2007 (11) TMI 603 - HC - Income Tax

Capital gain - acquisition of land - Determining the assessment year - exigible to tax - HELD THAT - Till the assessment year 1984-85, the assessee was required to invest the capital gain in the specified securities, like capital gain bonds issued from time to time or in a residential house under the various provisions of the Income-tax Act, 1961, from section 54 onwards within the time specified therein as computed from the date of transfer. It is obvious that in order to invest the money in the specified items, the assessee must first receive the money. Therefore, accepting the contention of the department would mean depriving the assessee of those benefits or tax relief in all cases where section 17 of the Land Acquisition Act, 1894, has been applied. The only case which deals with the situation where section 17 of the Land Acquisition Act, 1894 has been invoked in Nawab Mahmood Jung Bahadur s case 1987 (11) TMI 61 - ANDHRA PRADESH HIGH COURT . Apparently, in that case, the possession of the land was taken on 12-1-1967 and because section 17 had been invoked, therefore, the award was given on 2-11-1970. The revenue wanted to tax the capital gain in the assessment year 1973-74. This plea was turned down and the questions were answered in favour of the assessee. The said decision does not take into account the aforementioned consequences. Therefore, we are unable to agree with the view taken by the Andhra Pradesh High Court. We, therefore, hold that for the assessment year 1984-85, that is before the 1991 amendment was made, the ITAT was justified in holding that no capital gain is exigible to tax in assessment year 1984-85 on the facts and circumstances of the case. The application of the department under section 256(2) is, accordingly, dismissed.

Summary

Issues:
Determining taxability of capital gain in assessment year 1984-85 arising from land acquisition under the Land Acquisition Act, 1894.

Analysis:
The case involved a dispute regarding the taxability of capital gain arising from the acquisition of land under the Land Acquisition Act, 1894 in the assessment year 1984-85. The key issue was whether the capital gain should be taxed in the year possession was taken or in subsequent years when compensation was received. The department contended that as per section 16 of the Land Acquisition Act, 1894, the date of transfer is when possession is taken, making it taxable in the year of possession. However, the court highlighted that under section 17(1) of the Act, possession can be taken even before compensation is awarded, creating uncertainty for the assessee in disclosing capital gain before knowing the actual amount.

The court considered various authorities cited by the department to support their argument, emphasizing the definition of 'transfer' under section 2(47) of the Income-tax Act, 1961, which includes compulsory acquisition. However, the court noted that the department's stance would lead to practical difficulties for the assessee, as it would require them to file returns without knowing the exact capital gain amount until compensation is awarded. The court invoked the principle 'Lex non cogit ad impossibilia,' stating that the law should not compel individuals to perform impossible tasks.

Furthermore, the court highlighted the absence of section 54H in the Income-tax Act, 1961 before 1991, which allowed for an extension of time for acquiring new assets or investing capital gain. This absence meant that the assessee had to invest capital gain within the specified time from the date of transfer, creating a situation where the assessee would be deprived of tax benefits if forced to disclose capital gain before receiving compensation.

In reviewing the case law cited by the department, the court found that most cases did not address situations involving section 17 of the Land Acquisition Act, 1894. The only relevant case, Nawab Mahmood Jung Bahadur's case, dealt with a similar scenario where possession was taken before compensation was awarded, leading to a decision in favor of the assessee. The court disagreed with the Andhra Pradesh High Court's decision in that case, emphasizing the unique circumstances of cases involving section 17 applications.

Ultimately, the court held that in the absence of section 54H before 1991, the ITAT was justified in ruling that no capital gain was taxable in the assessment year 1984-85 based on the specific facts and circumstances of the case. Consequently, the department's application under section 256(2) was dismissed.