1970 (9) TMI 12 - HC - Income Tax

Capital gains - compensation received towards compulsory acquisition of property - solatium paid on compulsory acquisition - assessability

Issues Involved:
1. Whether compulsory acquisition of property amounts to transfer within the meaning of section 12B(1) of the Income-tax Act, 1922.
2. Whether the amount of Rs. 37,202 awarded under section 23(2) of the Land Acquisition Act, 1894, is to be included in the computation of capital gain.
3. Whether the sums of Rs. 16,200 and Rs. 15,420 awarded for extra cost of transport and lower selling price are to be included in the computation of capital gain.
4. Whether the sums of Rs. 7,000 and Rs. 50,000 received as compensation for loss of contracts and loss of profits are revenue receipts.
5. Whether the sum of Rs. 5,310 received as compensation for salary paid to employees is to be included in the taxable income of the assessee.

Issue-wise Detailed Analysis:

1. Compulsory Acquisition as Transfer:
The court examined whether the compulsory acquisition of property amounts to a transfer under section 12B(1) of the Income-tax Act, 1922. Section 12B(1) specifies that tax is payable on profits or gains arising from the sale, exchange, relinquishment, or transfer of a capital asset. The court clarified that compulsory acquisition cannot be regarded as a sale due to the lack of mutual consent. However, the term "transfer" is broad and includes any act by which property passes from one person to another, including by operation of law. The court concluded that compulsory acquisition constitutes a transfer within the meaning of section 12B(1), thus profits or gains arising from such acquisition are taxable as capital gains. This interpretation aligns with decisions from the Madhya Pradesh and Madras High Courts.

2. Inclusion of Solatium in Capital Gain:
The second issue dealt with whether the amount of Rs. 37,202 awarded as solatium under section 23(2) of the Land Acquisition Act, 1894, should be included in the computation of capital gain. The court held that solatium, although awarded for the compulsory nature of the acquisition, still represents consideration for the property acquired. Therefore, it forms part of the compensation and must be included in the computation of capital gain.

3. Extra Cost of Transport and Lower Selling Price:
The third issue concerned the sums of Rs. 16,200 and Rs. 15,420 awarded for extra transport costs and lower selling prices due to the relocation of the ice factory. The assessee did not press this issue, and hence the court did not address it.

4. Compensation for Loss of Contracts and Profits:
The fourth issue was whether the sums of Rs. 7,000 and Rs. 50,000 received as compensation for loss of contracts and loss of profits are revenue receipts. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Shamsher Printing Press, which held that compensation for loss of profits is a revenue receipt. Consequently, the court concluded that the sums in question are taxable as revenue receipts.

5. Compensation for Salary Paid to Employees:
The fifth issue involved the sum of Rs. 5,310 received as compensation for salary paid to employees who could not be discharged immediately upon the acquisition of the ice factory. The learned Advocate-General for the revenue stated that if this salary was not allowed as a deduction in the assessee's income-tax assessment, the revenue would delete the addition of Rs. 5,310 from the taxable income. Following this statement, the assessee did not press the issue, and the court did not address it.

Conclusion:
The court answered questions 1, 2, and 4 in the affirmative, confirming the taxability of the sums involved. Questions 3 and 5 were not answered as they were not pressed by the assessee. The assessee was ordered to pay the costs of the reference to the Commissioner.

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