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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