2017 (9) TMI 1103 - HC - Income Tax

Rectification of mistake u/s 154 - capital gains tax - exclusion of interest u/s 28 of the LA Act from the returned income - Section 10(37) applicability - Held that - CIT was in error in holding that Section 10(37) of the Act did not apply. There was no dispute that at the time when it was acquired by the Government of Haryana the Assessee s land was both an agricultural land and a capital asset within the meaning of Section 2 (14) (iii) which defined capital asset to mean, inter alia, property of any kind held by the Assessee but did not include agricultural land that was not situated within the jurisdiction of a municipality. In other words, agricultural land situated within a municipality would constitute a capital asset and therefore would be subject to capital gains tax upon the transfer of such asset. In the present case, the agricultural land of the Assessee that was acquired was situated within the Hisar municipality and, in terms of Section 2 (14) (iii) (a), was a capital asset, the transfer of which would attract capital gains tax under Section 45 of the Act. However, in terms of Section 10 (37) (i) income chargeable under the head capital gains , arising from transfer of such agricultural land located within the municipal limits, would not form part of the total income. Consequently, the impugned order of the CIT which holds to the contrary is both factually and legally erroneous. The Court is also unable to accept the stand of the AO that the decision of the Supreme Court in Ghanshyam (HUF) (2009 (7) TMI 12 - SUPREME COURT) was prospective and did not apply to the Assessee s case. The said decision is law declared by the Supreme Court which is binding on all authorities under Article 141 of the Constitution. For the purpose of Section 154 of the Act, the AO had to apply the said decision and permit the Assessee to exclude the interest component from the returned income. This was very much within the purview of Section 154 of the Act as this would not require any adjudication of a disputed question on the part of the AO.

Summary

Issues:
Challenge to order rejecting revision petition and affirming assessment order under Section 154 of the Income Tax Act, 1961 for AY 2008-09.

Detailed Analysis:

1. Challenge to Assessment Order:
The petitioner challenged the order rejecting the revision petition and affirming the assessment order under Section 154 of the Income Tax Act, 1961 for the Assessment Year (AY) 2008-09. The petitioner disclosed an income in the return, including enhanced compensation for land acquired along with statutory benefits under the Land Acquisition Act, 1894. The petitioner received the enhanced compensation and benefits during the relevant AY and offered it for taxation. Subsequently, the petitioner filed a rectification application before the Assessing Officer (AO) to exclude a specific interest component from the income chargeable, citing a Supreme Court decision. The AO rejected the application, stating that the petitioner should have filed a revised return to claim the exemption and that the Supreme Court decision could not have retrospective effect.

2. Revision Petition and CIT's Order:
The petitioner filed a revision petition under Section 264 of the Act before the Commissioner of Income Tax (CIT). The CIT affirmed the AO's order, stating that the land was non-agricultural as it was within municipal limits, and hence, a specific section of the Act did not apply. The court found an error in the CIT's interpretation, noting that the land was both agricultural and a capital asset as per the Act's definition. The court clarified that agricultural land within municipal limits would still be a capital asset subject to capital gains tax, but a specific section exempted income arising from the transfer of such land within municipal limits from forming part of the total income.

3. Legal Interpretation and Decision:
The court held that the CIT's order was factually and legally erroneous as it misinterpreted the application of Section 10(37) of the Act. The court also disagreed with the AO's view that a Supreme Court decision did not apply retrospectively. The court emphasized that decisions of the Supreme Court are binding on all authorities and must be applied. Therefore, the court set aside the orders of the CIT and the AO, allowing the petitioner's application under Section 154 of the Act. The court directed the AO to pass a consequential order in accordance with the law, granting relief to the petitioner as per the court's interpretation and legal analysis.

Conclusion:
The court's detailed legal analysis and interpretation clarified the application of relevant sections of the Income Tax Act, rectifying errors made by the CIT and the AO. The judgment emphasized the binding nature of Supreme Court decisions and the correct application of statutory provisions to ensure proper taxation treatment for the petitioner's case.