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2006 (9) TMI 222 - AT - Income TaxPowers of the Appellate Tribunal u/s 255 - Accrual of income - Capital gain - taxability of interest - Enhanced compensation along with interest against compulsory acquisition of land - Whether it will make any difference to the taxability of compensation and interest if the same are received on furnishing of security? - HELD THAT - We do not see nor were given any good reason why scheme of sub-section (5) should not be applied to receipt of enhanced or further enhanced compensation as envisaged by the sub-section. Why the amount received should not be brought to tax in the year of the receipt when language and intention of the Legislature is absolutely clear. Why Court should not give effect to the legislative intent and follow its mandate. On careful consideration of the statutory provision, particularly the scheme adopted with the introduction of sub-section (5) of section 45, we are unable to find any force in the arguments raised on behalf of the assessees or the interveners. As discussed, a new scheme to tax enhanced or further enhanced compensation on receipt basis in the year of receipt has been introduced by adopting plain and unambiguous language. Tribunals and courts are required to give effect to the mandate of the Legislature. Therefore, decision of Hindustan Housing Land Development Trust Ltd.'s case 1986 (7) TMI 10 - SUPREME COURT and all other decisions which have not taken note of intention and scheme of the Legislature and its purpose, are not applicable to cases where enhanced compensation is received. The provision was made to obviate the hardship and unintended consequences of subsection (5) of section 45. The clause was inserted to make entire scheme workable and to supply an obvious omission in the provision. The situation envisaged as per clause (c) above was required to be given reasonable construction to accomplish purpose and object of the enactment. Principle of reasonable construction by treating a provision as retrospective, on the ground that such construction would make the whole enactment workable, was applied by their Lordship of the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT 1997 (3) TMI 9 - SUPREME COURT . The aforesaid principle is fully applicable to the interpretation of clause (c) and we accordingly hold that it is retrospective in operation. Having held that as per sub-section (5) of section 45 of the Income-tax Act, enhanced or further enhanced compensation is to be taxed on receipt basis, as per scheme of sub-section (5) of section 45, we are of view that it does not make any difference whether compensation is received as per interim order or on certain conditions or without any condition. This simple answer follows from obvious and plain language. What is required to be considered is that compensation had been paid and received. If for any reason, it is subsequently reduced then assessment is required to be modified to take reduced compensation of income. Thus statutory provision leave no scope for not taxing compensation on receipt basis under any situation. There is no way to read in clear language of statute that receipt, if conditional or allowed as per interim order of High Court is no receipt of compensation and would not be taxed in the year of the receipt. If the arguments of counsel for the assessee and Interveners are adopted, it would tantamount to adopting a narrow and pedantic construction and reduce legislation to futility. Therefore, we do not find any substance in the arguments advanced on behalf of the assessees and the interveners. It will not be out of place to state that clause (c) of aforementioned sub-section would be redundant if arguments of assessee are accepted. In fact all the clauses would be redundant if capital gain is to be brought to tax only when compensation attain finality. Sub-section (5) of section 45 has no purpose to serve if above contention is accepted. The assessee wishes to apply only sub-section (1) of section 45 in total disregard of statutory provision of sub-section (5). Further after insertion of sub-section (5), the scheme of assessment of enhanced or further enhanced compensation is to be taxed only in the year of the receipt. If it is not taxed in that year, but is held to be taxed in the year in which amount of compensation is finally determined, then there is no provision to charge it to tax otherwise than in the year of receipt. Therefore special provision relating to taxability of amount in the year of receipt, cannot be disregarded. For aforesaid reasons also the arguments advanced on behalf of assessees cannot be accepted. As far as question of interest income on enhanced compensation is concerned, the Legislature had made no change in the statutory provision and, therefore, decision of Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. 1986 (7) TMI 10 - SUPREME COURT as also decision of Smt. Rama Bai v. CIT 1989 (11) TMI 2 - SUPREME COURT would apply. The interest is to be assessed on accrual basis from year to year. However, question of assessment of such interest on accrual basis would not arise unless it is finally determined. In case a dispute relating to interest payable on enhanced compensation is pending before a Court of Law and not attained finality, the same will not accrue and not liable to tax. Only after it is finally determined, the same can be subjected to tax, in the light of decisions of the Hon'ble Supreme Court, referred to above. Therefore, the Assessing Officer would revise assessment and tax enhanced compensation and interest, after providing reasonable opportunity of being heard to the assessee. All the above appeals are allowed in terms stated above.
Issues Involved:
1. Taxability of enhanced compensation and interest under the Land Acquisition Act. 2. Applicability of Section 45(5) of the Income-tax Act. 3. Impact of pending litigation on the taxability of enhanced compensation. 4. Taxability of compensation received on furnishing security. Detailed Analysis: 1. Taxability of Enhanced Compensation and Interest: The primary issue in these appeals was the taxability of compensation enhanced by courts under the Land Acquisition Act. The Assessing Officer taxed the enhanced compensation and interest on receipt basis under Section 45(5)(b) of the Income-tax Act. The assessees contended that since the decree/order awarding enhanced compensation was challenged in higher courts, the compensation could not be treated as final and taxable. The CIT (Appeals) accepted the assessees' contention, holding that the right to receive enhanced compensation was inchoate and not taxable until it attained finality. 2. Applicability of Section 45(5) of the Income-tax Act: The Regular Bench noted divergent interpretations of Section 45(5) across different Tribunal Benches. Some held that the Supreme Court's decision in CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 still applied, while others believed the decision was no longer applicable, and enhanced compensation was taxable in the year of receipt. The Special Bench was constituted to resolve this divergence. 3. Impact of Pending Litigation on the Taxability of Enhanced Compensation: The Special Bench considered whether enhanced compensation and interest should be taxed in the year of receipt, even if the order awarding them was under appeal. The learned Departmental Representative argued that Section 45(5) provided a complete code for taxing enhanced compensation on receipt basis, irrespective of pending appeals. The assessees' representatives contended that the right to receive compensation was not final until the litigation was resolved, and thus, it should not be taxed. 4. Taxability of Compensation Received on Furnishing Security: The Special Bench also considered whether the taxability of compensation and interest would differ if received on furnishing security. The learned Departmental Representative argued that the receipt of enhanced compensation, whether conditional or not, should be taxed as per Section 45(5). The assessees' representatives argued that compensation received under interim orders or on furnishing security should not be considered as taxable income until the final determination of the compensation. Judgment: 1. Enhanced Compensation Taxable on Receipt Basis: The Special Bench held that Section 45(5) of the Income-tax Act introduced a new scheme to tax enhanced compensation on receipt basis. The provision was clear and unambiguous, and the enhanced compensation should be taxed in the year of receipt, notwithstanding any pending litigation. The decision of the Supreme Court in Hindustan Housing & Land Development Trust Ltd. was applicable to the accrual basis under Section 45(1) but not to the receipt basis under Section 45(5). 2. Interest on Enhanced Compensation: Interest on enhanced compensation should be assessed on an accrual basis from year to year, as per the Supreme Court's decisions in Smt. Rama Bai v. CIT [1990] 181 ITR 400 and P. Mariappa Gounder v. CIT [1998] 232 ITR 2. However, if the interest is disputed and not finally determined, it will not accrue and thus will not be taxable until the dispute is resolved. 3. Compensation Received on Furnishing Security: The Special Bench held that the taxability of compensation received on furnishing security or under interim orders should be treated the same as any other receipt of enhanced compensation. It should be taxed in the year of receipt, and any subsequent reduction in compensation would be adjusted as per Section 45(5)(c). Conclusion: The Special Bench concluded that enhanced compensation and interest should be taxed on receipt basis as per Section 45(5) of the Income-tax Act, regardless of pending litigation or conditions attached to the receipt. The Assessing Officer was directed to revise the assessments accordingly, providing a reasonable opportunity of being heard to the assessees.
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