1.1 The Government under the Constitution of India is vested
with the power to compulsorily acquire the private property of its subject in
the given circumstances on payment of compensation. This compensation may in
some cases get enhanced, by the Government or by a Court, where the owner of the
property challenges the quantum of compensation. In such cases of enhancement,
the owner in addition to the compensation is granted interest on the delayed
payment which usually spreads over a period exceeding a year. It is also seen
that the Government in turn challenges the orders of enhancement and interest
thereon, passed by the Courts, before the higher forum, before whom the issue is
finally settled.
1.2 In the circumstances stated in paragraph 1.1, the issues
that arise under the law of income-tax are; whether the compensation received is
taxable or not; whether the interest received thereon is taxable or not and if
yes in which year it will be taxable and whether the interest can be taxed
pending the finalisation of the dispute surrounding the quantum of compensation.
1.3 The first issue referred to in paragraph 1.2 is sought to
be taken care of by insertion of S. 45(5) which provides for taxation of deemed
capital gains on compulsory acquisition of a property. The second issue about
the year of taxation of the interest is rested by the decision of the Apex Court
in the case of Ramabai v. CIT, 181 ITR 400 (SC), wherein it was held that
the interest received on additional compensation should not be taken to have
been accrued in the year of the order, but should be held to have accrued year
after year from the date of handing of the possession of the property till the
date of the order granting the interest and should be spread over the period for
which the same was granted and should be taxed in the respective years. The
third issue continues to emerge repeatedly before the Courts requiring the
Courts to address the issue of the taxability of interest pending its
finalisation.
1.4 A good number of decisions of the High Courts confirms
that the interest on enhanced compensation cannot be taxed till such time the
same is free of any dispute and it is only when the payment thereof is free of
any disputes that it can be brought to tax. As against this, the Revenue
regularly relies on the sole decision of the Andhra Pradesh High Court which
held that the interest should be taxed in the year in which the same was
received under the order of additional compensation and the fact that the
Government had filed an appeal against the order of enhancement shall not defer
the taxation.
2. M. Sarojini Devi’s case :
2.1 The issue came up for consideration of the Andhra Pradesh
High Court in the case of CIT v. M. Sarojini Devi, 250 ITR 759. In that
case, land belonging to the assessee had been acquired by the Government in the
year 1966 and compensation was awarded by the Land Acquisition Officer. The
amount of compensation was challenged by the assessee and on reference,
compensation at a higher rate was awarded in the previous year relevant to the
A.Y. 1976-77, together with an interest of Rs.43,642 for the period 1966 to
1975. The State Government challenged the said order of enhancement in an appeal
before the Supreme Court, which was pending. The Assessing Officer held that the
entire amount of interest on enhanced compensation was liable to tax in A.Y.
1976-77.
2.2 The assessment was challenged in appeal before the
Appellate Commissioner who held that the amount of interest received by the
assessee could not be taxed, as the matter had not become final and an appeal
was pending before the Supreme Court. In deciding the issue, he relied on a
judgment of the same Court in CIT v. Smt. Sankari Manickyamma, 105 ITR
172 (AP). On further appeal before the Tribunal, the Appellate Commissioner’s
view was upheld by following the said decision of the Court.
2.3 The Revenue being aggrieved referred the following
question to the Court : “Whether, on the facts and in the circumstances of the
case, the interest on compensation for the assessment year for which the
interest should be brought to tax is the one in which it was awarded or the year
in which issue of quantum of compensation becomes final ?”
The question raised was reframed by the Court as follows;
“Whether the AO has to wait till the final disposal by the final Court in an
acquisition matter before the interest accrued is taxed ?”
2.4 The Court on consideration of the facts noted that the
question was already answered by the Supreme Court in Rama Bai v. CIT,
181 ITR 400 (SC). The Court observed that the fact that the compensation was
enhanced by the High Court in an appeal and the interest accruing thereon was
received by the assessee made him liable to pay the tax, however, the interest
would be spread over the period for which it accrued to him, in accordance with
the Supreme Court judgment. It also noted that in case the judgment enhancing
the compensation in favour of the assessee was reversed by the Supreme Court,
the assessee, even after payment of tax on the accrued interest, would not be
remediless, as he could seek refund of the tax so paid, by making appropriate
application for rectification of the assessment. Lastly, the Court was of the
view that the judgment relied upon by the Tribunal in Smt. Sankari Manickyamma’s
case, 105 ITR 172 (AP), stood reversed in view of the judgment of the Supreme
Court in Rama Bai’s case, 181 ITR 400.
2.5 The Andhra Pradesh High Court for the above reasons,
answered the question in favour of the Revenue and against the assessee.
3. Karanbir Singh’s case :
3.1 The Punjab & Haryana High Court recently was required to
deal with the issue in the case of CIT v. Karanbir Singh, 216 CTR 585. In
that case land belonging to the assessee was acquired by the Punjab State
Electricity Board in 1962. During the previous year relevant to A.Y. 1986-87,
the assessee received enhanced compensation and interest to the tune of
Rs.11,87,485 and Rs.17,06,686, respectively. The State Government filed an
appeal against the said order of enhancement, which appeal was pending at the
time of assessment. The AO held that the entire amount of interest received of
Rs.17,06,686 was assessable in the assessee’s hands for the A.Y. 1986-87, as the
amount was actually received during that year.
3.2 Aggrieved by the order of assessment on this count, the assessee preferred an appeal before the CIT(A) and inter alia contended that the amount of interest received by the assessee was not taxable in his hands during the year in question in terms of judgment of the Supreme Court in CIT v. Hindustan Housing & Land Development Trust Ltd., 161 ITR 524. The CIT(A) did not accept the contention of the assessee, but directed for taxing only that amount of interest which accrued to the assessee during the assessment year in question, by relying on the decision in the case of Smt. Rama Bai v..CIT, 181 ITR 400 (SC).
3.3 The assessee, being still aggrieved, preferred an appeal before the Tribunal where the Tribunal relying upon decision of the Supreme Court in Hindustan Housing & Land Development Trust Ltd.’s case (supra) accepted the appeal of the assessee by holding that no amount of interest should be taxable, as the matter regarding compensation had not attained finality and was still fluid.
3.4 At the instance of the Revenue, the following question was referred to the Punjab & Haryana High Court; “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of interest on enhanced compensation received in June, 1985 in consequence upon judgment of District Judge and the amount having been utilised/invested in discretion of the assessee was not includible in the total income of the assessee ?”
3.5 The Revenue contended that the principles of law laid down in Hindustan Housing & Land Development Trust Ltd.’s case (supra) were not applicable in the facts and circumstances of the present case, as the right to receive compensation by the assessee was not in dispute and it was only the quantification thereof on account of which the appeals were pending at the relevant time; that merely because the quantum issue had not attained finality, the amount which had actually been received and was available at the discretion of the assessee could not be held to be non-taxable, as the same would be totally against the spirit of the taxing statute. Reliance was placed upon the judgment of the Andhra Pradesh High Court in CIT v. Smt. M. Sarojini Devi (supra).
3.6 The High Court noted that against a solitary judgment of the Andhra Pradesh High Court in Smt. M. Sarojini Devi’s case (supra), there were many judgments of different Courts taking a view in favour of the assessee on the issue, namely, CIT v. Laxman Das & Anr., 246 ITR 622 (All), Director of IT (Exemption) v. Goyal Charitable Trust, 125 CTR (Del.) 426, 215 ITR 672 (Del.), Chief CIT & Anr. v. Smt. Shantavva, 188 CTR (Kar.) 162,267 ITR 67 (Kar.) and CIT v. Abdul Mannan Shah Mohammed, 248 ITR 614 (Bom.). It also noted that a special leave peti-tion in a similar case was dismissed by the Supreme Court reported in CIT v. [anabaiViihabai Dudhe, 268 ITR (St) 215.
3.7 The High Court agreed that the Andhra Pradesh High Court in Smt. M. Sarojini Devi’s case (supra) had taken the view that the AO need not wait till the matter regarding assessment of compensation attained finality, however, for arriving at the above conclusion, much discussion was not available in that judgment. As against that, the Court found that in a number of judgments as referred to above, different Courts had held that such interest was to be taxed in the year of settlement of dispute and that under similar circumstances, a special leave petition to appeal against the judgment of the Bombay High Court had also been dismissed.
3.8 Keeping in view the totality of circumstances and the ratio of judgment referred to above, the Court decided the issue’ in favour of the assessee and against the Revenue, by holding that the Revenue was not entitled to tax the amount of interest received by the assessee on account of acquisition of land till such time the proceedings in reference thereto attained a finality.
Observations:
4.1 The Supreme Court in CIT v. Hindustan Housing & Land Development Trust Ltd., 161 ITR 524 (SC), held that when the Government had appealed against the award and the- additional amount of compensation was deposited in the Court, it was not taxable at that stage, as the additional compensation would not accrue as income when it was specifically disputed by the Government in appeal.
4.2 A position that has emerged and has gained acceptance on account of the above decision of the Supreme Court is that where the disputed additional compensation does not accrue till such time the dispute relating thereto is settled; the question of taxing interest thereon should not arise at all, as the same has also not accrued till then.
4.3 The Bombay High Court following the above referred Supreme Court decision in the case of Abdul Mannan Shah’s case (supra) held that in view of the said judgment of the Supreme Court, there was no merit in the Revenue’s appeal and that no substantial question of law arose as the judgment of the Supreme Court, on facts, squarely applied to the facts of the case before them. In that case, the Court was required to consider the taxability of the interest on enhanced compensation pending the appeal by the Government.
4.4 Recently a similar view was expressed by the Delhi High Court in Paragon Constructions (I) (P) Ltd. v. CIT & Anr., 274 ITR 413, in a matter pertaining to arbitration where the amount of arbitration award received by the assessee was not held to be taxable till the proceedings attained a finality.
4.5 The issue appears to be fairly settled in favour of the assessee, not only by the decisions of the High Courts, but also by the decision of the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) and in all fairness the Revenue should accept the position law laid down under these decisions to be final where the right to receive enhanced compensation itself is disputed by the Government. This acceptance will in turn avoid any futile litigation. The interest on enhanced compensation whenever in dispute before whichever forum should not be brought to tax till such time there remains no dispute regarding the quantum of enhanced compensation payable or paid in pursuance of an order of compulsory acquisition.
4.6 It is at the same time appropriate to note that the Supreme Court in the above mentioned case of Hindustan Housing & Land Development Trust Ltd. (supra) held that when the right to receive enhanced compensation itself was under dispute and was not absolute that the compensation cannot be said to have accrued, however, where the right was admitted and only quantification thereof was disputed, the taxation of the admitted undisputed amount need not be deferred. In that case, the enhanced compensation awarded by the arbitrators was allowed to be withdrawn on furnishing of a security bond that the amount released would be refunded in the event of the assessee found to be disentitled to the compensation so enhanced. In Abdul Mannan Shah’s case (supra), the case before the Bombay High Court, the assessee was permitted to withdraw the amount of interest deposited in the Court on furnishing the security for refund.
