2015 (12) TMI 464 - HC - Income Tax

Money received by the assessee by way of enhanced compensation/interest - Whether the amount of enhanced compensation received by the assessee during the relevant previous year is taxable in view of the provisions of Section 45(5)(b) of the Income Tax Act, 1961? - Held that - The question of bringing the enhanced compensation received by the Assessee during the relevant previous year to tax for the purposes of capital gains under Section 45 (5) (b) of the Act will have to await the final decision in the appellate proceedings emanating from the order of the ADJ in the proceedings under Section 31 (2) LA Act. ITAT was incorrect in law in holding that the decision in CIT v. Hindustan Housing and Land Development Trust Limited (1986 (7) TMI 10 - SUPREME Court ) is to be applied despite Section 45(5) of the Act. The question of assessing to tax the interest received by the assessee on enhanced compensation in the same year in which the enhanced compensation is received will also have to await the final decision in the appellate proceedings emanating from the order of the ADJ in the proceedings under Section 31 (2) LA Act. Turning to the wealth tax appeals, it is seen that as held by the ITAT in the present case, amount of compensation received by the Assessee in the nature of trust money which may be required to be returned by the Assessee in case she does not succeed in the appeal emanating from the order in the proceedings under Section 31 (2) of the LA Act. For an Assessee to be brought to tax within the ambit of the wealth tax provisions, it should be shown, as on the valuation date, to be belonging to the Assessee. In the facts of the case, the ITAT was justified in holding that the provision of WT Act did not stand attracted yet. That too will have to await the final decision in the appellate proceedings emanating from the order of the ADJ in the proceedings under Section 31 (2) LA Act.

Issues Involved:
1. Taxability of enhanced compensation under Section 45(5)(b) of the Income Tax Act.
2. Applicability of the Supreme Court decision in CIT vs. Hindustan Housing and Land Development Trust Limited despite changes in the law.
3. Assessment of interest on enhanced compensation in the same year it is received.
4. Inclusion of enhanced compensation/interest in the net wealth under the Wealth Tax Act.

Detailed Analysis:

Issue 1: Taxability of Enhanced Compensation under Section 45(5)(b) of the Income Tax Act
The main question was whether the enhanced compensation received by the assessee during the relevant previous year is taxable under Section 45(5)(b). The court noted that Section 45(5) was introduced to address the difficulties in taxing compensation for compulsory acquisition, which was previously taxed in the year of acquisition. The court explained that under Section 45(5), both the initial and enhanced compensation are taxed in the year of receipt, even if the right to receive compensation is under dispute. However, in this case, the right to receive compensation itself was still under litigation, making it inchoate. Therefore, the court held that the question of taxing the enhanced compensation must await the final decision in the pending appellate proceedings.

Issue 2: Applicability of CIT vs. Hindustan Housing and Land Development Trust Limited
The court examined whether the ITAT was correct in applying the Supreme Court's decision in CIT vs. Hindustan Housing and Land Development Trust Limited despite the subsequent introduction of Section 45(5). The court clarified that the decision in Hindustan Housing applied to situations where the right to receive compensation was in dispute. However, Section 45(5) specifically addresses the taxation of enhanced compensation in the year of receipt, irrespective of pending appeals. Therefore, the ITAT's reliance on the Hindustan Housing decision was incorrect in light of the specific provisions of Section 45(5).

Issue 3: Assessment of Interest on Enhanced Compensation
The court considered whether the interest on enhanced compensation should be assessed in the same year it is received. The court referred to the Supreme Court's decision in CIT v. Ghanshyam (HUF), which held that interest under Section 28 of the Land Acquisition Act is part of the compensation and should be taxed in the year of receipt. However, since the right to receive compensation itself was still under litigation, the court held that the question of taxing the interest must also await the final decision in the pending appellate proceedings.

Issue 4: Inclusion of Enhanced Compensation/Interest in Net Wealth under the Wealth Tax Act
The court addressed whether the enhanced compensation and interest should be included in the assessee's net wealth. The ITAT had held that the compensation received was in the nature of "trust money" and therefore not includable in the net wealth. The court agreed, noting that for wealth tax purposes, the asset must belong to the assessee on the valuation date. Since the right to receive the compensation was still under litigation, it could not be considered as belonging to the assessee. Therefore, the question of including the enhanced compensation and interest in the net wealth must also await the final decision in the pending appellate proceedings.

Conclusion:
The court concluded that the questions of law regarding the taxability of enhanced compensation and interest, as well as their inclusion in the net wealth, must await the final decision in the pending appellate proceedings under Section 31(2) of the Land Acquisition Act. The appeals were dismissed with no orders as to costs.

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