2012 (10) TMI 322 - AT - Income Tax

Capital Gain in lieu of surrender the right - Agricultural land of assessee was acquired by State Gov. in 1986-87 - Compensation for the same also received in the same year - Further in AY 2003-04 the assessee claimed exemption in respect of amount received on surrendered his right to use water from well Assessee contended that Sec. 45 were not attracted and consequently no capital gain arise because there was no cost of acquisition for which rights - AO of the view that State Gov. has primarily acquired the Agricultural land and the well on it was a part and parcel of such land covered under capital asset within the meaning of Sec. 2(14) and liable to tax u/s. 45 Held that - Following the decision in case of B.C. Srinivas Shetty (1981 (2) TMI 1 - SUPREME COURT) that right of lifting of water was acquired by assessee without any cost. Hence no capital gain could be worked out since Sec. 45(1) r.w.s. 48(1) are not applicable in respect of payment made to assessee in lieu of surrender the right to lift the water from well filled for widening of road. Appeal decides in favour of assessee

Summary

Issues:
1. Whether the compensation received for surrendering the right to draw water from a well, which was already compulsorily acquired by the State Government, is liable to Capital Gains tax.
2. Whether the amount of compensation received is liable to Capital Gains tax when there was no cost of acquisition for the new right granted by the State Government.
3. Whether the deduction is available from the compensation amount as per the explanation to Section 45(5)(b) of the IT Act, 1961.
4. Whether the observation of the CIT(A) regarding the correction of the cost of acquisition of the right to draw water from the well is binding.

Analysis:
1. The appellant, the assessee, owned agricultural land with a well that was acquired by the State Government in 1986 for road widening. The appellant received compensation of Rs. 15,00,000 in 2003-04 for surrendering the right to draw water from the well to the Pune Municipal Corporation. The appellant claimed exemption from taxation on this amount, arguing that no capital gains tax should apply. However, the Assessing Officer disagreed, stating that the gains from surrendering the right are taxable under section 45 of the Income Tax Act.
2. The appellant contended that since the State Government granted the right to draw water after the land acquisition without any cost to the appellant, it should not be subject to capital gains tax. The appellant relied on a Supreme Court decision to support this argument. The Assessing Officer, however, maintained that the well was part of the capital asset acquired by the State Government, making the compensation taxable under the Income Tax Act.
3. The appellate authority upheld the Assessing Officer's decision, prompting the appellant to challenge it. The appellant argued that the compensation was in exchange for surrendering the water rights, not an enhanced compensation for acquisition. The appellant highlighted the unique circumstances of the case, where the right was granted post-acquisition without any cost to the appellant.
4. The Tribunal found that the appellant's right to draw water from the well was an independent right granted by the State Government without any associated acquisition cost. As such, the compensation received for surrendering this right should not be subject to capital gains tax. The Tribunal cited the Supreme Court decision in support of its ruling and directed the deletion of the capital gains calculated by the Assessing Officer.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, ruling that the compensation received for surrendering the right to draw water from a well, which was granted by the State Government without any cost to the assessee, is not liable to Capital Gains tax.