2004 (7) TMI 88 - HC - Income Tax

Assessing Officer treating the enhanced compensation received by the assessee as capital gains u/s 45(5)(b) - Revenue having accepted the claim that the land in question was agricultural land not falling within the definition of capital asset in the year when the land was compulsorily acquired cannot be permitted to treat it as a capital asset in the year in which enhanced compensation has been received. Once the land in question is held to be not a capital asset the question of additional compensation to be assessed as capital gain under section 45(5) does not arise Assessee s appeal allowed tribunal s order is set aside

Summary

Issues Involved:
1. Classification of the land as agricultural or non-agricultural.
2. Applicability of capital gains tax on enhanced compensation under section 45(5)(b) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of the Land as Agricultural or Non-Agricultural:

The initial acquisition of the land by the Haryana Government occurred in 1983, and the compensation awarded at that time was not subjected to capital gains tax as the land was classified as agricultural. The Commissioner of Income-tax (Appeals) supported the claim that the land was agricultural at the time of acquisition, noting that the land was held as agricultural and there was no evidence of its use for business or commercial purposes. The land did not fall within any municipality or municipal limits, which further supported its classification as agricultural.

The Tribunal, however, found that the land was described as "Gair Mumkin" or "Abi" in revenue records, indicating non-cultivable land. It also noted the absence of evidence of cultivation and the surrounding commercial properties. The Tribunal concluded that the land was not agricultural, thus classifying it as a capital asset.

2. Applicability of Capital Gains Tax on Enhanced Compensation:

The enhanced compensation received by the assessee in 1994-95 was treated by the Assessing Officer as capital gains under section 45(5)(b) of the Income-tax Act. The Tribunal upheld this view, asserting that the land was a capital asset at the time of acquisition.

However, the High Court found that the Revenue had previously accepted the land as agricultural in 1983, exempting it from capital gains tax. The High Court emphasized that once the land was classified as agricultural and not a capital asset in the year of acquisition, the Revenue could not reclassify it in a subsequent year when enhanced compensation was received. The High Court cited section 45(5) of the Act, which applies to capital assets, and concluded that since the land was not a capital asset at the time of acquisition, the enhanced compensation could not be taxed as capital gains.

Conclusion:

The High Court allowed the appeal, reversing the Tribunal's findings. It held that the amount of Rs. 16,55,566 received as enhanced compensation was not assessable as capital gains under section 45(5)(b) of the Income-tax Act for the assessment year 1994-95, as the land was agricultural and not a capital asset at the time of its acquisition. The High Court's decision was based on the principle that the nature of the asset should be determined at the time of acquisition, and the Revenue could not change this classification in subsequent years.