2015 (10) TMI 953 - HC - Income Tax

Interest on fixed deposits representing compensation, pledged against bank guarantee given to KIADB pending resolution of dispute over title of land - whether is taxable in the respective years when such interest was credited by bank in its books as held by ITAT? - Held that - If an amount is received by the assessee on certain conditions or by imposing any restrictions, such as of furnishing security, the assessee does not become the real owner of the money, though received in his name, or the interest that accrues thereon would not be chargeable to tax, till such dispute is resolved and the condition, or restriction, so imposed is removed or resolved.For the foregoing reasons, we decide the first question of law in favour of the assessee and against the Revenue. Part of compensation relating to trees in the agricultural land acquisition proceeding - whether is taxable as capital gains and chargeable to tax in the block period and not in the year of unconditional receipt as held by ITAT - whether the capital gains could be charged on the compensation for the standing mango and other fruit bearing trees, building, borewell and other assets on the agricultural land of the assessee, which was acquired under a notification for compulsory acquisition? - Held that - What is to be noted in this regard is that it was acquisition of the land, along with structure, trees etc., which was made by a single transaction. It was only for the purpose of payment of compensation that valuation of the building, borewell, standing trees (which may be mango, tamarind and other fruit bearing trees) was made. While calculating the valuation of the trees, which was done by the Land Acquisition Officer of the Board, part relief had been granted by the Authorities with regard to certain kinds of trees and also the building and the borewell. But mango trees, which were approximately 12 years of age, were valued separately, and compensation on the same was treated as taxable. In this regard, since it is clear that the acquisition was for the entire land on as is where is basis , and the land in question is agricultural land, and the valuation of the trees and other assets, were made only for the purpose of calculating compensation, therefore the amount paid to the assessee was actually for acquisition of the agricultural land, which was exempted from tax. Hence, the question of payment of capital gains on the compensation only for the mango trees, etc., cannot be justified in law. The ratio of the decision COMMISSIONER OF INCOME TAX v/s M.RAMAIAH REDDY (1984 (12) TMI 56 - KARNATAKA High Court) goes in favour of the assessee and not the Revenue. We are of the firm opinion that it was one transaction of acquisition, under which the land, as well as the trees, etc., had been acquired, and splitting the same into two for the purpose of taxation would be against the law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of interest on fixed deposits representing compensation.
2. Taxability of compensation for trees and other assets as capital gains.

Issue-wise Detailed Analysis:

Issue 1: Taxability of Interest on Fixed Deposits Representing Compensation

The first issue concerns whether the interest on fixed deposits, which represented compensation pledged against a bank guarantee given to the Karnataka Industrial Area Development Board (KIADB) pending resolution of a title dispute, is taxable in the respective years when such interest was credited by the bank in its books.

The assessee argued that the interest amount had never been in his hands until the decision of the Regular Second Appeal, as it was part of a legal dispute raised by his cousins regarding the title of the land acquired by the Board. Since the assessee did not maintain any books of account, the mercantile method of accounting would not apply. Under the cash system of accounting, income would be chargeable to tax only when the assessee becomes the complete owner of the interest amount without any dispute or restriction. The assessee contended that until the title of the suit land was finalized, there was always some impediment or restriction over the compensation amount and the interest accrued on it. Therefore, the interest amount should be taxable only in the assessment year 2009-10, when the dispute was resolved.

The Revenue argued that under the provisions of the Income Tax Act, particularly Section 5, the assessee would be liable to pay tax on such income received or deemed to be received. Since the compensation for land and other assets was received in 1997 and 1999 respectively and kept in the bank in the assessee's name, any interest accrued on such amount would be treated as received by the assessee when it accrued in his account and would thus be liable for tax.

The court held that since the assessee did not maintain any books of accounts, the cash system of accounting would apply. Under this system, income is subjected to tax only when received or deemed to be received by the assessee. The court concluded that the interest income, though in the name of the assessee, was not in his hands due to the pending legal dispute and the requirement to furnish a bank guarantee. Therefore, the interest could not be considered real income until the dispute was resolved, and the assessee became the complete owner of the compensation amount and the interest accrued thereon. The court decided this issue in favor of the assessee, stating that the interest income would be taxable only in the assessment year 2009-10.

Issue 2: Taxability of Compensation for Trees and Other Assets as Capital Gains

The second issue pertains to whether the capital gains could be charged on the compensation for standing mango and other fruit-bearing trees, buildings, borewells, and other assets on the agricultural land acquired under a notification for compulsory acquisition.

The court noted that the acquisition was for the entire land, along with structures, trees, etc., made by a single transaction. The valuation of the building, borewell, and standing trees was done only for the purpose of calculating compensation. Since the land in question was agricultural land, the compensation for the acquisition of agricultural land was exempted from tax. Therefore, the court held that the payment of capital gains on the compensation for mango trees and other assets could not be justified in law.

The Tribunal had relied on the decision in the case of Commissioner of Income Tax v. M. Ramaiah Reddy, which related to the acquisition of urban land. The court clarified that the acquisition of land, along with trees, was a single transaction and could not be split for the purpose of taxation. The court concluded that splitting the transaction into two for taxation purposes would be against the law.

Accordingly, the court answered the second question in favor of the assessee, holding that the compensation for trees and other assets on the agricultural land should not be treated as taxable capital gains.

Conclusion:

Both substantial questions of law were answered in favor of the assessee and against the Revenue. The appeal was allowed, and no costs were imposed.