A Full Bench consisted of Justice A.M.Khanwilkar, Justice Hemant Gupta and Justice Dinesh Maheshwari held that capital gains of the Assessee could be calculated only upon the final date of award of compensation.
Brief Facts of the Case
Property acquisition was done by way of notification dated 15.05.1968. Whereas, the official award of compensation was made on 29.09.1970. At the time of issuance of the notification for acquisition, the land was already in possession of the beneficiary. Hence, the Income Tax Appellate Tribunal ordered that the transaction that leads to the computation of capital gains would be considered to have taken place on the date of notification and not on the date of the award. The date of notification was to be treated as the date of taking over physical possession.
The High Court of Punjab and Haryana at Chandigarh but did not agree with this line of reasoning. It held that the amount of compensation was determined only on the passing of the award. Thus, if any capital gain was chargeable to tax, it would be chargeable for the previous year about the date of the award.
The question is whether the High Court was right to take the date of the award, as the date of accrual of capital gains. This stance is referring to Section 45 of the Income Tax Act, 1961 (“the Act, 1961”). Hence, the present appeal.
Appellant’s Arguments
The land was already in possession of the beneficiary with the issuance of notification. The Appellant (Assessee) was divested of its title and right to this property. The transfer of land was complete on the date of that notification.
Hence, capital gains arising out of such acquisition and interest accrued could not have been charged to tax referring to the date of award, which is on a later date.
Respondent’s Arguments
Supporting the order of the High Court the Counsel stated that though possession of the land was with the beneficiary in the year 1968, no gain on account of transfer of land accrued to the Appellant (Assessee) on the date of notification. This is because the amount of compensation had not been determined. And the same was determined only in the award dated 29.09.1970.
Court’s View
Applying the aforesaid concepts of “transfer” and “transfer of property” to the facts of the present case, it could be found that when the subject land has been acquired, its transfer from the Appellant (Assessee) to the Government is covered by Section 2(47) of the Act of 1961.
The Bench stated that as long as possession was not taken, the mere fact of issuance of notification under Section 4 of or declaration under Section 6 under the Land Acquisition Act, 1894 (“ the Act, 1984”) does not divest the owner of his right in respect of the property.
The Court agreed with the inference in the case of Peter John v. Commissioner of Income-Tax: (1986) 157 ITR 711. The right to receive compensation comes into being when the Government takes possession of the property. The right to receive interest also accrues at the same time. It does not correspond with the completion of the transfer of the property under acquisition. And accrual of such a gain classifies as “capital gain”.
But when a compulsory acquisition is concerned, accrual of capital gain depends upon completion of the transfer of property from the owner to the Government and not upon accrual of the right to receive compensation.
In the case of compulsory acquisition of land under the Act, 1894, a transfer is completed with the vesting of land in the Government. This correlates with taking over of possession of the land under acquisition by the Government. But, where possession is taken over before arriving at the relevant stage for such transfer, capital gains will add only at the relevant stage and not before so.
Capital gains then add upon making of the award (in the case of ordinary acquisition referable to Section 16) and after end of fifteen days from the publication of the notice (in the case of urgency acquisition under Section 17).
The Bench observed that in the present case no urgency acquisition was done by the Government. The transfer of land from the Appellant (Assessee) to the Government was completed not before the date of the award. Hence, the earliest date for accrual of capital gains because of this acquisition was the date of award i.e., 29.09.1970.
Court’s Decision
Long term capital gains of the Appellant due to acquisition accrues from the date of award of compensation as the tax liability arises only after the award of the enhanced amount of compensation.
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