sea change with the insertion of sections 56(2)(viii) and
57(iv) in the Act. In view of the amendments, according to the Punjab &
Haryana High Court, the decision of the Apex Court in the Ghanshyam
case did not come to the rescue of the assessee to claim that interest received
u/s 28 of the 1894 Act was to be treated as compensation and to be dealt with
under ‘capital gains’. The argument raised that there was no amendment in
section 10(37) was considered to be ill-founded, on the ground that it dealt
with capital gains arising from transfer of agricultural land and it nowhere
provided as to what was to be included under the head ‘capital gains’.
The High Court did
not agree with the view taken by the Gujarat High Court in the Movaliya
Bhikhubhai Balabhai case that amendment by the Finance (No. 2) Act,
2009 was not in connection with the decision of the Supreme Court in the Ghanshyam
case but to mitigate the hardship caused by the decision of the Supreme Court
in the Rama Bai case. The interpretation based on Circular No. 5
of 2010 did not influence the Punjab & Haryana High Court and it was held
that there was no scope of taking outside aid for giving such an interpretation
to newly-inserted provisions when their language was plain, simple and
unambiguous. Accordingly, it was held that the interest received on compensation
or enhanced compensation was to be treated as ‘income from other sources’ and
not under the head ‘capital gains’.
In deciding the
issue in favour of the Revenue, the High Court chose to follow its own
decisions in the cases of CIT vs. Bir Singh (HUF) in ITA No. 209 of 2004
dated 27th October, 2010 which was later on followed in the
case of Hari Kishan vs. Union of India [CWP No. 2290 of 2001 dated 30th
January, 2014]; Manjet Singh (HUF) Karta Manjeet Singh vs. Union of India
[2016] 65 taxmann.com 160; and the decision of the Delhi High Court in the case of CIT
vs. Sharda Kochhar [2014] 49 taxmann.com 120. The Court overlooked its
own decisions, delivered in the context of TDS, in the cases of Jagmal
Singh vs. State of Haryana rendered in Civil Revision No. 7740 of
2012 on 18th July, 2013 and Haryana State Industrial
Development Corpn. Ltd. vs. Savitri rendered in Civil Revision
No. 2509 of 2012 on 29th November, 2013, wherein it was held
that there was no requirement of deducting tax at source from the amount of
interest determined to be payable u/s 28 of the Land Acquisition Act, 1894.
OBSERVATIONS
There can be three
different components of amount received or to be received by a person whose
land has been compulsorily acquired under any law for the time being in force:
the initial compensation which is awarded by the competent authority, the
enhanced compensation which is awarded by the court, and interest, on
compensation or the enhanced compensation which becomes payable due to the
direction of the court or due to the statutory provision of the relevant law.
Sub-section (5) of
section 45 is a charging provision and it creates a charge on the capital gains
on transfer of a capital asset, being a transfer by way of compulsory
acquisition under any law, or a transfer where the consideration for which is
determined or approved by the Central Government or the Reserve Bank of India.
The relevant portion of the sub-section (5) of section 45 is reproduced below:
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…
It can be noticed
that an accrual or a receipt which can be considered as ‘the compensation or
the consideration’ in the circumstances specified in section 45(5) gets covered
within the ambit of this provision and needs to be taxed as ‘capital gains’ in
the manner provided therein. In particular, sub-clause (b) of section 45(5)
deals with the taxability of the enhanced amount of compensation or
consideration and it provides as under:
(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.
Therefore, the
whole of the amount by which the compensation or consideration is enhanced by
the court is deemed to be the income chargeable under the head capital gains
irrespective of the manner in which such enhanced amount of the compensation or
consideration has been determined or how that amount has been referred to in
the relevant governing law under which it has been determined. What is relevant
is that the compensation or the enhanced amount needs to be brought to tax
under the head ‘capital gains’ by virtue of the deeming fiction created under
the aforesaid provisions.
There are no
separate or specific provisions dealing with the taxability of the interest
received on compensation or enhanced compensation which is being taxed as per
the general provisions of the Act, particularly sections 56 to 59. The
confusion about the year of taxation was addressed by the Apex Court in the
case of Smt. Ramabai. A set of the specific provisions was
inserted in the Act by the Finance (No. 2) Act, 2009 with effect from 1st
April, 2010 to provide that such interest shall be taxable in the year of
receipt nullifying the ratio of the Supreme Court decision. The issue of
taxation of such interest was dealt with extensively by the Supreme Court in
the case of Ghanshyam (HUF) while dealing with the taxation of
capital gains u/s 45(5). The issue before the Supreme Court was about the year
in which the enhanced compensation and interest thereon, received by the
assessee, were taxable. The assessee contended that those amounts could not be
held to have accrued to him during the year of receipt, as the entire amount
received 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; and that the amount of enhanced compensation and the interest
thereon were received by him in terms of the interim order of the High Court
against his furnishing of security to the satisfaction of the executing Court.
As against this, the Revenue pleaded that those amounts in question were
taxable in the concerned year of receipt in which they were received by relying
upon section 45(5).
For deciding this
issue, of the year in which the enhanced compensation as well as interest
thereon were taxable, the Supreme Court in that case, of Ghanshyam (HUF),
had to first decide as to what fell within the meaning of the term
‘compensation’ as used in section 45(5). It was for the obvious reason that if
any of the components of the receipt could not be regarded as ‘compensation’,
then such component would not be governed by the provisions of section 45(5) so
as to deem it to be income chargeable under the head ‘capital gains’. Apart
from dealing with the nature of different amounts which were awarded under
different sub-sections of section 23 of the Land Acquisition Act, 1894 as part
of the enhanced compensation, the Supreme Court also determined the true nature
of receipt of ‘interest’ granted under two different provisions of that Act,
i.e., sections 28 and 34. These two provisions dealing with the interest to be
paid to the person whose land has been acquired are as follows:
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
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.
The Supreme Court,
explaining the distinction between the interest that became payable under both
the above provisions of the 1894 Act held that the interest u/s 28 only was
needed to be considered as part of the compensation itself. The relevant
extracts from the Supreme Court’s decision in this regard are reproduced below:
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…
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 vs. Union of India (1994) 1 SCC 44]. In the case of Shree Vijay
Cotton & Oil Mills Ltd. vs. State of Gujarat [1991] 1 SCC 262, this
Court has held that interest is different from compensation.
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.
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.
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 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.
Thus, though a
component of the amount received was referred to as the ‘interest’ in section
28 of the 1894 Act, such part was to be considered to be part of the
‘compensation’ insofar as section 45(5) of the Income-tax Act was concerned.
When it came to the ‘interest’ referred to in section 34 of the 1894 Act, it
was to be treated as interest simpliciter and not as the ‘compensation’
for tax purposes and such interest was to be brought to tax as per the general
provisions of the law. This was because of the Court’s understanding that
interest u/s 28 was in the nature of damages awarded for granting insufficient
compensation in the first instance. The Court held that the interest under the
latter section 34 was to make up the loss due to delay in making the payment of
the compensation, the former section 28 interest being at the discretion of the
court and the latter section 34 interest being mandatory.
Later, this
decision in the case of Ghanshyam (HUF) was followed by the
Supreme Court in the cases of CIT vs. Govindbhai Mamaiya (2014) 367 ITR
498 and CIT vs. Chet Ram (HUF) (2018) 400 ITR 23.
Now the question
arises as to whether the amendments made by the Finance (No. 2) Act, 2009 with
effect from 1st April, 2010 have altered the position. The relevant
amendments are narrated below:
- Section 145A as existing then was substituted
whereby a sub-clause (b) was added to it to provide as under:
(b) interest
received by an assessee on compensation or on enhanced compensation, as the
case may be, shall be deemed to be the income of the year in which it is
received.
- Sub-clause (viii) was inserted in sub-section
(2) of section 56 to provide as under:
(viii) income by
way of interest received on compensation or on enhanced compensation referred
to in clause (b) of section 145A.
- Sub-clause (iv) was inserted in section 57 to
provide as under:
(iv) in the case
of income of the nature referred to in clause (viii) of sub-section (2) of
section 56, a deduction of a sum equal to fifty per cent of such income and no
deduction shall be allowed under any other clause of this section.
These amendments,
in our considered opinion, will apply only if the receipt concerned, like in
section 34 of the 1894 Act, can be regarded as ‘interest’ in the first place
and not otherwise. If the amount concerned has already been considered to be a
part of the compensation and, hence, governed by section 45(5), it cannot be
recharacterised as ‘interest’ merely by relying on the aforesaid amended
provisions. The characterisation of a particular receipt either as
‘compensation’ or ‘interest’ needs to be done independent of these provisions
and one needs to apply these amended provisions only if it has been
characterised as ‘interest’. Therefore, the basis on which the interest payable
u/s 28 of the 1894 Act has been regarded as part of the compensation by the
Supreme Court still prevails and does not get overruled by the aforesaid
amendments.
Recently, in the
context of a motor accident claim made under the Motor Vehicles Act, the Bombay
High Court in the case of Rupesh Rashmikant Shah vs. UOI (2019) 417 ITR
169, after considering the amended provisions of the Income-tax Act,
has held that interest awarded under the said Act as a part of the claim did
not become chargeable to tax merely because of the provision contained in
clause (viii) of section 56(2) of the Income-tax Act. Please see BCAJ Volume
51-A Part 3, page 51 for a detailed analysis of the nature of interest
awarded under the Motor Vehicles Act and the implications of section 56(2)
r/w/s 145A/B thereon. The relevant portion from this decision is reproduced
below:
We, therefore, hold that the interest awarded in
the motor accident claim cases from the date of the Claim Petition till the
passing of the award or in case of Appeal, till the judgment of the High Court
in such Appeal, would not be exigible to tax, not being an income. This
position would not change on account of clause (b) of section 145A of the Act
as it stood at the relevant time amended by Finance Act, 2009 which provision
now finds place in sub-section (1) of section 145B of the Act. Neither clause
(b) of section 145A, as it stood at the relevant time, nor clause (viii) of
sub-section (2) of section 56 of the Act, make the interest chargeable to tax
whether such interest is income of the recipient or not.
Further, section
2(28A) defines the term ‘interest’ in a manner that includes the interest
payable in any manner in respect of any moneys borrowed or debt incurred. In a
case of compulsory acquisition of land, there is obviously no borrowing of
monies. Is there any debt incurred? The ‘incurring’ of the debt, if at all,
arises only on grant of the award for enhanced compensation. Before the award
for the enhanced compensation, there is really no debt that can be said to have
been incurred in favour of the person receiving compensation. In fact, till
such time as the enhanced compensation is awarded there is no certainty about
the eligibility to it, leave alone the quantum of the compensation. This is
also one of the reasons in support of the argument that the amount so awarded
u/s 28 of the 1894 Act cannot be construed as ‘interest’ even when it is
referred to as ‘interest’ therein.
It is important to
appreciate the objective for the introduction of the amendments in sections
56(2), 57(iv) and 145A/B which was to provide for the year in which interest
otherwise taxable is to be taxed. This objective is explained in clear terms by
Circular No. 5/2010 dated 3rd June, 2010 issued by the CBDT for
explaining the objective behind the introduction. The relevant paragraph of the
Circular reads as under:
‘The existing provisions
of Income Tax Act, 1961, provide that income chargeable under the head
“Profits and gains of business or profession” or “Income from
other sources”, shall be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee. Further the
Hon’ble Supreme Court in the case of Smt. Rama
Bai vs. CIT (1990) 84 CTR (SC) 164 : (1990) 181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced
compensation shall be taxable on accrual basis. This has caused undue hardship
to the taxpayers. With a view to mitigate the hardship, section 145A is amended
to provide that the interest received by an assessee on compensation or
enhanced compensation shall be deemed to be his income for the year in which it
was received, irrespective of the method of accounting followed by the
assessee.
Further, clause
(viii) is inserted in sub-section (2) of the section 56 so as to provide that
income by way of interest received on compensation or enhanced compensation
referred to in clause (b) of section 145A shall be assessed as “income
from other sources” in the year in which it is received.’
In the
circumstances, it is clear that the provisions of clause (viii) of section 56
and clause (iv) of section 57 and section 145A/B are not the charging sections
in respect of interest under consideration and their scope is limited to
defining the year of taxation of a receipt which is otherwise characterised as
interest.
The amendment as noted by the Gujarat High Court was brought about by the
Legislature to alleviate the difficulty that arose due to the decision of the
Apex Court in the case of Smt. Rama Bai vs. CIT, 181 ITR 400
wherein it was held that arrears of interest computed on delayed or enhanced
compensation should be taxable on accrual basis in the respective years of
accrual. It was to mitigate this hardship that section 145A was amended to
provide that the interest received by an assessee on compensation or enhanced
compensation shall be deemed to be his income for the year in which it was
received, irrespective of the method of accounting followed by the assessee. By
relying upon this clarification, the Gujarat High Court held that the concerned
amendments by the Finance (No. 2) Act, 2009 were not in connection with the
decision of the Supreme Court in the Ghanshyam (HUF) case but was
brought in to mitigate the hardship caused to the assessee on account of the
decision of the Supreme Court in the Rama Bai case.
Summing up, it is appropriate to not decide
the taxability or otherwise and also the head of taxation simply on the basis
of the nomenclature used in the relevant law under which the payment is made,
of compensation or enhanced compensation or interest, whatever the case may be.
The receipt for it to be classified as ‘interest’ or ‘compensation’ should be
tested on the touchstone of the provisions of the Income-tax Act. The better
view, in our considered opinion, is the view expressed by the Gujarat High
Court that the interest received u/s 28 of the Land Acquisition Act, 1894
should be taxed as capital gains in accordance with the provisions of section
45(5), subject to the exemption provided in section 10(37), and not as
interest, and no tax at source should be deducted therefrom u/s 194A.
