Income Tax Return of AY 1971-72 finally closed after Supreme Court says assessment was correct

Shishir Sinha New Delhi | Updated on August 26, 2020 Published on August 26, 2020

Dispute concerned levy of capital gains tax on compnesation towards land acquisition

Can capital gain be applicable for compensation awarded for land acquired in 1970s? Yes, it seems. Endorsing the Income Tax Department’s decision for return filed for assessment year 1971-72 in 2020, the Supreme Court while dismissing the appeal against applicability of capital gains tax in the matter which had originated way back in 1970.

A piece of land in Ambala became an evacuee property after its original owner migrated to Pakistan; and it was allotted to the Amrik Singh (the assesssee, who is no more and his son is the appellant in the case) who had migrated to India, in lieu of his property left in Pakistan. Later he got the compensation along with interest as said land was taken over for public purpose.

A three-judge bench of Justice AM Khanwilkar, Justice Hemant Gupta and Justice Dinesh Maheswari gave its ruling. The dispute essentially concerned with chargeability of tax for capital gains arising out of the award of compensation towards acquisition of land belonging to the assessee.

“We have not an iota of doubt that in the second round of proceeding, the AO (Assessing officer) had rightly assessed the tax liability of the appellant, on long-term capital gains arising on account of acquisition, on the basis of the amount of compensation allowed in the award dated 29.09.1970 as also the enhanced amount of compensation accrued finally to the appellant; and as regards interest income, had rightly made protective assessment on accrual basis,” the bench said.

For the assessment year 1971-1972, the assessee had declared income at ₹1,408 inclusive of ₹408 from the house property and ₹1,000 being the amount of interest earned (on award). While not accepting the income so declared, the AO in his assessment order dated February 12, 1982, enhanced the income from house property to ₹1,200 and also enhanced the interest income to ₹11,596 with reference to the interest received under the award.

At first level of appeal, addition regarding house property was deleted. But the appellate authority found that the assessee was paid ₹62,550 as compensation and ₹9,532 as solatium and yet, capital gains on this account were not taxed by the AO. Reply to show cause notice by assessees was rejected and ₹23,146 was added as capital gain tax. This became dispute and challenged at various level.

Divakar Vijayasarathy, Founder and Managing Partner at DVS Advisors LLP, said that the current position of the Income Tax Act, 1961 is that the capital gain on compulsory acquisition of asset is taxable in the year in which the first installment of the compensation is received. This provision was introduced through the Finance Act, 1991 with retrospective effect from 1988. The judgement is with regard to the year of transfer of capital asset which has been compulsory acquired in the pre-1988 era since it was taxable in the year of transfer as per the erstwhile provisions. However the judgment could still have relevance since the indexation benefit is allowed only till the year of transfer.

This judgment could lead to ambiguity in pending matters related to ownership of asset where in possession of capital asset has been adjudged to be exercise of ownership. However given the present language in the definition of the term transfer under Section 2(47) of the Act, it is quite clear that transfer of possession without receipt of consideration or registration would still lead to a transfer by virtue of Section 53A of Transfer of Property Act, 1882.

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Published on August 26, 2020
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