2014 (7) TMI 1002 - HC - Income Tax

Taxability u/s 45(5)(b) Transfer of capital asset - Held that - Section 45(5) is inserted to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset - additional compensation is treated as deemed income in the hands of the recipient even if the actual recipient happens to be a person different from the original transferor by reason of death, etc. For this purpose, the cost of acquisition in the hands of the receiver of the additional compensation is deemed to be nil Section 45(5) was an overriding provision and took care of the situation where the capital gains arose from transfer of a capital asset being a transfer by way of compulsory acquisition and the compensation for such transfer was enhanced in stages by a court, tribunal or authority. Following the decision in Commissioner of Income Tax Vs. Ghanshyam (HUF), 2009 (7) TMI 12 - SUPREME COURT - the Finance Act, 1987 inserted Section 45(5) to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. Accordingly, additional compensation is treated as deemed income in the hands of the recipient even if the actual recipient happens to be a person different from the original transferor by reason of death, etc. For this purpose, the cost of acquisition in the hands of the receiver of the additional compensation is deemed to be nil. However, the compensation awarded in the first instance would continue to be chargeable as income under the head capital gains , in the previous year in which the transfer took place - addition made by AO was in accordance with law i.e. Section 45(5) of the Act Decided in favour of Revenue.

Issues Involved:
1. Taxability of Rs. 72,80,752/- received by the assessee under Section 45(5)(b) of the Income Tax Act.
2. Applicability of the Supreme Court's decision in the case of C.I.T. Vs. Hindustan Housing and Land Development Trust Ltd. in light of Section 45(5) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 72,80,752/- under Section 45(5)(b) of the Income Tax Act:

The Revenue appealed under Section 260A of the Income Tax Act, 1961, pertaining to the assessment year 1988-99. The primary issue was whether the amount of Rs. 72,80,752/- received by the assessee was taxable under Section 45(5)(b) of the Act. The respondent-assessee, representing the legal heir of B.K. Kochhar, had initially declared a business income of Rs. 17,693.60. After receiving notices under Section 148, the assessee revised the income to Rs. 23,750/- and declared the receipt of Rs. 72,80,752/- as compensation and Rs. 1,20,466/- as initial compensation with interest, claiming these amounts were not taxable due to pending challenges before the Supreme Court.

The Assessing Officer taxed these amounts, noting that the assessee's father had Bhumidari rights in agricultural land acquired by the Government, with enhanced compensation awarded by the Additional District Judge, Delhi, and further directed by the Delhi High Court. The Tribunal later accepted the assessee's contention that the amount was not taxable in the year in question, referencing earlier decisions and holding that Section 45(5) was not applicable as the money was paid against a bank guarantee.

The Supreme Court's decision in Commissioner of Income Tax Vs. Ghanshyam (HUF) clarified that Section 45(5) was enacted to tax additional compensation in the year of receipt instead of the year of transfer. This provision was intended to address difficulties in rectifying assessments when additional compensation was awarded in stages. The court held that Section 45(5) was an overriding provision applicable to compulsory acquisitions, making additional compensation taxable in the year of receipt.

2. Applicability of Supreme Court's Decision in C.I.T. Vs. Hindustan Housing and Land Development Trust Ltd.:

The Tribunal had relied on the Supreme Court's decision in Hindustan Housing and Land Development Trust Ltd., which held that additional compensation was not taxable until the right to receive it became absolute. However, the Supreme Court in Ghanshyam (HUF) elucidated that this decision was no longer applicable due to the introduction of Section 45(5), which specifically addressed the taxation of additional compensation in the year of receipt.

The Supreme Court in Ghanshyam (HUF) explained that Section 45(5) was introduced to remove the difficulties caused by multiple rectifications of assessments due to staged awards of additional compensation. It clarified that additional compensation, including solatium and interest under Section 28 of the Land Acquisition Act, was to be treated as part of the enhanced compensation and taxed in the year of receipt.

Computation and Conclusion:

The Assessing Officer computed the taxable income, including the enhanced compensation, solatium, and interest, totaling Rs. 67,71,560/-. The Supreme Court's interpretation confirmed that these amounts were part of the taxable capital gains under Section 45(5).

Final Judgment:

The High Court answered both substantial questions of law in favor of the Revenue and against the assessee. It held that the addition made by the Assessing Officer was in accordance with Section 45(5) of the Act and that the decision in Hindustan Housing and Land Development Trust Ltd. was no longer applicable post the statutory amendment effective from 1st April 1988. The appeal was disposed of with no orders as to cost.

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