* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No. 198/2001
Reserved on: 24th July, 2014
% Date of Decision: 28th August, 2014
Commissioner of Income Tax - VIII,
New Delhi ....Appellant
Through Mr. Sanjay Kumar, Jr. Standing
Counsel for Mr. Kamal Sawhney, Sr.
Standing Counsel.
Versus
Gulab Sundri Bapna ...Respondent
Through None
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J.
1. This appeal by the Revenue which relates to assessment year
1988-89, was admitted for hearing vide order dated 18th May, 2004 on
the following substantial questions of law:-
"1. Whether the ITAT is justified in law in
deleting the addition of Rs.59,63,410/- being the
amount of enhanced compensation received by the
assessee during the year?
2. Whether the amount of Rs.59,63,410/-
received by the assessee during the previous year
relevant to assessment year 1988-89 is taxable in
view of the provisions of Section 45(5)(b) of the
I.T. Act?
3. Whether the ITAT is correct in law that no
capital gains arose to the assessee on receipt of
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compensation because of the acquisition of land in
which the assesse had tenancy rights only?"
2. The facts, as noticed by the Income Tax Appellate Tribunal
(Tribunal, for short), are that land admeasuring 24.1 acres in village
Arkpur, owned by the Government and managed by the Land
Development Officer was given on lease in favour of M/s Delhi
Pottery Works (P) Ltd., vide registered lease deed dated 19th March,
1924. Late Kesar Singh and his sons took on sub-lease 19.1 acres of
land and constructed factory premises and installed machinery
thereon under the sub-lease dated 20th March, 1942. The sub-lease
was for a period of 17 years and rent fixed was Rs.500 per month.
Respondent assessee Late Gulab Sundri Bapna, now represented by
her legal heirs, was wife of Late Kesar Singh. M/s Delhi Pottery
Works (P) Ltd., went into liquidation and the leasehold rights were
transferred in favour of Harnam Kaur, widow of Ram Singh Kabli, in
March, 1949 and thereafter rent payable under the sub-lease was paid
to her. Notification under Section 4 of the Land Acquisition Act dated
15th September, 1962, was issued in respect of land in Village Arkpur
including the land under sub-tenancy and occupation of the
respondent assessee. This was followed by a notification under
Section 6 of the Act dated 5th December, 1968. In January, 1975,
two awards were made by the Land Acquisition Officer fixing
compensation for the acquired land. The respondent assessee handed
over vacant possession of land under sub-lease on 30th March, 1976
and of the factory building on 17th September, 1976. In the
meanwhile, in 1964, Harnam Kaur had executed a Trust Deed
whereby Sardarni Harnam Kaur Trust was assigned rights in the land.
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Thus, there were three claimants and the District Judge, in his
decision dated 20th April, 1983, held that the compensation for
acquisition of land and building should be distributed inter se in the
following manner:-
A. Union of India 25% of the award money.
B. Smt. Harnam Kaur Trust Rs.1,20,000/- being 20 years
capitalization of monthly rent
of Rs.500/-.
C. Smt. G.S. Bapna(Respondent
assessee) The Balance amount.
3. Aggrieved by the quantum awarded, respondent assessee filed
a reference under Section 18 of the Land Acquisition Act, which was
decided by the Additional District Judge on 20 th February, 1987.
Award for enhanced compensation was challenged by the Union of
India before the Delhi High Court, in an appeal which was admitted
but the respondent assessee was allowed to withdraw Rs.94,89,304/-
on furnishing security for restitution. The aforesaid amount was
withdrawn on 30th July, 1987, by the respondent assessee by
furnishing security/guarantee.
4. The Assessing Officer brought to tax Rs.59,63,410/- after
excluding 50% of the compensation so awarded in terms of Section
48(2) of the Act. The respondent assessee, however, succeeded
before the Commissioner of Income tax (Appeals) who observed that
she was only a sub-lessee of the land and her interest was only that of
a tenant. As there was no cost of acquisition of the tenancy right,
capital gain was not chargeable/computable. Further, the
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compensation paid was not taxable till the dispute was finally decided
by the High Court.
5. Appeal filed by the Revenue before the Tribunal relying upon
Section 45(5) of the Act was rejected observing that the word
,,received would not include or mean compensation received, if the
assessee was liable to refund the amount received. Further, the
compensation paid was for acquisition of tenancy right and not for
acquisition of ownership rights. Section 55(2)(a) was substituted by
Finance Act, 1994 w.e.f. 1st April, 1995, stipulating that the cost of
acquisition of tenancy rights could be taken as NIL in cases where
there was no purchase price and the said amendment was applicable
only with effect from the assessment year 1994-95.
6. The Supreme Court in CIT vs. B.C. Srinivasa Setty [1981] 128
ITR 294 (SC) had held that if cost of acquisition of a capital asset was
not determinable, then the sale consideration received would be a
capital receipt but not taxable, because cost of acquisition was
incapable of being ascertained and computation as envisaged under
Section 48 was not possible. The effect thereof was that in such cases
the assessee would not be liable to pay capital gains tax on the sale
consideration received. The aforesaid decision was in relation to
consideration received for transfer of goodwill. The said principle
was extended to tenancy rights, by the Delhi High Court in Bawa
Shiv Charan Singh vs. CIT, Delhi, [1984] 149 ITR 29, observing
that the tenancy right had no cost of acquisition and, therefore, capital
gains cannot be computed. Faced with the aforesaid decisions,
Section 55(2) was inserted and amendments were made stipulating
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that in transactions specified including payment received for
surrender or relinquishing tenancy rights, where it was not possible to
ascertain cost of acquisition, the cost of acquisition would be taken to
be NIL for computing capital gains. However, where it was possible
to ascertain the cost of acquisition, such cost would be taken into
consideration for computing taxable gains under Sections 48 and 49
of the Act. The said insertion, as noticed above is applicable with
effect from assessment year 1994-95. Therefore, it would not be
applicable to the case in hand.
7. Decision of the Delhi High Court in Bawa Shiv Charan
(supra) was not accepted as a correct legal ratio and was overruled by
the Supreme Court in CIT vs. D.P. Sandu Bros. Chembur (P) Ltd.
[2005] 273 ITR 1 (SC). This was a case relating to Assessment Year
1987-88 and, therefore, Section 55(2) as amended by Finance Act,
1994 w.e.f. 1st April, 1995 was not applicable. It was held that
tenancy right gets acquired with effect from a particular date and it
would be possible that it was acquired at a cost and this was a
question of fact. Reference was made to the decision of the Supreme
Court in A.R. Krishnamurthy & Anr. Vs. CIT [1989] 176 ITR 417
(SC), wherein it has been held that it cannot be said conceptually that
there would be no cost of acquisition for grant of lease and cost of
acquisition of lease hold rights could be determined. Thus, the
Supreme Court in categorical terms has held that the judgment in the
case of B.C. Srinivasa Setty's case (supra) would not be applicable
to capital gains earned on surrender of tenancy rights. In the case of
D.P. Sandu Bros. (supra), the Supreme Court did not interfere with
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the final outcome/decision as the Revenues stand before the High
Court was that the cost of acquisition of the tenancy was incapable of
being ascertained. The ratio of the said decision is binding on us and
has to be applied. In other words, we have to proceed on the basis
that cost of acquisition of leasehold rights could be determined and
was capable of being ascertained and this was the position even
before Section 55(2) was amended by Finance Act, 1994 with effect
from 1st April, 1995. Thus, the decision of the Supreme Court in B.C.
Srinivasa Setty's case (supra) would not be applicable to cases of
surrender of tenancy rights.
8. Read in this manner and applying the ratio of the decision of
the Supreme Court in D.P. Sandu Bros.'s case (supra), it has to be
held that the tenancy right had computable cost of acquisition and,
therefore, the consideration received on surrender or acquisition was
taxable as capital gains even prior to 1st April, 1995. In the present
case, as noticed, the sub-lease was for 17 years and even construction
had been raised by the predecessors of the respondent assessee.
9. This brings us to Section 45(5) of the Act and whether the same
would be applicable to the facts of the present case. The aforesaid
Section reads as under:-
"Section 45. ...
(5) Notwithstanding anything contained in sub-section (1),
where the capital gain arises from the transfer of a capital
asset, being a transfer by way of compulsory acquisition
under any law, or a transfer the consideration for which
was determined or approved by the Central Government or
the Reserve Bank of India, and the compensation or the
consideration for such transfer is enhanced or further
enhanced by any court, tribunal or other authority, the
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capital gain shall be dealt with in the following manner,
namely :--
(a) the capital gain computed with reference to the
compensation awarded in the first instance or, as the case
may be, the consideration determined or approved in the
first instance by the Central Government or the Reserve
Bank of India shall be chargeable as income under the head
,,Capital gains of the previous year in which such
compensation or part thereof, or such consideration or part
thereof, was first received; and
(b) the amount by which the compensation or
consideration is enhanced or further enhanced by the court,
tribunal or other authority shall be deemed to be income
chargeable under the head ,,Capital gains of the previous
year in which such amount is received by the assessee;
(c) where in the assessment for any year, the capital gain
arising from the transfer of a capital asset is computed by
taking the compensation or consideration referred to in
clause (a) or, as the case may be, enhanced compensation
or consideration referred to in clause (b), and subsequently
such compensation or consideration is reduced by any
court, Tribunal or other authority, such assessed capital
gain of that year shall be recomputed by taking the
compensation or consideration as so reduced by such court,
Tribunal or other authority to be the full value of the
consideration.
Explanation.--For the purpose of this sub-section,--
(i) in relation to the amount referred to in clause (b), the
cost of acquisition and the cost of improvement shall be
taken to be nil;
(ii) the provisions of this sub-section shall apply also in a
case where the transfer took place prior to the 1st day of
April, 1988;
(iii) where by reason of the death of the person who made
the transfer, or for any other reason, the enhanced
compensation or consideration is received by any other
person, the amount referred to in clause (b) shall be deemed
to be the income, chargeable to tax under the head ,,Capital
gains of such other person."
10. The aforesaid Section was interpreted by the Supreme Court in
CIT vs. Ghanshyam (HUF) [2009] 315 ITR 1 (SC), and it was held
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that the profits and gains from transfer of a capital asset by
compulsory acquisition was chargeable under the head ,,capital gains.
Section 45(5) was enacted as it was noticed that in case of
compulsory acquisition, additional compensation was/is awarded at
several stages by different authorities. This had necessitated multiple
rectifications in the original assessment order causing great
administrative difficulty and problem in collection of the additional
demand. With a view to remove these difficulties, by Finance Act,
1987, Section 45(5) was enacted to provide for taxation of additional
compensation as deemed income in the year of receipt in the hands of
the recipient. The Section also stipulated that the cost of acquisition
in the hands of the receiver of the additional compensation would be
deemed to be NIL and this would not affect the compensation already
taxed at the first instance in the earlier previous year when the
transfer of capital asset took place. Thus, in case of compulsory
acquisition of assets, capital gain was/is charged on the compensation
originally awarded in the year of transfer, and the additional
compensation was/is deemed to be taxable income and was/is taxed in
the year in which it was/is received and, it was/is not taxed in the year
of transfer of the capital asset. Earlier decision of the Supreme Court
in CIT vs. Hindustan Housing and Land Development Trust Ltd.
[1986] 161 ITR 524 (SC), was held to be inapplicable after enactment
of Section 45(5) of the Act. In light of the aforesaid decision, it has to
be held that the additional compensation received would be taxable in
the present assessment year, i.e. 1988-89. Therefore, decision of the
tribunal to the contrary cannot be sustained and has to be set aside.
ITA 198/2001 Page 8 of 11
11. The aforesaid reasoning deals with and answers the contention
of the respondent assessee that the acquisition of tenancy rights being
indeterminate, capital gain tax was not payable on enhanced
compensation under Section 45(5) of the Act.
12. The respondent assessee, however, submits that the Assessing
Officer and the Appellate Authorities including the Tribunal have not
given a finding that the cost of acquisition of tenancy right was
determinable and thus, Section 45(5) cannot be invoked as the said
Section is not applicable. It is further submitted that Section 45(5)
stipulates how capital gains has to be charged and is not the
computation provision. Reliance is placed on decision of the Punjab
& Haryana High Court in Commissioner of Income Tax vs. Leader
Engg. Works,[2004] 269 ITR 542.
13. The aforesaid contentions are without merit and are fallacious.
In D.P. Sandu's case (supra), Supreme Court in categorical terms
has held that the cost of acquisition could be computed in case of
acquisition of tenancy rights. Moreover, in the present case, sub-lease
in question was for a period of 17 years and the respondent assessee
also had constructed a super-structure, a factory, which was
constructed by the predecessor of the respondent assessee. The
respondent assessee had in the land acquisition proceedings, claimed
that they were entitled to compensation on acquisition of their land
under the sub-lease. Their rights had been acquired. Value of the sub-
lease rights of the respondent assessee was ascertained and
accordingly, the compensation was assessed and paid. Thus, the
tenancy right had value and, therefore, compensation was paid. Once
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it was held that it was possible to ascertain the cost of acquisition of
tenancy rights then it follows that capital gains could be computed
and shall be payable. Further, Section 45(5) is both the charging
Section as well as the computation Section. It specifically provides
for how and in what manner capital gain on compulsory acquisition of
land is to be computed and taxed. For the purpose of taxation of
enhanced compensation received, cost of acquisition has to be taken
as NIL as per the statutory mandate of Section 45(5) of the Act.
Logically, therefore, it follows that the compensation received in this
year by the respondent assessee has to be taxed. For the purpose of
taxation of enhanced compensation received, cost of acquisition is to
be taken as NIL as per the statutory mandate of Section 45(5). The
stand that the compensation received in any year pertains to only one
transfer and gain, has been undone and negated by enactment of
Section 45(5). Each assessment year is separate and distinct and
enhanced compensation received is to be taxed in the year of receipt
i.e. the year in question. Thus, the argument of the respondent
assessee is untenable and is contrary to the dictum of the Supreme
Court in the case of Ghanshyam (HUF) (supra). Similarly, the
contention that capital gains on enhanced compensation received is
taxable only when the original or earlier compensation itself was
taxed in the facts of the present case has to be rejected for several
reasons. Firstly, there is no evidence that original compensation
received by the respondent assesse was not taxed and there is no such
factual finding to that effect by any authority. Secondly, each
assessment year/order is separate and distinct. The assessee or
Revenue cannot take advantage of a wrong computation or failure to
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tax or erroneous taxation in an earlier year. The argument also fails
to take notice of the fact that the courts declare the law as it exists and
when the Supreme Court pronounced the judgment in Ghanshyam
(HUF)'s case (supra), it declared the legal position as it was. As per
the ratio of D.P. Sandu's case (supra), it is possible to compute and
calculate cost of acquisition of tenancy rights and, therefore, gain on
transfer of tenancy rights is taxable as capital gains. Another
contention of the respondent assessee that they would have availed
benefit of Section 54/54F of the Act is equally fallacious. It is not the
case of the respondent assessee that they had taken benefit under
Section 54/54F of the Act. The respondent assessee wanted to take
and sought advantage of legal opinion to claim that the gain was not
taxable. The risk was inherent in the said stance and stand and had its
consequences. The legal position as it unfolded and evolved, is
against the respondent assesse. Tax, therefore, has to be paid. Income
has been certainly earned is not exempt from tax.
14. In view of the aforesaid discussion, the questions of law
mentioned above are answered in favour of the appellant Revenue
and against the respondent assessee. Appeal is disposed of. In the
facts of the present case, there will be no order as to costs.
-sd-
(SANJIV KHANNA)
JUDGE
-sd-
(V. KAMESWAR RAO)
JUDGE
August 28, 2014
kkb
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