High Court Of Punjab & Haryana
CIT vs. Smt. Parkash Kaur & Ors.
Section 45(5)(b), 145, 155(7A), 292B
Asst. Year 1985-86
Adarsh Kumar & Ajay Kumar Mittal, JJ.
IT Ref. No. 114 of 2009
9th September, 2010
Counsel Appeared : Rajesh Katoch, for the CIT : None, for the Assessee
JUDGMENT
Ajay Kumar Mittal, J. :
The controversy herein is basically between the assessee, Chanan Singh and the Revenue pertaining to the asst. yr. 1985-86. Chanan Singh having died, his legal heirs, i.e., Parkash Kaur, wife and two daughters, namely, Parvinder Kaur and Jatinder Kaur are on record in his place. Reference in this judgment will, however, be made by indicating assessee only.
2. In this reference filed under s. 256(1) of the IT Act, 1961 (for short “the Act'”) the Income-tax Appellate Tribunal, Amritsar Bench Amritsar, (in short “the Tribunal”) vide order dt. 26th March, 1999, passed in Reference Appln. No. 142/Asr/1998 arising out of ITA No. 242/Asr/1992) at the instance of the Revenue, in respect of asst. yr. 1985-86, has referred the following question of law, for the opinion of this Court :
“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in not upholding theassessment of enhanced compensation and interest received by the assessee under the general provisions of the IT Act, even if the provisions of the s. 45(5)(b) were not specifically applicable ?”
3. In brief, the facts of the case are that some land of the father of the assessee, Chanan Singh (deceased), now represented through his legal heirs, was acquired by the defence authorities on 4th Feb., 1972. Compensation for the land was paid. At a later point of time, the amount of compensation was enhanced from Rs. 1,09,364 to Rs. 11,49,885 plus solatium amounting to Rs. 2,99,970 and interest amounting to Rs. 21,67,552. The assessee received a sum of Rs. 4,87,795 on 28th May, 1984. In response to notice issued under s. 148 of the Act, return was filed showing an income of Rs. 3,800, under the head “interest” on accrual basis. The AO worked out the capital gains on the receipt of enhanced compensation and made an addition of Rs. 2,89,678. The assessee aggrieved by the addition, preferred appeal before the Commissioner of Income-tax (Appeal) [in short “CIT(A)”]. The CIT(A) held that sub-s. (5) of s. 45 was introduced, w.e.f. 1st April, 1988 and it did not have retrospective effect, and thus, the AO fell in error in making the addition for the asst. yr. 1985-86 under s. 45(5)(b). He further held in clear terms that since subs. (5) was not on the statute book for the asst. yr. 1985-86, the addition made to the tune of Rs. 2,89,678 on account of capital gain on the basis of the enhanced compensation received on May 28, 1984 could not be sustained. The CIT(A) accordingly deleted the addition made by the AO. So far as the objection raised on behalf of the assessee that notice under s. 148 of the Act was invalid, the CIT(A) held that the same was not sustainable in law in view of the provisions of s. 292B of the Act.
The Revenue filed appeal before the Tribunal. The Tribunal also did not agree with the submissions made by the Revenue and accordingly dismissed the appeal vide order dt. 30th July, 1998.
We have heard learned counsel for the petitioner and have perused the record. A perusal of the question referred shows that the amount received by the assessee had components of enhanced compensation and also of interest. The question referred requires answer to the following issues :
(i) Whether the amount of enhanced compensation received is exigible to capital gain tax under the provisions of the Act ?
(ii) The method of accountancy adopted by the assessee. (iii) Whether the interest received is liable to be taxed in the light of method of accountancy followed by the assessee ?
7. Taking up the issue regarding taxability of enhanced compensation, the legal position may be analysed.
8. Sec. 45 of the Act is attracted where there is a transfer of a capital asset. Sub-sec. (1) thereof provides that any profits or gains arising on transfer of a capital asset is exigible to capital gain tax. In other words, in order to bring the income within the ambit of tax under the head “Capital gains”, some profits or gains must arise on the transfer of capital asset. The ingredients for chargeability to capital gains tax are :
(i) the existence of a capital asset owned by the assessee,
(ii) transfer of capital asset during the previous year,
(iii) arising of profits or gains from such transfer,
(iv) such profits or gains must accrue or arise to the assessee.
In the present case, it is an admitted fact that the land was acquired on 4th Feb., 1972 relating to the asst. yr. 1972-73. Now, the point that is to be adjudicated is whether the subsequent amount which has been received in later year by the assessee as enhanced or additional compensation would be taxable as capital gains relating to the year of acquisition/transfer of capital asset, i.e., the asst. yr. 1972-73 or in the year of receipt, viz. the asst. yr. 1985-86.
Learned counsel for the Revenue referred to the provisions of s. 45(5)(b) of the Act read with Expln. (ii) thereto, and in the alternative s. 155(7A) of the Act so as to bring the case of the assessee regarding receipt of enhanced compensation chargeable to capital gains tax. We do not find any force in the contention of the learned counsel. Sec. 45(5)(b) of the Act relates to receipt of additional or enhanced compensation subsequent to the year of acquisition/transfer. According to it, the enhanced compensation is taxable in the year of receipt. Sec. 45(5) was inserted by Finance Act 1987, w.e.f. 1st April, 1988 and, therefore, applies to the asst. yr. 1988-89 and subsequent thereto. Reference may be made to Expln. (ii) as well which deals with acquisition relating to period earlier to its insertion. The only harmonious construction that can be placed on it shall be that it applies to those cases where the acquisition may be of earlier years but the compensation is received subsequent to the insertion of s. 45(5), i.e., after 1st April, 1988. The said sub-section or the Explanation, therefore, does not apply in the present case. Reference to s. 155(7A) is equally essential before it can be finally concluded regarding taxability of receipt of enhanced compensation in the present case. According to the said provision, the AO could rectify any assessment where subsequently additional or enhanced amount of compensation was received. The period of four years was to be reckoned from the end of the previous year in which the additional compensation or consideration was received by the assessee. Sub-sec. (7A) was incorporated in s. 155 by Finance Act, 1978 retrospectively, w.e.f. 1st April, 1974 and was omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1998. The assessee would not be covered under this provision as the assessment year involved is 1972- 73 and further the assessee had not filed any return for the said year which could be rectified. Therefore, the enhanced compensation would not be exigible to tax either in the year of receipt, i.e., the asst. yr. 1985-86 or in the year of acquisition/transfer of capital asset i.e., the asst. yr. 1972-73. Adverting to the second limb regarding interest, it may be noticed that there are two types of interest. One is awarded under s. 28 of the Land Acquisition Act, 1894 (in short “1894 Act”) and the other is under s. 34 of the 1894 Act. In so far as interest under s. 28 of the 1894 Act is concerned, the same partakes of the character of compensation and would be governed by the aforesaid principle for levy of capital gain tax as held in CIT vs. Ghanshyam (HUF) (2009) 224 CTR (SC) 522 : (2009) 26 DTR (SC) 129 : (2009) 315 ITR 1 (SC) by the apex Court. However, for determining whether interest under s. 34 of the 1894 Act is liable to be taxed in the year of receipt, the basic question for determination would be the method of accountancy which was being followed by the assessee.
16. We examine the concerned provision first. Sec. 145 of the Act relates to method of accounting. Originally enacted, s. 145 provided that income under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with the method of accounting regularly followed by an assessee. Accordingly the assessee was entitled to choose any one of the following systems of accountancy : (a) cash or receipts system; or (b) mercantile or accrual system; or (c) mixed or hybrid system.
Under the cash system of accountancy, the assessee is liable to pay tax on the income on the basis of cash receipts during the year under consideration whereas under the mercantile system of accountancy, the liability of an assessee is determined according to accrual of the income relating to the assessment year in question. Hybrid system is mixed system of accountancy where the assessee for any particular source of income could adopt cash or mercantile system of accounting, but in no case, he could employ for the part of the transactions or events different system of accountancy relating to one source of income. However, the amendment of s. 145 of the Act by the Finance Act 1995 w.e.f. 1st April, 1997 relating to asst. yr. 1997-98 and subsequent years shall not affect the decision of the present case.
In case, the assessee was following mercantile/accrual basis, the same would be discernible from earlier years returns where the assessee would have shown the income on account of interest that might have accrued in those years. Otherwise, it shall be treated that cash/receipt basis is the only method which is being adopted by the assessee. Even under the hybrid system of accountancy, the assessee is required to follow either mercantile or cash system in respect of this source of income. There is nothing on record to suggest that the assessee had been declaring interest income on yearly accrual basis, therefore, it shall be taken that the assessee had been following cash system only. Once that is so, then the interest received during the asst. yr. 1985-86 cannot escape from income tax.
In view of the above, the reference is answered accordingly.
[Citation : 330 ITR 332]
