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Income Tax Act – Section 45(5) – compensation of land under sec.23 , 23 A, 28 & 34 of L.A.Act by brothers as legal heirs for the land of father – whether all the brothers can be considered as AoP and whether interest is also taxable and payable by spread over the period – A.O. held that the brothers as AoP not individuals & held that taxable is payable by the date of receipt of interest – High court consider them as Individuals but not A.o.P. and held that it should be spread over from the date of dispossession to till the date of actual payment – Apex court held that since the property came from inheritance but not by formation in to association of persons – the question of Association of Persons not applicable – for the second point – interest is not taxable as it is derived from business – so the interest paid under sec.34 of LA Act is not taxable but the interest paid under Sec.28 is a part of compensation and is liable to be taxed – tax is payable whenever received but not for a spread over period – allowed the appeal = CIVIL APPEAL NO(S). 8103/2009 COMMR.OF INCOME TAX,RAJKOT Appellant(s) VERSUS GOVINDBHAI MAMAIYA Respondent(s) = 2014 – Sept. Month – http://judis.nic.in/supremecourt/filename=41908

Income Tax Act – Section 45(5)  – compensation of land under sec.23 , 23 A, 28 & 34 of L.A.Act by brothers as legal heirs for the land of father – whether all the brothers can be considered as AoP and whether interest is also taxable and payable by spread over the period – A.O. held that the brothers as AoP not individuals & held that taxable is payable by the date of receipt of interest – High court consider them as Individuals but not AoP. and held that it should be spread over from the date of dispossession to till the date of actual payment – Apex court held that since the property came from inheritance but not by formation in to association of persons – the question of Association of Persons not applicable – for the second point – interest is not taxable as it is derived from business – so the interest paid under sec.34 of LA Act is not taxable but the interest paid under Sec.28 is a part of compensation and is liable to be taxed – tax is payable whenever received but not for a spread over period – allowed the appeal = 

The respondents are three brothers.  Their father  died  leaving

the land admeasuring 17 acres and 11 gunthas to the three brothers  and  two

other  persons  who  relinquished  their  rights  in  favour  of  the  three

brothers.  A part  of  this  bequeathed  land  was  acquired  by  the  State

Government and compensation was paid for it.  On  appeal,  the  compensation

amount was enhanced  and  additional  compensation  alongwith  interest  was

awarded.

3.           The  respondents  filed  their  return  of  income   for   each

assessment years claiming the status of ‘individual’. 

 Two  questions  arose for consideration before the Assessing Officer.

One was as to whether  these

three brothers could file  separate  returns  claiming  the  status  of  the

‘individual’ or they were to be treated as ‘Association of  Persons’  (AoP).

Second question was regarding the taxability of  the  interest  on  enhanced

compensation and this interest which was received in a particular  year  was

to be assessed in the year of receipt or it could be spread over the  period

of time.=

 

Assessing Officer had passed the assessment order by treating  their  status

as that of a AoP.  The Assessing Officer had  also  refused  to  spread  the

interest income over the years and treated it as  taxable  in  the  year  of

receipt.  

Ultimately, the High Court has decided that these persons  are  to

be given the status of ‘individual’ and assessed accordingly and not as  AoP

and that the interest  income  is  to  be  spread  over  from  the  year  of

dispossession of land, that is the assessment year 1987-88 till the year  of

actual payment which was received in the assessment year 1999-2000  applying

the principles of accrual of income.   

It  is  in  this  backdrop  that  the

Revenue has approached this Court  challenging  the  decision  of  the  High

Court.=

In the present case, the admitted  facts  are  that  the  property  in

question which was acquired by the Government, came to  the  respondents  on

inheritance from their father i.e. by the operation  of  law.

Furthermore,

even the income which is earned in the form of interest is  not  because  of

any business venture of the three assessees but it is the result of the  act

of the Government  in  compulsorily  acquiring  the  said  land.

In  these

circumstances, the case is squarely covered by the  ratio  of  the  judgment

laid down in Meera & Company (supra) inasmuch as it is not a case where  any

“Association of Persons” was formed by  volition  of  the  parties  for  the

purpose of generation of income.  

This basic test to  determine  the  status of AoP is absent in the present case.

7.    Insofar as the second question is concerned, that is also  covered  by

another judgment of this Court in Commissioner of Income Tax, Faridabad  vs.

Ghanshyam (HUF) reported in (2009) 8 SCC  412,  albeit,  in  favour  of  the

Revenue.

In that case, the court drew distinction

between  the  “interest” earned under Section 28 of the  Land  Acquisition  Act  and  the  “interest” which is under Section 34  of  the  said  Act.   

The  Court  clarified  that

whereas compensation given to the assessee of the  land  acquired  would  be

‘income’, the  enhanced compensation/consideration becomes income by  virtue

of Section 45(5)(b) of the Income Tax Act.

The  question  was  whether  it

will cover “interest” and if so, what would be the year of taxability.

The

position in this respect is explained in paras 49 and  50  of  the  judgment

which make the following reading:

“49. As discussed  hereinabove,

Section  23(1-A)  provides  for  additional

amount.  It takes care of the increase in the value at the rate of  12%  per

annum.

Similarly, under Section 23(2) of the 1894 Act there is a  provision

for solatium which also  represents   part  of  the  enhanced  compensation.

Similarly, Section  28  empowers  the  court  in  its  discretion  to  award

interest on the excess  amount  of  compensation  over  and  above  what  is

awarded by the Collector.

It includes additional amount under Section 23(1-

A) and solatium under Section 23(2) of the said  Act.

Section  28  of  the

1894 Act applies only in respect of the  excess  amount  determined  by  the

court after reference under Section 18 of the 1894  Act.

It  depends  upon

the claim, unlike interest under section 34 which depends on undue delay  in

making the award.

50. It is true that “interest” is not  compensation.   

It  is  equally  true

that Section  45(5)  of  the  1961  Act  refers  to  compensation.

But  as

discussed hereinabove, we have to go by  the  provisions  of  the  1894  Act

which awards “interest” both as an accretion  in  the  value  of  the  lands

acquired and interest for undue delay.

Interest  under  Section  28  unlike

interest under Section 34 is an accretion to the value, hence it is  a  part

of enhanced compensation  or  consideration  which  is  not  the  case  with

interest under Section 34 of the 1894 Act.  

So also additional amount  under

Section 23 (1-A) and solatium under Section 23(2)  of  the  1961  Act  forms

part of enhanced compensation under Section 45(5)(b) of the 1961 Act.

8.          It is clear from the above that whereas interest  under  Section

34 is not treated as a part of income subject to tax,

the  interest  earned

under Section 28, which  is  on  enhanced  compensation,  is  treated  as  a

accretion to the value and therefore, part of the enhanced  compensation  or

consideration making it exigible to tax.

After  holding  that  interest  on

enhanced compensation under Section 28 of 1894 Act  is  taxable,  the  Court

dealt with the other aspect namely,

the  year  of  tax  and  answered  this

question by holding that it has to be tested on receipt basis,  which  means

it would be taxed in the year in which it is received.  

It would  mean  that

converse position i.e. spread over of this interest on accrual basis is  not

permissible.

Here  again,  we  would  like  to  reproduce  the  discussion

contained in paras 53 and 54 which  gives the  rational  in  coming  to  the

said conclusion.  Paras 53 and 54 read as under:

“53.  The scheme of Section 45(5) of the 1961 Act was inserted  w.e.f.  1-4-

1988 as an overriding provision.  As stated above,  compensation  under  the

L.A.Act, 1894, arises and is payable  in  multiple  stages  which  does  not

happen in cases of transfers by sale, etc.

Hence, the  legislature  had  to

step in and say that as and when the assessee  claimant  is  in  receipt  of

enhanced compensation it shall be treated as “deemed income”  and  taxed  on

receipt basis.

Our above understanding is supported by insertion of  clause

(c) in Section 45(5) w.e.f. 1-4-2004 and Section 155(16) which refers  to  a

situation of  a  subsequent  reduction  by  the  court,  tribunal  or  other

authority and recomputation/ amendment of the assessment order.

54. Section 45 (5) read as a whole [including clause  (c)]  not  only  deals

with reworking as urged on behalf of the assessee but also with  the  change

in the full value of the consideration (computation) and since the  enhanced

compensation/consideration (including interest under Section 28 of the  1894

Act) becomes payable/ paid under the  1894  Act  at  different  stages,  the

receipt of such enhanced compensation/ consideration is to be taxed  in  the

year of receipt subject to adjustment, if any, under Section 155(16) of  the

1961 Act, later on.

Hence, the  year  in  which  enhanced  compensation  is received is the year of  taxability.   Consequently,  even  in  cases  where

pending  appeal,  the  court/tribunal/authority  before  which   appeal   is

pending, permits the claimant to withdraw against security or otherwise  the

enhanced compensation (which is in dispute), the same is liable to be  taxed

under Section 45(5) of the 1961 Act.

This is the scheme  of  Section  45(5)

and Section 155(16) of the 1961 Act.  We may clarify that  even  before  the

insertion of Section 45(5)(c)  and  Section  155(16)  w.e.f.  1-4-2004,  the

receipt of enhanced compensation under Section 45(5)(b) was taxable  in  the

year of receipt which is only reinforced by insertion of clause (c)  because

the right to receive payment under the 1894 Act is not in doubt.”

0.    In view of the above discussion, we allow these appeals  in  part  and

set aside that portion of the impugned judgment of the  High  Court  whereby

spread over of the interest received under section 28 of the  1894  Act,  on

the enhanced income is allowed with the direction that it would be taxed  in

the year in which such interest on enhanced compensation was received.

2014 – Sept. Month – http://judis.nic.in/supremecourt/filename=41908

Non-Reportable
IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S). 8103/2009

COMMR.OF INCOME TAX,RAJKOT Appellant(s)

VERSUS

GOVINDBHAI MAMAIYA Respondent(s)
WITH
CIVIL APPEAL No. 8104/2009
CIVIL APPEAL No. 8105/2009
CIVIL APPEAL No. 8106/2009
CIVIL APPEAL No. 8107/2009
CIVIL APPEAL No. 8108/2009
CIVIL APPEAL No. 8109/2009
CIVIL APPEAL No. 8110/2009
J U D G M E N T
A.K. SIKRI, J.
The question of law that arises for consideration in all these
appeals which are filed by the Commissioner of Income Tax, Rajkot
(hereinafter referred to as the ‘Revenue’) is common. The respondents in
all these appeals are also common. The three respondents (hereinafter
referred to as the ‘assessee’) are brothers. The issue raised is identical
in all these appeals which pertains to different assessment years and that
is the reason that there are eight appeals before us. For the sake of
convenience, we will refer to the facts emerging from the records of Civil
appeal No.8103 of 2009.

2. The respondents are three brothers. Their father died leaving
the land admeasuring 17 acres and 11 gunthas to the three brothers and two
other persons who relinquished their rights in favour of the three
brothers. A part of this bequeathed land was acquired by the State
Government and compensation was paid for it. On appeal, the compensation
amount was enhanced and additional compensation alongwith interest was
awarded.

3. The respondents filed their return of income for each
assessment years claiming the status of ‘individual’. Two questions arose
for consideration before the Assessing Officer. One was as to whether these
three brothers could file separate returns claiming the status of the
‘individual’ or they were to be treated as ‘Association of Persons’ (AoP).
Second question was regarding the taxability of the interest on enhanced
compensation and this interest which was received in a particular year was
to be assessed in the year of receipt or it could be spread over the period
of time.

4. Without going into the detail as to how this question traversed
and decided by one forum to other, suffice it is to state that the
Assessing Officer had passed the assessment order by treating their status
as that of a AoP. The Assessing Officer had also refused to spread the
interest income over the years and treated it as taxable in the year of
receipt. Ultimately, the High Court has decided that these persons are to
be given the status of ‘individual’ and assessed accordingly and not as AoP
and that the interest income is to be spread over from the year of
dispossession of land, that is the assessment year 1987-88 till the year of
actual payment which was received in the assessment year 1999-2000 applying
the principles of accrual of income. It is in this backdrop that the
Revenue has approached this Court challenging the decision of the High
Court.

5. Insofar as the treatment of the respondents giving the status of
‘individual’ and assessing on that basis is concerned, the issue is no more
res integra. Learned counsel for the Revenue candidly and fairly conceded
that this aspect stands conclusively determined by various judgments. It
would be suffice to refer to the judgment of this Court in Meera and
Company, Ludhiana vs. Commissioner of Income Tax, Punjab, J & K and
Chandigarh, Patiala reported in (1997) 4 SCC 677. After taking note of
some previous judgments on this issue, the Court summed up the legal
position in paras 19 and 20 which are reproduced below::
“19. In the case of CIT v. Indira Balkrishna, AIR 1960 SC 1172, this Court
held that “association of persons” meant an association in which two or
more persons joined in a common purpose or common action. As the words
occurred in a section which imposed a tax on income, the association must
be one the object of which was to produce income, profits or gains. In
that case, the co-widows of a Hindu governed by Mitakshara law inherited
his estate which consisted of immovable properties, shares, money lying in
deposit and a share in a registered firm. The Appellate Tribunal found that
they had not exercised their right to separate enjoyment and that except
for jointly receiving the dividends from the shares and the interest from
the deposits, they had done no act which had helped to produce income. This
Court held that the co-widows succeeded as co-heirs to the estate of the
deceased husband. It was held that since the widows had an equal share in
the income from immovable properties, Section 9(3) of the Indian Income Tax
Act, 1922 will apply. So far as other incomes were concerned, it was held:

“Coming back to the facts found by the Tribunal, there is no finding that
the three widows have combined in a joint enterprise to produce income.
The only finding is that they have not exercised their right to separate
enjoyment, and except for receiving the dividends and interest jointly, it
has been found that they have done no act which has helped to produce
income in respect of the shares and deposits. On these findings it cannot
be held that the three widows had the status of an association of persons
within the meaning of section 3 of the Indian Income Tax Act.”

20. The meaning of “an association of persons” was also examined by this
Court in the case of G. Murugesan & Brothers v. CIT, (1973) 4 SCC 211. It
was held in that case that an association of persons could be formed only
when two or more individuals voluntarily combined together for certain
purposes. Volition on the part of the members of the association was an
essential ingredient. It was further held that even a minor could join “an
association of persons” if his lawful guardian gave his consent. The income
in that case arose under two heads – house property and dividends from
shares. The question before this Court was whether the dividend income
should be assessed in the hand of an association of persons or individuals.
One Sinnamani Nadar executed a settlement deed in favour of his four
grandsons. The property covered by the settlement deed comprised of a house
property which had been let out and some shares. The donees were to enjoy
the income of these properties during their lifetime. Thereafter, the
properties were to devolve on their children. In that case, it was pointed
out that Income Tax return was filed in the status of association of
persons prior to the assessment year 1959-60 to 1962-63, the returns were
submitted as individuals specifically stating that the donees were not
functioning as an association of persons.”

6. In the present case, the admitted facts are that the property in
question which was acquired by the Government, came to the respondents on
inheritance from their father i.e. by the operation of law. Furthermore,
even the income which is earned in the form of interest is not because of
any business venture of the three assessees but it is the result of the act
of the Government in compulsorily acquiring the said land. In these
circumstances, the case is squarely covered by the ratio of the judgment
laid down in Meera & Company (supra) inasmuch as it is not a case where any
“Association of Persons” was formed by volition of the parties for the
purpose of generation of income. This basic test to determine the status
of AoP is absent in the present case.

7. Insofar as the second question is concerned, that is also covered by
another judgment of this Court in Commissioner of Income Tax, Faridabad vs.
Ghanshyam (HUF) reported in (2009) 8 SCC 412, albeit, in favour of the
Revenue. In that case, the court drew distinction between the “interest”
earned under Section 28 of the Land Acquisition Act and the “interest”
which is under Section 34 of the said Act. The Court clarified that
whereas compensation given to the assessee of the land acquired would be
‘income’, the enhanced compensation/consideration becomes income by virtue
of Section 45(5)(b) of the Income Tax Act. The question was whether it
will cover “interest” and if so, what would be the year of taxability. The
position in this respect is explained in paras 49 and 50 of the judgment
which make the following reading:

“49. As discussed hereinabove, Section 23(1-A) provides for additional
amount. It takes care of the increase in the value at the rate of 12% per
annum. Similarly, under Section 23(2) of the 1894 Act there is a provision
for solatium which also represents part of the enhanced compensation.
Similarly, Section 28 empowers the court in its discretion to award
interest on the excess amount of compensation over and above what is
awarded by the Collector. It includes additional amount under Section 23(1-
A) and solatium under Section 23(2) of the said Act. Section 28 of the
1894 Act applies only in respect of the excess amount determined by the
court after reference under Section 18 of the 1894 Act. It depends upon
the claim, unlike interest under section 34 which depends on undue delay in
making the award.

50. It is true that “interest” is not compensation. It is equally true
that Section 45(5) of the 1961 Act refers to compensation. But as
discussed hereinabove, we have to go by the provisions of the 1894 Act
which awards “interest” both as an accretion in the value of the lands
acquired and interest for undue delay. Interest under Section 28 unlike
interest under Section 34 is an accretion to the value, hence it is a part
of enhanced compensation or consideration which is not the case with
interest under Section 34 of the 1894 Act. So also additional amount under
Section 23 (1-A) and solatium under Section 23(2) of the 1961 Act forms
part of enhanced compensation under Section 45(5)(b) of the 1961 Act.”

8. It is clear from the above that whereas interest under Section
34 is not treated as a part of income subject to tax, the interest earned
under Section 28, which is on enhanced compensation, is treated as a
accretion to the value and therefore, part of the enhanced compensation or
consideration making it exigible to tax. After holding that interest on
enhanced compensation under Section 28 of 1894 Act is taxable, the Court
dealt with the other aspect namely, the year of tax and answered this
question by holding that it has to be tested on receipt basis, which means
it would be taxed in the year in which it is received. It would mean that
converse position i.e. spread over of this interest on accrual basis is not
permissible. Here again, we would like to reproduce the discussion
contained in paras 53 and 54 which gives the rational in coming to the
said conclusion. Paras 53 and 54 read as under:

“53. The scheme of Section 45(5) of the 1961 Act was inserted w.e.f. 1-4-
1988 as an overriding provision. As stated above, compensation under the
L.A.Act, 1894, arises and is payable in multiple stages which does not
happen in cases of transfers by sale, etc. Hence, the legislature had to
step in and say that as and when the assessee claimant is in receipt of
enhanced compensation it shall be treated as “deemed income” and taxed on
receipt basis. Our above understanding is supported by insertion of clause
(c) in Section 45(5) w.e.f. 1-4-2004 and Section 155(16) which refers to a
situation of a subsequent reduction by the court, tribunal or other
authority and recomputation/ amendment of the assessment order.

54. Section 45 (5) read as a whole [including clause (c)] not only deals
with reworking as urged on behalf of the assessee but also with the change
in the full value of the consideration (computation) and since the enhanced
compensation/consideration (including interest under Section 28 of the 1894
Act) becomes payable/ paid under the 1894 Act at different stages, the
receipt of such enhanced compensation/ consideration is to be taxed in the
year of receipt subject to adjustment, if any, under Section 155(16) of the
1961 Act, later on. Hence, the year in which enhanced compensation is
received is the year of taxability. Consequently, even in cases where
pending appeal, the court/tribunal/authority before which appeal is
pending, permits the claimant to withdraw against security or otherwise the
enhanced compensation (which is in dispute), the same is liable to be taxed
under Section 45(5) of the 1961 Act. This is the scheme of Section 45(5)
and Section 155(16) of the 1961 Act. We may clarify that even before the
insertion of Section 45(5)(c) and Section 155(16) w.e.f. 1-4-2004, the
receipt of enhanced compensation under Section 45(5)(b) was taxable in the
year of receipt which is only reinforced by insertion of clause (c) because
the right to receive payment under the 1894 Act is not in doubt.”
0. In view of the above discussion, we allow these appeals in part and
set aside that portion of the impugned judgment of the High Court whereby
spread over of the interest received under section 28 of the 1894 Act, on
the enhanced income is allowed with the direction that it would be taxed in
the year in which such interest on enhanced compensation was received.
…………………….J.
[ J. CHELAMESWAR ]
………………………J.
[ A.K. SIKRI ]
NEW DELHI
SEPTEMBER 04, 2014

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