ITR No. 114 of 1999 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITR No. 114 of 1999 Date of Decision: 9.9.2010 The Commissioner of Income-Tax, Ludhiana ...Petitioner Versus Smt. Parkash Kaur and others ...Respondents. CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present: Mr. Rajesh Katoch, Central Govt. Standing Counsel for the petitioner. None for the respondent. AJAY KUMAR MITTAL, J. The controversy herein is basically between assessee, Chanan Singh and the Revenue pertaining to the assessment year 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. In this reference filed under Section 256(1) of the Income- tax Act, 1961 (for short “the Act’”) the Income Tax Appellate Tribunal, Amritsar Bench Amritsar, (in short “the Tribunal”) vide order dated 26.3.1999, passed in Reference Application No. 142(ASR)/1998 arising out of ITA No. 242(ASR/1992) at the instance of the Revenue, in ITR No. 114 of 1999 -2- respect of assessment year 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 Income-tax Appellate Tribunal was right in law in not upholding the assessment of enhanced compensation and interest received by the assessee under the general provisions of the Income-tax Act, even if the provisions of the section 45(5)(b) were not specifically applicable?” 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 Defence Authorities on 4.2.1972. Compensation for the land was paid. At a later point of time, the amount of compensation was enhanced from Rs. 1,09,364/- to 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 28.5.1984. In response to notice issued under Section 148 of the Act, return was filed showing an income of Rs. 3,800/-, under the head “interest” on accrual basis. The assessing officer 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 (Appeals) {in short “CIT(A)”}. The CIT(A) held that sub-section (5) of Section 45 was introduced w.e.f. 1.4.1988 and it did not have retrospective effect, and thus, the assessing officer fell in error in making the addition for the assessment year 1985-86 under Section 45(5)(b). It further held in ITR No. 114 of 1999 -3- clear terms that since sub-section (5) was not on the statute book for the assessment year 1985-86, the addition made to the tune of Rs. 2,89,678/- on account of capital gain on the basis of enhanced compensation received on 28.5.1984 could not be sustained. The CIT (A) accordingly deleted the addition made by the assessing officer. So far as the objection raised on behalf of the assessee that notice under Section 148 of the Act was invalid, the CIT(A) held that the same was not sustainable in law in view of the provisions of Section 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 dated 30.7.1998. 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 component 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? ITR No. 114 of 1999 -4- Taking up the issue regarding taxability of enhanced compensation, the legal position may be analyzed. Section 45 of the Act is attracted where there is a transfer of a capital asset. Sub-section (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 4.2.1972 relating to assessment year 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. assessment year 1972-73 or in the year of receipt, viz. assessment year 1985-86. Learned counsel for the revenue referred to the provisions of Section 45(5)(b) of the Act read with Explanation (ii) thereto, and in ITR No. 114 of 1999 -5- the alternative Section 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. Section 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. Section 45(5) was inserted by Finance Act 1987 w.e.f 1.4.1988 and, therefore, applies to assessment year 1988-89 and subsequent thereto. Reference may be made to Explanation (ii) as well which deals with acquisition relating to period earlier to its insertion. 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 insertion of Section 45(5), i.e. after 1.4.1988. The said sub-section or the explanation, therefore, does not apply in the present case. Reference to Section 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 Assessing Officer could rectify any assessment where subsequently additional or enhanced amount of compensation was received. The period of four year was to be reckoned from the end of the previous year in which the additional compensation or consideration was received by the assessee. Sub-section (7A) was incorporated in Section 155 by Finance Act, 1978 retrospectively w.e.f. 1.4.1974 and ITR No. 114 of 1999 -6- was omitted by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1998. 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, enhanced compensation would not be exigible to tax either in the year of receipt, i.e. assessment year 1985-86 or in the year of acquisition/ transfer of capital asset i.e. assessment year 1972-73. Adverting to second limb regarding interest, it may be noticed that there are two types of interest. One is awarded under Section 28 of the Land Acquisition Act,1894 (in short “1894 Act”) and the other is under Section 34 of the 1894 Act. In so far as interest under Section 28 of 1894 Act is concerned, the same partakes the character of compensation and would be governed by the aforesaid principle for levy of capital gain tax as held in CIT v. Ghanshyam Dass, [2009] 315 ITR 1 by the Apex Court. However, for determining whether interest under Section 34 of 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. We examine the concerned provision first. Section 145 of the Act relates to method of accounting. Originally enacted, Section 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 system of accountancy:- (a) cash or receipts system; or ITR No. 114 of 1999 -7- (b) mercantile or accrual system; or (c) mixed or hybrid system. Under 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 Section 145 of the Act by Finance Act 1995 with effect from 1.4.1997 relating to assessment year 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 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 ITR No. 114 of 1999 -8- system only. Once that is so, then the interest received during the assessment year 1985-86 cannot escape from income tax. In view of the above, the reference is answered accordingly. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) September 9, 2010 JUDGE rkmalik/gbs