2015 (8) TMI 567 - HC - Income Tax

Taxability of receipt of enhanced compensation - Whether the entire amount of award received by the assessee, shown in his books of account as liability of the trust does not amount to income of the assessee liable to be taxed in his hands under the Income-tax Act? - liabilty to pay gift-tax to the assessment year 1984-85 relevant to the financial year 1983-84 on the amount of award finally received and accounted for in his books of account in the name of the trust The P. Sreeramulu Naidu Trust created under a trust deed dated April 26, 1976, transferring the right to receive the compensation in favour of the said trust ? - Held that - Any amount representing debt other than the one secured by mortgage or hypothecation need not be in actual or constructive possession of the claimant. In the ultimate analysis, it is a right to claim the amount. However, the right must be clear and a definite one. The remote possibility of receiving the amount such as the one in a suit for damages, cannot be treated as an actionable claim. Unlike the right to receive compensation under the relevant enactments, the Bombay High Court in Akber A. Dehgamwalla s case (1991 (4) TMI 37 - BOMBAY High Court) explained the distinction as under It is only the amount of compensation that is to be determined later on after taking into account various relevant aspects. In the case of damages for breach of contract, there is no vested right as such. Breach of contract gives merely a right to sue which right is certainly not an asset within the meaning of section 2(e) of the Act. The amount involved in this case is the one referable to the Act.If a mere right to receive the compensation that may be enhanced may tend to become the one, equivalent to damages. The reason is that one cannot take the enhancement of compensation for granted. Several factors surround it and it is only on a case being made out, that the court can enhance the compensation. Had the applicant gifted the mere right to receive a probable enhanced compensation, things would have been different altogether. By the time he created the trust deed, the compensation stood already enhanced in the year 1974. What was gifted to the trust was the compensation enhanced in the O. P. The only difference was that the amount so enhanced was subject to modification by the High Court. Therefore, being an actionable claim, it was capable of being gifted. Therefore, the view taken by the Assessing officer, the Commissioner and the Tribunal in the instant case that the right to receive enhanced compensation could not have been gifted, does not accord with law. We hold that the arrangement made under the gift deed was legal and valid and there is nothing unnatural about it. However, the undisputed facts disable the applicant from getting any relief. It has already been mentioned that the enhanced compensation of about ₹ 4,00,000 was received by the applicant between April 26, 1976, and April 25, 1977. Had he passed on that amount instantly to the trust, the amount would have become the corpus of the trust. Since the amount remained in the hands of the applicant, at least till April 4, 1983, i.e., for a period of 6 years, it partakes of the character of income and was rightly assessed to tax. It was only in the subsequent year, i.e., 1984-85, that he was levied gift-tax, accepting the contention of the transfer of the amount on April 4, 1983. - Decided against assessee.

Summary

Issues Involved:
1. Tax liability on compensation amount received by the applicant and transferred to a trust.
2. Applicability of Income-tax Act and Gift-tax Act on the transaction.

Analysis:

1. Tax Liability on Compensation Amount:
The case involves the acquisition of land by the government under the Land Acquisition Act, with compensation awarded to the applicant. The applicant later created a trust and transferred the compensation amount to the trust. The primary issue is whether the compensation amount, which was reflected in the applicant's books but transferred to the trust, should be considered as income liable to tax in the hands of the applicant. The Assessing Officer, Commissioner, and Tribunal held that the amount was taxable as income since it remained in the applicant's possession for a significant period. The applicant argued that the right to receive compensation is an actionable claim and can be transferred, citing relevant legal precedents. However, the court found that since the applicant retained the amount for several years, it was rightfully assessed as income. The court emphasized that the transfer of an actionable claim must involve a clear and definite right, which was not the case here due to the delay in transferring the amount to the trust.

2. Applicability of Income-tax Act and Gift-tax Act:
The applicant contended that the transfer of the compensation amount to the trust was valid and should not be subject to tax under the Income-tax Act. However, the court disagreed, stating that the delay in transferring the amount made it akin to income and subject to taxation. The court also addressed the issue of gift-tax liability for the assessment year 1984-85, relevant to the financial year 1983-84. The court held that the applicant was rightly levied gift-tax for the subsequent year, considering the delayed transfer of the compensation amount to the trust. Despite the legal validity of the arrangement under the gift deed, the court ruled against the applicant, emphasizing the factual circumstances that led to the taxation of the amount as income.

In conclusion, the court rejected the reference and ruled in favor of upholding the tax liability on the compensation amount received by the applicant and transferred to the trust. The court found that the delay in transferring the amount to the trust resulted in it being treated as income, subject to taxation under the Income-tax Act and Gift-tax Act.