Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the ITO was not competent to bring to tax the capital gains for the asst. yr. 1973-74 on the ground that the lands vested in the Government prior to the assessment year under consideration ?

Counsel Appeared

M. Suryanarayana Murthy, for the Revenue : Mohd. Imtiaz, for the Assessee

Y.V. ANJANEYULU J.:

This reference made by the Tribunal for the income-tax asst. yr. 1973-74 is at the instance of the Revenue. Two questions are referred for the consideration of this Court. They are :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the ITO was not competent to bring to tax the capital gains for the asst. yr. 1973-74 on the ground that the lands vested in the Government prior to the assessment year under consideration ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the interest has to be assessed on accrual basis ? “

2. Lands in survey Nos. 30, 43 and 72 situated at Bakshiguda were acquired under the Land Acquisition Act. The total extent was 35 acres 25 guntas. Invoking the provisions of s. 17 of the Land Acquisition Act, possession of the lands was taken on 12th Jan., 1967. Thereafter, award proceedings continued and an award was passed on 2nd Nov., 1970, according to which the compensation payable was Rs. 1,500 per acre. Before the Land Acquisition Officer, there was also a dispute regarding the persons to whom the compensation was payable. Aggrieved by the quantum of compensation awarded, an application for reference under s. 18 of the Land Acquisition Act was also filed. Consequently, the Land Acquisition Officer made two references to the civil Court, one under s. 30 and the other under s. 18 of the Land Acquisition Act. These two references were determined by compromise in the previous year relevant to the asst. yr. 1973-74. Pursuant to the compromise, the assessee received the compensation as enhanced. The question that arose for consideration was the assessment of capital gains arising on the acquisition of lands. The ITO felt that the capital gain arising on the transfer of the lands has to be assessed for the asst. yr. 1973-74 inasmuch as the compromise took place in the Court of the Subordinate Judge in the previous year relevant to that assessment year. In that view, he determined the capital gain at Rs. 2,27,338 and included it in the income of the assessee for the asst. yr. 1973-74. Interest at Rs. 8,256 was also paid to the assessee under s. 34 of the Land Acquisition Act. This interest related to the period from the date of possession to the date of payment. This interest was also included in the total income relevant to the asst. yr. 1973-74, The assessee questioned the correctness of the above assessment. According to the assessee, the transfer of the lands took place in the previous year relevant to the asst. yr. 1967-68 and consequently capital gain was not liable to be taxed for the year 1973-74. It was further claimed that the interest paid under s. 34 of the Land Acquisition Act was mandatory and not discretionary and, consequently, it was liable to be taxed from year to year and the assessment of the interest for the asst. yr. 1973-74 was also erroneous. The assessee filed an appeal before the AAC raising the above contentions. The AAC accepted the contention that the capital gain is not liable to be taxed in the asst. yr. 1973-74 but has to be considered in the assessment for the year 1967-68. In that view, he has deleted from the assessment the capital gain of Rs. 2,27,338. As far as the interest is concerned, the AAC thought that the matter was covered by a decision of this Court in CIT vs. Smt. Sankari Manickyamma (1976) 105 ITR 172 (AP) : TC39R.669. In that view, he upheld the assessment of the interest.

3. Both the Revenue and the assessee filed appeals before the Tribunal, the Revenue contending that the capital gain was liable to be assessed for the asst. yr. 1973-74 and the assessee contending that the entire interest was not liable to be taxed for the asst. yr. 1973-74. These two appeals were disposed of by the Tribunal by a common order. The Tribunal upheld the order of the AAC to the effect that the capital gain was not liable to be assessed in the previous year relevant to the asst. yr. 1973-74 inasmuch as the transfer had taken place when possession of the land was taken on 12th Jan., 1967, which fell in the asst. yr. 1967-68. As regards the assessment of interest, the Tribunal upheld the assessee’s contention that it is not liable to be taxed in the assessment for the year 1973-74 inasmuch as the interest under consideration was not paid under s. 28 of the Land Acquisition Act but was payable under s. 34 of the Act. It was pointed out that as far as the interest under s. 34 was concerned, the assessee has a right to receive the same from year to year from the date of possession to the date of payment and, therefore, the legal right to receive the interest accrues in favour of the assessee from year to year with the result that interest has to be assessed for the corresponding years to which it related. The Tribunal pointed out that the interest which was the subject-matter of the assessment in Sankari Manickyamma’s case (supra) was under s. 28 of the Land Acquisition Act. Inasmuch as the grant of interest under s. 28 was discretionary, the view taken was that the interest accrues as income only when the Court exercises the discretion and not before. The Tribunal held that that principle does not apply to the interest payable under s. 34 of the Land Acquisition Act. In that view, the assessee’s contention regarding the non-assessability of the interest has also been upheld by the Tribunal. Aggrieved by the aforesaid order of the Tribunal, the Revenue is in reference before this Court, as already observed.

4. Sec. 45 of the IT Act clearly lays down that capital gains arising on the transfer of an asset is liable to be taxed for the year in which the transfer took place. Thus, the statute itself determined the year of assessment so far as capital gain is concerned and the parties cannot be in dispute on this matter. The only question that has to be considered is as to when the transfer took place. Admittedly, possession of the lands in this case was taken on 12th Jan., 1967, by invoking the urgency provisions contained in s. 17 of the Land Acquisition Act. Sec. 17 itself provides that the moment possession is taken, the lands vest in the Government free from all encumbrances. Thus, the vesting of the lands acquired took place in January, 1967 and that renders capital gain liable for assessment for the year 1967-68. It is not possible for the Revenue to shift the assessment of capital gain to a year other than the one fixed by s. 45 of the IT Act on the ground that the assessee had been bargaining for enhancement of compensation and that reference was settled only subsequently in the year 1972-73 corresponding to the income- tax asst. yr. 1973-74. Having regard to this legal position, we find that the AAC as well as the Tribunal were quite justified in coming to the conclusion that the capital gain on the compulsory acquisition of the lands is not liable to be taxed in the assessment for the year 1973-74. We accordingly answer the first question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue.

5. As regards the second question, there cannot be the slightest doubt, on the above facts, that the interest paid to the assessee was under s. 34 of the Land Acquisition Act. Payment of such interest is statutory and not discretionary. That being so, the right to receive that interest accrues in favour of the assessee from year to year and the assessments will have to be made accordingly from year to year. The proposition is elementary and if support should be shown to this proposition, it will be found in CIT vs. V. Janardhan Reddy (1984) 39 CTR (AP) 73 : (1984) 145 ITR 303 (AP) : TC39R.667. It would appear from the record that no part of the interest received by the assessee related to the asst. yr. 1973-74. Consequently, the Tribunal was justified in directing the exclusion of the interest from the assessment. We accordingly answer the second question referred to us also in the affirmative, that is, in favour of the assessee and against the Revenue.

In the result, both the questions are answered in favour of the assessee and against the Revenue. There shall be no order as to costs.

[Citation : 172 ITR 592]