2009 (7) TMI 12 - SC - Income Tax

Enhanced compensation ITAT deleted deletion of enhanced compensation and interest thereon from the total income of the assessee on the ground that the said two items, awarded by the Reference Court, was under dispute in First Appeal before the High Court Held that the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155(16) of the 1961 Act, later on. - This is the scheme of Section 45(5) and Section 155(16) of the 1961 Act - We may clarify that even before the insertion of Section 45(5)(c) and Section 155(16) the receipt of enhanced compensation under Section 45(5)(b) was taxable in the year of receipt Decision in favor of revenue.

Issues Involved:
1. Interpretation of Section 45(5) of the Income-tax Act, 1961, as it stood prior to 1.4.2004.
2. Taxability of enhanced compensation and interest thereon under the head "Capital Gains".
3. Applicability of the Supreme Court judgment in the case of Hindustan Housing and Land Development Trust Ltd.
4. Analysis of the provisions of the Land Acquisition Act, 1894, particularly Sections 23, 28, and 34.
5. Determination of the year of taxability for enhanced compensation and interest.

Issue-Wise Detailed Analysis:

1. Interpretation of Section 45(5) of the Income-tax Act, 1961, as it stood prior to 1.4.2004:
The controversy revolves around whether enhanced compensation and interest received by the assessee should be taxed in the year of receipt under Section 45(5) of the Income-tax Act, 1961. The court discussed the legislative intent behind inserting Section 45(5) by the Finance Act, 1987, effective from 1.4.1988, which aimed to tax additional compensation in the year of receipt rather than the year of transfer of the capital asset. This provision was introduced to mitigate difficulties arising from multiple rectifications of assessments due to staged compensation awards in compulsory acquisition cases.

2. Taxability of enhanced compensation and interest thereon under the head "Capital Gains":
The court analyzed the provisions of Section 45(5) and concluded that enhanced compensation, including additional amounts under Section 23(1A) and solatium under Section 23(2) of the Land Acquisition Act, 1894, forms part of the capital gains. Interest awarded under Section 28 of the Land Acquisition Act is considered part of the enhanced compensation, while interest under Section 34 is for delay in payment and does not form part of the compensation.

3. Applicability of the Supreme Court judgment in the case of Hindustan Housing and Land Development Trust Ltd.:
The court distinguished the present case from the Hindustan Housing judgment, stating that the latter was delivered before the insertion of Section 45(5) and dealt with the Income-tax Act, 1922. The current case involves the 1961 Act, which has a broader definition of "transfer" under Section 2(47) and a specific provision for compulsory acquisition under Section 45(5). Therefore, the Hindustan Housing judgment is not applicable to the present case.

4. Analysis of the provisions of the Land Acquisition Act, 1894, particularly Sections 23, 28, and 34:
The court examined Sections 23(1A), 23(2), 28, and 34 of the Land Acquisition Act, 1894. Section 23(1A) provides for an additional amount as compensation, Section 23(2) mandates solatium, and Section 28 allows discretionary interest on excess compensation. Section 34 mandates interest for delayed payment. The court concluded that interest under Section 28 is part of the enhanced compensation, while interest under Section 34 is not.

5. Determination of the year of taxability for enhanced compensation and interest:
The court held that the year in which enhanced compensation and interest under Section 28 are received is the year of taxability under Section 45(5). This includes cases where the amount is received against security pending appeal. The court emphasized that the scheme of Section 45(5) and Section 155(16) of the Income-tax Act, 1961, supports this interpretation.

Conclusion:
The Supreme Court allowed the civil appeals filed by the Department, concluding that enhanced compensation and interest thereon are taxable in the year of receipt under Section 45(5) of the Income-tax Act, 1961. The court clarified that the judgment in Hindustan Housing is not applicable to the present case and emphasized the legislative intent behind Section 45(5). The court directed that recomputation based on this judgment should not be done for decade-old cases to avoid difficulties.

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