Income-Tax Appeal No. 209 of 2004 1 IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH. --- Income-Tax Appeal No. 209 of 2004 Date of Decision: 27.10.2010 The Commissioner of Income Tax, Faridabad --- Appellant Versus Bir Singh (HUF), Ballabgarh --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL. --- PRESENT:Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant-Revenue. None for the respondent. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-tax Act, 1961 (for short “the Act’”) has been filed by the Revenue against the order dated 19.1.2004, passed by the Income Tax Appellate Tribunal, Bench ‘SMC-1’, Delhi (in short “the Tribunal”) in Income-tax Appeal No. 452/Del/2001, relating to assessment year 1997-98, claiming the following substantial questions of law for determination by this Court: 1- Whether the Hon’ble ITAT was justified in applying the ratio, laid down in the case of CIT Vs. Hindustan Housing & Land Development Trust Limited to the present case even after insertion of Section 45(5) in Income-Tax Appeal No. 209 of 2004 2 the Income Tax Act specifically for charging of enhanced compensation in the year of receipt? 2- Whether the Hon’ble ITAT was justified in holding that neither additional compensation nor interest accrued or received thereon can be taxed unless it attains finality from the High Court in spite of the fact that the additional compensation as well as the interest has actually been received by the assessee? 2. Briefly stated the facts of the case necessary for adjudication as narrated in the appeal are that the respondent- assessee received some amount of enhanced compensation in respect of the land acquired under the Land Acquisition Act, 1894 (for short “the 1894 Act”). It was claimed that the said amount and the interest accrued thereon were not taxable as the amount so received was not final and was still in dispute, and the same had been ordered to be paid on furnishing a security. The plea of the assessee was not accepted by the assessing officer on the ground that the amount by which the quantum of compensation was enhanced or would be enhanced in future by the court shall be deemed to be the income, chargeable under the head ‘capital gains’ of the previous year in which such amount was received. 3. The assessee filed appeal before the Commissioner of Income Tax (Appeals), [hereinafter referred to as “CIT(A)”]. The CIT (A) directed that the income from capital gains and the interest received by the assessee be charged in the year of receipt and the Income-Tax Appeal No. 209 of 2004 3 percentage of capital gains arising out of payment, covered by the security should not be treated as income for the year but the remaining amount which was not covered by the security should be treated as income for the year and charged to tax under the head ‘capital gains’. The CIT(A) further directed that deductions under Sections 54B and 54F of the Act be allowed from the date of actual receipt of the enhanced amount of compensation. The Revenue filed appeal against the order of the CIT(A) before the Tribunal which was dismissed by order dated 19.1.2004. 4. This is how the Revenue is again in appeal before this Court. 5. We have heard learned counsel for the appellant and perused the record. 6. Learned counsel for the appellant-Revenue submitted that the enhanced compensation that was received by the assessee was taxable in the year of receipt. Learned counsel further submitted that any interest which had been paid to the assessee on account of delayed payment was also taxable in the hands of the assessee under the head ‘income from other sources’ in the year of receipt. The counsel, thus, urged that the Tribunal had erred in affirming the order of the CIT(A). In support of her submissions, learned counsel referred to the judgment of the Supreme Court in Commissioner of Income-tax v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC). 7- In so far as the question of receipt of enhanced compensation is concerned, the same stands concluded in favour of Income-Tax Appeal No. 209 of 2004 4 the Revenue by the decision of the apex Court in Ghanshyam (HUF)’s case (supra). 8. Section 45(5) of the Act was inserted by the Finance Act, 1987 w.e.f. 1.4.1988. According to it, under clause (b) thereof, the enhanced compensation shall be chargeable under the head “capital gains of the previous year” in which such amount is received by the assessee. 9. This came for consideration before the Apex Court in Ghansham’s case (supra) on which reliance has been placed by the Revenue. In that case, the Hon’ble Supreme Court was dealing with the issue relating to assessability of capital gains to income tax under the provisions of Section 45(5) of the Act. Section 45 was amended by the Finance Act, 1987, w.e.f. 1.4.1988, whereby sub-section (5) was inserted as an overriding provision. It was held that the enhanced compensation under the 1894 Act arises and is payable at multiple stages and, therefore, compensation is treated as “deemed income” at the time when it is received and taxed on receipt basis. This is notwithstanding the cases where enhanced compensation may be in dispute in pending appeal and claimant had been permitted to withdraw the amount conditionally. It was further held that interest on enhanced value of the land which forms part of compensation is exigible to tax in the year of receipt. However, it was observed that interest on account of delayed payment of enhanced compensation is also income but its nature is different. The said judgment while interpreting Section 45(5)(b) of the Act dealt with the Income-Tax Appeal No. 209 of 2004 5 taxability of enhanced compensation and interest under the 1894 Act which partakes the character of compensation alone. 10. The question that now remains for consideration in this appeal is, whether the interest on enhanced compensation received by the assessee is exigible to tax in the year of receipt or at the time when the lis regarding compensation for the acquired land attains finality. 11. The issue requires answer to the following points: (a) the scope of term ‘income’ under the Act; (b) whether interest on enhanced compensation is income which accrues or arises during pendency of appeal by the State and pendency of litigation regarding determination of final compensation has any effect thereon? 12. Delving on the first issue, for its answer, various provisions of the Statute requires examination. 13. Section 2(24) of the Act gives an inclusive definition of “income” which is to be construed in the widest term. It adds several artificial categories to the concept of “income”. Anything which can properly be described as “income” is taxable under the Act unless expressly exempted. Even if a receipt did not fall within the ambit of any of those clauses enumerated therein, it still would be “income” if it partakes the character of “income”. 14. Section 4 of the Act is the charging provision. What is levied by virtue of provisions of Section 4 is income tax alone. This Income-Tax Appeal No. 209 of 2004 6 section brings to charge the total income of the previous year of every person. In order to constitute income, the receipt must come as a return from a definite source which is of the character of income according to the ordinary meaning of that word. Section 4 of the Act postulates that: (a) Annual Finance Act shall prescribe the rate or rates for the year at which income tax is to be charged; (b) the charge of income tax is on every person specified as assessable entities in Section 2(31); (c) the income is that of the previous year; and (d) the levy is on the total income of the assessable entity computed in accordance with and subject to the provisions of the Act. 15. Section 5 describes “scope of total income”. According to it, income that accrues or arises or is received or is deemed to accrue or arises or is received during any previous year alone is to be taken note of. A receipt must come in the character of income or profit in respect of a transaction. The Act draws a distinction between income accruing or arising and income received. The accrual or arising of income has nothing to do with the actual receipt. 16. From a plain reading of aforesaid statutory provisions, it emerges that the expressions “accrued” or “arisen” or “received” or “deemed to be received” used in the Act must be given their plain meaning in the absence of any particular definition to fall within the scope of income. Income-Tax Appeal No. 209 of 2004 7 17. Now, examining the exigibility of income tax to the amount received as interest on enhanced compensation, inevitably reference has to be made to the method of accountancy followed by the assessee. 18. Income is assessed on the basis of either actual receipt of interest received on enhanced compensation during pendency of appeal in higher court or on the basis of amount accrued during the year. The former is called cash system whereas latter is termed as mercantile system. Under cash system, the income is exigible to tax only on the basis of actual receipt irrespective of the fact, whether the same had arisen or not whereas mercantile system envisages accrual or arising of income or deemed to accrue or arise during the year in question. 19. Section 145 of the Act provides for method of accountancy being followed by an assessee. The income arises either on receipt basis or on accrual basis and income is deemed to accrue or arise to a person without its actual accrual or receipt. Under the aforesaid provision, the income chargeable under the head “profit and gains of business or profession” and “income from other sources” is to be computed in accordance with the method of accountancy regularly employed by the assessee. Where an assessee- landholder is not maintaining any particular system of accountancy, the assessing officer shall be justified to proceed on the basis that the assessee is adopting cash system of accountancy only and the interest received on enhanced compensation shall be liable to be assessed to income tax when it is actually received by the assessee. Income-Tax Appeal No. 209 of 2004 8 20. It would now be appropriate to advert to the decision of the apex Court in Commissioner of Income Tax vs. Hindustan Housing and Development Trust (1986) 161 ITR 524 on the basis of which, the Tribunal had adjudicated against the Revenue. That was a case relating to a limited company which was maintaining its accounts on mercantile system. The land of the assessee company had been acquired and the arbitrator had made his award on 29.7.55 granting compensation to the assessee. However, the same was disputed by the State in the appeal where the company was permitted to withdraw the amount deposited by the State Government on furnishing bond for refunding the amount in the event of appeal being allowed, treating the dispute to be real and substantial. The apex Court held that in such a situation no absolute right to receive the compensation at that stage had accrued to the assessee and, therefore, extra amount of compensation of Rs. 7,24,914/- was not income accruing or arising to the assessee. The assessee had been following mercantile system and in those facts, the Hon’ble Supreme Court held it not to be an accrual or arising of income. 21. The second issue cannot be effectively answered without ascertaining the nature of the receipt of interest under the 1894 Act. 22. The interest to be paid under the 1894 Act falls under Sections 28 and 34 of the said Act. Sections 28 and 34 of the Act read thus: “28. Collector may be directed to pay interest on excess compensation. - If the sum which, in the opinion of the Court, the Collector ought to have awarded as Income-Tax Appeal No. 209 of 2004 9 compensation is in excess of the sum which the Collector did not award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court. Provided that the award of the Court may also direct that where such excess or any part thereof is paid into Court after the date or expiry of a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of such excess or part thereof which has not been paid into Court before the date of such expiry. 34. Payment of interest - When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited: Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date or expiry of the said period of one year on the amount of compensation or part thereof Income-Tax Appeal No. 209 of 2004 10 which has not been paid or deposited before the date of such expiry.” 23. Under the scheme of the 1894 Act, interest under Section 34 is part of compensation while interest under Section 28 is not the interest which partakes the character of compensation and is treated differently. The interest component on enhanced compensation under Section 28 is taxable under Section 56 of the Act as ‘income from other sources’. 24. The apex Court in Ghanshyam (HUF)’s case (supra), considered this aspect as under: “…. The award of interest under Section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount. In such cases interest on that excess alone is payable. Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the Court includes the additional compensation awarded under Section 23(1-A) and the solatium under Section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount which is determined by the Court after a reference under Section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award for compensation. See: Income-Tax Appeal No. 209 of 2004 11 Ram Chand and Ors. etc. v. Union of India and Ors. (1994) 1 SCC 44. In the case of Shree Vijay Cotton & Oil Mills Ltd,. vs. State of Gujarat (1991) 1 SC 262, this Court has held that interest is different from compensation. 24. To sum up interest is different from compensation. However, interest paid on the excess amount under Section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under Section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under Section 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34.” 25. The apex Court in the aforesaid decision has held that interest directed by the Collector is to be treated as part of compensation while the interest on the enhanced compensation directed by the Court is not. Even though there is little confusion in reference to the relevant sections but as per discussion, it is clear that interest directed by the Collector partakes the character of compensation and forms part thereof under Section 34 of the Act whereas the interest ordered by the Court falls under Section 28 of the Act. 26. To conclude, from the above it emerges:- Income-Tax Appeal No. 209 of 2004 12 (a) that ‘income from Business or profession’ and ‘income from other sources’ are ascertained on the basis of system of accountancy followed by the assessee; (b) where assessee is not maintaining books of accounts by adopting any specific method, it shall be treated to be cash system of accountancy; (c) the interest under Section 34 to be awarded by the Collector partakes the character of compensation and is taxable in the year of receipt in view of Section 45(5)(b) of the Act; and (d) under cash system of accountancy, the element of interest awarded by the Court received on enhanced amount of compensation under Section 28 of the 1894 Act falls for taxation under Section 56 as ‘income from other sources’ in the year of receipt. 27. The interpretation aforesaid has the legislative acceptance by way of incorporation of Section 145A(b) and 56(1)(viii) w.e.f. 1.4.2010 by Finance (No.2) Act, 2009 whereby now irrespective of system of accountancy being followed by the assessee, the interest on enhanced compensation shall be taxable in the year of receipt. In view of the above, the questions of law are answered accordingly and the appeal is allowed. No costs. (AJAY KUMAR MITTAL) JUDGE Income-Tax Appeal No. 209 of 2004 13 (ADARSH KUMAR GOEL) October 27, 2010 JUDGE *rkmalik*