2010 (3) TMI 868 - HC - Income Tax

Capital gain - abolition of jagir - whether provision of section 45 are applicable where cost is nil - receipt of compensation - agriculture income - held that - sub-section (5) of section 45 of the Act overrides what is laid down in sub-section (1) of section 45 of the Act. - the provisions of sub-section (5) of section 45 of the Act are a complete code in themselves and operate regardless of operation of section 45(1) of the Act. The enhanced compensation received by the assessee is not amenable to tax under the provisions of section 45(1) read with section 48 of the Act but is taxable as per the provisions of section 45(5)(b) of the Act. The assessee is therefore not entitled to claim that the amount of enhanced compensation cannot be brought to tax by virtue of the cost of acquisition of the capital asset being nil in the light of the legislative scheme laid down in section 45(5)(b) of the Act. Nor is it possible to find any legal infirmity in the finding recorded by the Tribunal that the amount of enhanced compensation cannot be treated as agricultural income.

Issues Involved:
1. Taxability of compensation received for jagir under section 45 of the Income-tax Act, 1961.
2. Applicability of section 45(5)(b) for compensation received.
3. Exemption of compensation as agricultural income.
4. Taxability of interest received on compensation.

Detailed Analysis:

1. Taxability of Compensation Received for Jagir:
The primary issue was whether the compensation received for the jagir, which did not have any cost of acquisition, was subject to tax under section 45 of the Income-tax Act, 1961. The appellant argued that since the jagir had no cost, the provisions of section 45, which deals with capital gains, could not apply. The Tribunal, however, rejected this contention, holding that the compensation received was taxable under section 45(5)(b). The court upheld the Tribunal's decision, stating that section 45(5)(b) specifically deals with compensation received for compulsory acquisition and overrides section 45(1).

2. Applicability of Section 45(5)(b) for Compensation Received:
Section 45(5)(b) was central to this case. It states that any enhanced compensation received for compulsory acquisition is taxable as capital gains in the year it is received, with the cost of acquisition and improvement deemed to be nil. The appellant argued that in the absence of any cost of acquisition, the scheme for taxing capital gains would fail. However, the court held that section 45(5)(b) is a complete code in itself and operates independently of section 45(1). Thus, the enhanced compensation was rightly brought to tax under section 45(5)(b).

3. Exemption of Compensation as Agricultural Income:
The appellant contended that the compensation received should be exempt as agricultural income. The Tribunal found no evidence of agricultural operations on the waste lands in question and noted that the Gujarat Revenue Tribunal had classified the lands as waste lands under section 11(3)(i) of the Jagir Abolition Act. The court upheld this finding, concluding that the enhanced compensation could not be treated as agricultural income.

4. Taxability of Interest Received on Compensation:
The interest component of the compensation was another significant issue. The appellant argued that the interest should be spread over the years it accrued, rather than being taxed in a lump sum in the year of receipt. The court agreed with this contention, citing several Supreme Court judgments, including CIT v. T. N. K. Govindarajulu Chetty and Rama Bai v. CIT, which established that interest accrues year by year and should be spread over the respective years. Consequently, the Tribunal erred in bringing the entire interest amount to tax in the year under consideration.

Conclusion:
The court concluded that:
- The enhanced compensation received by the appellant is taxable under section 45(5)(b) and not exempt from tax due to the absence of a cost of acquisition.
- The compensation cannot be classified as agricultural income.
- The interest received on the compensation should be spread over the years it accrued, not taxed in a lump sum.

Both appeals were disposed of with no order as to costs, and the related civil application was rendered infructuous.

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