2003 (9) TMI 21 - HC - Income Tax

(1) Whether, Tribunal was justified in law in holding that the provisions of section 43B are not applicable to the outstanding liability on account of land tax (under the Rajasthan Land Tax Act) and thereby deleting the disallowance of Rs. 8,21,088 made u/s 43B? Held that the Tribunal was not right in allowing deduction of the amount of land tax to the extent it was not actually paid during the previous year relevant to the assessment year 1988-89. However, the amount of Rs. 41,388 claimed by the assessee to have actually been paid during the previous year shall be allowed as deduction subject to verification. - (2) Whether Tribunal was justified in law in holding that receipt of Rs. 1,00,000 from M/s. J. K. White Cement Works for transfer of leasehold rights by surrendering the same so as to enable M/s. J. K. White Cement Works to acquire the same, is a capital receipt and not taxable in the hands of assessee, either as capital gain or as casual income under section 10(3)? Held Yes

Issues Involved:
1. Applicability of Section 43B of the Income-tax Act to the outstanding liability on account of land tax.
2. Taxability of the receipt of Rs. 1,00,000 from M/s. J. K. White Cement Works as capital receipt or casual income under Section 10(3) of the Income-tax Act.

Detailed Analysis:

Issue 1: Applicability of Section 43B to Outstanding Liability on Account of Land Tax

The first issue pertains to the disallowance of Rs. 8,21,088 claimed by the assessee as an outstanding liability on account of land tax under the Rajasthan Land Tax Act. The disallowance was made under Section 43B of the Income-tax Act, which mandates that certain deductions are allowed only on actual payment.

The assessee argued that since the Rajasthan Land Tax Act was declared ultra vires by the Supreme Court, the land tax should not be treated as a tax or duty under Section 43B but as a business expense deductible on a mercantile basis. The court noted that the Supreme Court in India Cement Ltd. v. State of Tamil Nadu had held royalty to be a tax, and thus Section 43B would apply to the claim for deduction of royalty, as affirmed in Gorelal Dubey v. CIT.

The court concluded that the Tribunal's order allowing the deduction of Rs. 8,21,088 was beyond the scope of Section 43B. However, it directed the verification of the actual payment of Rs. 41,388 during the relevant assessment year and allowed this amount as a deduction.

Issue 2: Taxability of Rs. 1,00,000 from M/s. J. K. White Cement Works

The second issue concerns whether the receipt of Rs. 1,00,000 by the assessee from M/s. J. K. White Cement Works for surrendering part of its limestone lease area is a capital receipt or taxable income under Section 10(3) of the Income-tax Act.

The Tribunal found that the amount was received as compensation for surrendering a part of the mining lease, which was a business asset, and thus not a casual income. It also disagreed with the Commissioner of Income-tax (Appeals) that it was taxable as capital gains, noting that the amended provisions regarding the cost of tenancy rights were not applicable to the assessment year in question (1988-89).

The court agreed with the Tribunal's view that the amount received was a capital receipt and not taxable as revenue. It referred to the Supreme Court's decision in Kettlewell Bullen and Co. Ltd. v. CIT, which held that compensation for the loss of a capital asset is a capital receipt. The court also considered the principle that if the cost of acquisition of a capital asset cannot be determined, the computation provisions for capital gains cannot be applied, as established in CIT v. B. C. Srinivasa Setty.

The court concluded that the receipt of Rs. 1,00,000 was a capital receipt and not includible in taxable income as capital gain due to the inability to ascertain the cost of acquisition of the leasehold rights. The amendment to Section 55(2) of the Income-tax Act, which took effect from April 1, 1995, and provided that the cost of acquisition of certain assets, including tenancy rights, would be taken as nil, was not applicable retrospectively to the assessment year 1988-89.

Conclusion

The court partly allowed the appeal, holding that the Tribunal was incorrect in allowing the deduction of the land tax amount that was not actually paid during the relevant assessment year. However, it upheld the Tribunal's decision that the receipt of Rs. 1,00,000 from M/s. J. K. White Cement Works was a capital receipt and not includible in the taxable income. The amount of Rs. 41,388 claimed by the assessee as actually paid during the previous year was allowed as a deduction subject to verification. No costs were awarded.

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