The Supreme Court in Commissioner of Income Tax v Ghanshyam considered whether enhanced compensation and interest received in a compulsory land acquisition could be deducted from the total income of an assessee on the basis that the amounts were in dispute before the High Court of Punjab & Haryana.
Ghanshyam’s lands were acquired by the Haryana Urban Development Authority. Ghanshyam received an enhanced compensation of Rs8,713,517 (US$190,000) and interest of Rs147,575 in 1998-1999. This was relevant to the 1999-2000 assessment year.
Ghanshyam did not offer to tax the enhanced compensation and interest in his 1999-2000 income tax return, contending that the compensation had not accrued in the year of receipt since it was pending appeal before the high court. Ghanshyam also stated that the enhanced compensation and interest was received pursuant to an interim order of the high court on his furnishing adequate (tangible) security to withdraw the same.
The assessing officer rejected Ghanshyam’s contention stating that under section 45(5) of the Income Tax Act, 1961 (ITA), the compensation amount, enhanced or further enhanced by the court, was chargeable as income under capital gains for the year 1998-1999. The assessing officer taxed the amount of enhanced compensation and interest for the previous year.
Ghanshyam challenged the assessing officer’s decision before the Commissioner of Income Tax (Appeals) who set aside the order. The Income Tax Department impugned the CIT(A)’s order before the Income Tax Appellate Tribunal (ITAT). The ITAT upheld the order of the CIT(A). The department thereafter carried the matter to the high court. In upholding the order of the ITAT, the high court held that Ghanshyam’s case was squarely covered by the Supreme Court’s decision in Commissioner of Income-tax v Hindustan Housing and Land Development Trust Ltd (Hindustan Housing), dismissing the department’s appeal. The department then took the appeal to the Supreme Court.
Hindustan Housing and the ITA
It is noteworthy that in Hindustan Housing, the Supreme Court decided that an assessee had no absolute right to receive enhanced compensation when the entire amount was in dispute in an appeal. Therefore, the extra amount could not be construed as income accruing to the assessee during the relevant previous year.
Dealing with Ghanshyam’s case, the Supreme Court distinguished Hindustan Housing on the ground that the judgment was delivered prior to the amendment of section 45(5) of the ITA on 1 April 1988. Section 45(5) introduced a wholly new scheme keeping in mind cases of compulsory acquisition under the Land Acquisition Act, 1894 (LAA), which envisaged the payment of compensation at multiple stages with withdrawal of amounts for use by claimants for several years pending litigation.
It also observed that Hindustan Housing was rendered in respect of the assessment year 1956-1957 under the Income Tax Act, 1922, whereas Ghanshyam’s case fell under the ITA, which defines “transfer” in a much wider sense under section 2(47).
The Supreme Court held that section 45(5) of the ITA was inserted as an overriding provision to ensure that as and when an assessee was in receipt of enhanced compensation, it would be treated as “deemed income” and taxed on a receipt basis.
Provisions under the LAA
The court analysed the following provisions of the LAA: section 23(1-A) dealing with additional compensation at the rate of 12% per annum on the market value of land; section 23(2), which provides for solatium which is a part of enhanced compensation; section 28, which empowers the court to award interest on the excess amount of compensation awarded by it over the amount awarded by the collector; and section 34, which provides for award of interest at 9% per annum. The court observed that interest under section 28 of the LAA was an accretion to the value and hence a part of enhanced compensation.
The court also referred to sections 45(5) and 155(16) of the ITA, which contemplate a subsequent reduction by a court, tribunal or other authority and deal with the recomputation or amendment of any assessment order.
The court ultimately settled a two-decade old controversy and held that enhanced compensation (ordered to be released during the pendency of appellate proceedings) was liable to tax under section 45(5) of the ITA in the year of receipt.
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