1975 Supreme(Mad) 445

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE V. RAMASWAMY & THE HONOURABLE MR. JUSTICE V. SETHURAMAN
Dollar Company - Appellant
Versus
Commissioner of Income Tax, Madras I - Respondent
Case No : Tax Case No. 306 of 1969
Decided On : 10 September 1975

Compulsory acquisition of land by the Government constitutes a "transfer" within the meaning of section 12B of the Indian Income-tax Act, 1922, and is subject to capital gains tax. The profits or gains arising from compulsory acquisition are to be deemed to be income of the previous year in which the acquisition took place, even if the compensation is awarded in subsequent years.

Headnote:

CAPITAL GAINS - COMPULSORY ACQUISITION - SECTION 12B - TRANSFER - COMPENSATION - ASSESSMENT YEAR - APPELLATE ASSISTANT COMMISSIONER - POWERS - SECTION 31(3)(B) - SECTION 34(3) - TIME LIMIT - REASSESSMENT - INCOME-TAX ACT, 1922.

Fact of the Case:

The assessee, a registered firm carrying on business as chemists and druggists, purchased 134 grounds along with a house on October 17, 1958. Out of the said 134 grounds, 127 grounds were acquired by the Government under the Land Acquisition Act for the purpose of construction of quarters for the employees of the Port Trust. The assessee included in its return of income for the previous year ended on December 31, 1960, relevant for the assessment year 1961-62, a sum of Rs. 28, 017 as capital gains, which was arrived at by deducting the cost of the lands from the compensation awarded on February 10, 1960. The Income-tax Officer added to this sum the additional compensation received consequent on the order of the City Civil Court dated November 28, 1961, amounting to Rs. 29, 264, and also added Rs. 2, 69, 497, which according to him would represent the net excess compensation further demanded by the assessee. The assessee appealed to the Appellate Assistant Commissioner, who upheld the assessment of Rs. 28, 017 and Rs. 29, 264 but set aside the assessment of Rs. 2, 69, 497 with the direction that the Income-tax Officer should re-do it after ascertaining the correct amount of further compensation that may become due to the assessee. The assessee appealed to the Tribunal, which held that the compulsory acquisition was a "transfer" within the scope of section 12B and that the entire compensation whenever awarded would have to be brought to tax in the year in which the acquisition took place. The Tribunal also upheld the Appellate Assistant Commissioner's decision to set aside the assessment.

Finding of the Court:

1. Compulsory acquisition of land by the Government constitutes a "transfer" within the meaning of section 12B of the Indian Income-tax Act, 1922, and is subject to capital gains tax. 2. The profits or gains arising from compulsory acquisition are to be deemed to be income of the previous year in which the acquisition took place, even if the compensation is awarded in subsequent years. 3. The Appellate Assistant Commissioner has the power under section 31(3)(b) of the Act to set aside an assessment and direct the Income-tax Officer to make a fresh assessment after making further inquiry, and this power is not subject to the time limit prescribed in section 34(1)(b) for reassessments.

Issues: 1. Whether compulsory acquisition of land constitutes a "transfer" as contemplated under section 12B of the Indian Income-tax Act, 1922, so as to attract capital gains tax? 2. Whether the compensation to which the assessee became entitled by orders of court subsequent to the previous year ended December 31, 1960, could be taken into account for determining the capital gains under section 12B for the year of assessment 1961-62? 3. Whether the Income-tax Appellate Tribunal is right in law in holding that the Appellate Assistant Commissioner of Income-tax had power to set aside the assessment with a direction to the Income-tax Officer to re-do the assessment after the claim for compensation is finally settled through future orders of courts?

Ratio Decidendi: 1. The word "transfer" in section 12B of the Indian Income-tax Act, 1922, includes both a transfer by act of parties and a transfer by operation of law, such as compulsory acquisition by the Government. 2. The profits or gains arising from compulsory acquisition are to be deemed to be income of the previous year in which the acquisition took place, even if the compensation is awarded in subsequent years. This is because section 12B introduces a statutory fiction that overrides all other considerations, including the method of accounting used by the assessee. 3. The Appellate Assistant Commissioner has the power under section 31(3)(b) of the Act to set aside an assessment and direct the Income-tax Officer to make a fresh assessment after making further inquiry, and this power is not subject to the time limit prescribed in section 34(1)(b) for reassessments. This is because the second proviso to section 34(3) lifts the time limit in cases where the Income-tax Officer acts in pursuance of a direction given by the Appellate Assistant Commissioner.

Final Decision: The questions referred to the court are answered as follows: 1. Yes, compulsory acquisition of land constitutes a "transfer" as contemplated under section 12B of the Indian Income-tax Act, 1922, so as to attract capital gains tax. 2. Yes, the compensation to which the assessee became entitled by orders of court subsequent to the previous year ended December 31, 1960, could be taken into account for determining the capital gains under section 12B for the year of assessment 1961-62. 3. Yes, the Income-tax Appellate Tribunal is right in law in holding that the Appellate Assistant Commissioner of Income-tax had power to set aside the assessment with a direction to the Income-tax Officer to re-do the assessment after the claim for compensation is finally settled through future orders of courts.