CA Hemant Sharma
LAND Acquisition Bill a most heated topic during the budget session of the year 2015. Central Government is in a hurry to pass the land acquisition bill to make it a complete legislation. However, the Anna’s new movement against this bill made government’s way tougher. There is a chaos not limited to the fact whether this bill should be enacted or not but also to the taxability of the interest income generated by way of compulsory acquisition which is discussed later. The scope of this write up is an attempt to clarify second chaos that is taxability of various incomes (specifically interest) from compulsory acquisition of land. Types of income which an asset under consideration can result are capital gain (if asset is a capital asset), interest on compensation or enhanced compensation. The Apex Court in the case CIT vs Ghanshyam (HUF) vide order dated 16th July 2009 in respect of interest income awarded to the assesse has given following obiter:
Para 20 of order (Quoting Section 28 of Land Acquisition Act 1894)
20. We also quote herein below Section 28 of the 1894 Act which reads as under:
“Section 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 compensation is in excess of the sum which the Collector did 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.”
Para 21 of order (Quoting Section 34 of Land Acquisition Act 1894)
21. We also quote herein below Section 34 of the 1894 which reads as under:
“Section 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 of expiry of the said period of one year on the amount of compensation or part thereof which has not been paid or deposited before the date of such expiry.”
Para 24 of order (Expression of View by Hob’ble Apex Court on these interests)
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.
Thus, it can concluded that out of the total interest amount portion which is under section 28 will be taxed as compensation and interest under section 34 will be taxed normally by applying sections 145A(b), 56(2)(viii), and 57(iv) which are reproduced below:
Notwithstanding anything to the contrary contained in section 145
(b ) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.
(viii) income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A.
(iv) in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section.
Now it has to be looked into how legal position can affect the assesse (Whether in his favor or against), this can be understood by the following table describing different situations:
|S.no||Particulars||If Land is Rural Agricultural||If Land is Urban Agricultural||If Land is Urban Land|
|1||Whether Land is Capital Asset?||No (If falling outside the limits as specified in Section 2(14)).||Yes (If falling Inside the limits as specified in Section 2(14)).||Yes|
|2||Whether Capital Gain is Exempt?||No Question of Cap Gain||Yes, subject to Fulfillment of Conditions as specified in Section 10(37)||No|
|3||Inclusion of Interest Under Section 28 of the Act 1894||Will be included under enhanced compensation and will not be taxed as no Capital Gain will arise.||Will be included under enhanced compensation and will not be taxed as Capital Gains from this are exempt under Section 10(37).||The Interest under consideration should be included in the enhanced compensation as per above cited case but practically assessee will never want this inclusion due to reason mentioned in point 4.|
|4||Whether Assessee will be benefited by inclusion of interest under section 28 of 1894 Act in enhanced compensation?||Yes, because here part of interest under section 28 of 1894 Act will not be taxed as it is included in enhanced compensation of an asset the gains of which are exempt. In other words, by dint of falling outside section 2(14) will save tax. In this Scenario above mentioned SC order can be used favorably.||Yes, because here part of interest under section 28 of 1894 Act will not be taxed as it is included in enhanced compensation of a Capital Asset the gains of which are exempt under Section 10(37) of the 1961 Act. In other words, by dint of Section 10(37) will save this class of interest from tax. In this Scenario above mentioned SC order can be used favorably.||No, because the Capital Gains in this situation are taxable at the flat rate of 20%. Whereas if interest is not included in enhanced compensation it will entitled to get a flat deduction of 50% and the balance 50% will subject to tax at normal slab rates. Incidence of tax is higher if interest under consideration is included in compensation and vice-versa.|
|5.||Whether Tax Planning can be done by using above cited judgment in respect of interest under section 28 of the 1894 Act?||Yes||Yes||No|
|6.||Taxability of Interest Under Section 34 of the 1894 Act||Taxed normally after a deduction of flat 50%||Taxed normally after a deduction of flat 50%||Taxed normally after a deduction of flat 50%|
|7.||When interest under Section 34 of the 1894 Act is to be taxed is an issue at all in these cases?||A. What Various Judicial Pronouncement says?
Interest on enhanced compensation is not taxable on lumsum basis under mercantile system, however spread over on annual basis over the period starting from the date of compulsory acquisition to the date on which court makes an order for enhanced compensation.
This ratio-decidendi expressed by following judicial pronouncements:
1. ITO vs Amar Lal (order dated 30th Nov 2006)
2. CIT vs Rama Bai (order dated 8th Nov 1989)
3. CIT vs Vikrambhai Sombhai Patel (order dated 23rd May 2014)
B. What statue says?
This has been dealt by the clause b section 145A inserted by Finance Act 2009 w.e.f 1-04-2010 and the same is reproduced below:
“Notwithstanding anything to the contrary contained in section 145
(b ) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.”
Memorandum to the Finance Act 2009 explaining this amendment
The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai Vs. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to tax payers.
With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. Further, it is proposed to insert clause (viii) in sub-section (2) of section 56 to provide that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as “income from other sources” in the year in which it is received. This amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 and subsequent assessment years.
The legislatures have dealt with the issue with the amendment through Finance Act 2009. However, they left the taxpayers with the ambiguity because of the words highlighted in the memorandum explaining the amendment.
Possible meaning of “in relation to assessment year 1998-99 and subsequent assessment years.”
Means interest related or accrued after 1998-99 is to be only covered by section 145A(b) and hence taxed on receipt basis but if it relates or belongs to period before 1998-99 it should be taxed as per above mentioned pronouncements.
Hence, the legislatures need to clarify on this matter so that resultant litigation can be avoided.
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