2003 (10) TMI 254 - AT - Income Tax

Summary

Issues Involved:
1. Charging of 'Long Term Capital Gain' by invoking section 45(5)(b) of the IT Act.
2. Taxability of additional compensation received during the pendency of litigation.
3. Applicability of case laws cited prior to the introduction of section 45(5).
4. Interpretation and application of section 45(5) in the context of disputed compensation.

Issue-Wise Detailed Analysis:

1. Charging of 'Long Term Capital Gain' by Invoking Section 45(5)(b) of the IT Act:
The primary issue revolves around whether the additional compensation awarded by the City Civil Court, Madras, and received by the appellants should be taxed as 'Long Term Capital Gain' under section 45(5)(b) of the IT Act. The Assessing Officer had taxed the additional compensation as capital gain for the Assessment Year 1995-96, arguing that the receipt of Rs. 95,98,499 was not a notional income but a real income enjoyed by the appellants. This was upheld by the CIT(A), who also cited the decision of ITAT Delhi in Smt. Gulab Sundari Bapna v. Dy. CIT [2001] 79 ITD 455, emphasizing that the enhanced compensation was real income and not notional.

2. Taxability of Additional Compensation Received During the Pendency of Litigation:
The appellants argued that the additional compensation was disputed and pending before the Hon'ble High Court, and hence, should not be taxed until the dispute is resolved. They cited several case laws, including CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC), to support their claim that income does not accrue until it is judicially determined. The Tribunal noted that the High Court had allowed the withdrawal of 50% of the enhanced compensation as an interim relief, not as a final determination. The Tribunal emphasized that the legal position is that there is no liability to pay enhanced compensation until it is judicially determined by the final court.

3. Applicability of Case Laws Cited Prior to the Introduction of Section 45(5):
The appellants contended that the CIT(A) erred in dismissing the relevance of case laws decided before the introduction of section 45(5). They argued that the principles established in these cases still apply, particularly the distinction between the right to receive payment being in dispute and merely quantifying the amount to be received. The Tribunal agreed, noting that the introduction of section 45(5) did not nullify the principles established by the Supreme Court in cases like Hindustan Housing & Land Development Trust Ltd.

4. Interpretation and Application of Section 45(5) in the Context of Disputed Compensation:
The Tribunal analyzed section 45(5) and its clauses (a) and (b), noting the use of different terms 'first received' and 'received'. It concluded that the Legislature intended to tax the original compensation when first received, but the additional compensation only when it is finally received and not when it is still under dispute. The Tribunal emphasized that the enhanced compensation should be taxed only when the dispute is finally settled to avoid multiplicity of litigation and undue hardship to the taxpayer. The Tribunal relied on the decision of the jurisdictional High Court in CIT v. Abdul Mannan Shah Mohammed [2001] 248 ITR 614 (Bom.), which held that additional compensation permitted to be withdrawn on giving security was not taxable at that stage.

Conclusion:
The Tribunal concluded that the CIT(A) erred in affirming the assessment of the additional compensation as 'Long Term Capital Gain' for the year under consideration. The appeals were allowed, and the findings of the first appellate authority were reversed, emphasizing that the enhanced compensation should be taxed only when the dispute is finally resolved.