REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4401 OF 2009 (Arising out of S.L.P.(C) No.17640 of 2008)

Commissioner of Income-tax, Faridabad … Appellant (s)

Versus

Ghanshyam (HUF) … Respondent(s)

WITH

Civil  Appeal No. 4402 of 2009 – Arising out of S.L.P. (C) No.17644 of  2008  Civil Appeal No.  4403 of 2009 – Arising out of S.L.P. (C) No.17643 of  2008 Civil Appeal No.  4404 of 2009 – Arising out of S.L.P. (C) No.17645 of  2008 Civil Appeal No.  4405 of 2009 – Arising out of S.L.P. (C) No.17642 of  2008 Civil Appeal No.  4406 of 2009 – Arising out of S.L.P. (C) No.17641 of  2008 Civil  Appeal No. 4407 of 2009 – Arising out of S.L.P. (C) No.17647 of  2008 Civil Appeal No.  4408  of 2009 – Arising out of S.L.P. (C) No.17646 of  2008 Civil Appeal No.  4409 of 2009 – Arising out of S.L.P. (C) No.8350 of 2009

Civil Appeal No. 4410 of 2009 – Arising out of S.L.P. (C) No.8451 of 2008 Civil Appeal No.  4411 of 2009 – Arising out of S.L.P. (C) No.4832 of 2008 Civil Appeal No.  4412 of 2009 – Arising out of S.L.P. (C) No.4833 of 2008 Civil Appeal No. 4413  of 2009 – Arising out of S.L.P. (C) No.4834 of 2008 Civil Appeal No. 4414  of 2009 – Arising out of S.L.P. (C) No.4835 of 2008 Civil  Appeal No. 4415 of 2009 – Arising out of S.L.P. (C) No.20657 of  2008 Civil Appeal No. 4416  of 2009 – Arising out of S.L.P. (C) No.20658 of  2008 Civil Appeal No.  4417 of 2009 – Arising out of S.L.P. (C) No.20659 of  2008

Civil Appeal No.  4418  of 2009 – Arising out of S.L.P. (C) No.7599 of  2009

Civil Appeal No. 4419  of 2009 – Arising out of S.L.P. (C) No.3054 of 2008 Civil Appeal No. 4420  of 2009 – Arising out of S.L.P. (C) No.3717 of 2009 Civil Appeal No.  4422 of 2009 – Arising out of S.L.P. (C) No.4174 of 2009 Civil Appeal No.  4423 of 2009 – Arising out of S.L.P. (C) No.31566 of  2008 Civil Appeal No.  4424 of 2009 – Arising out of S.L.P. (C) No.713 of 2009 Civil Appeal No. 4425  of 2009 – Arising out of S.L.P. (C) No.5300 of 2009 Civil Appeal No.  4426 of 2009 – Arising out of S.L.P. (C) No.6378 of 2009

J U D G M E N T

S. H. KAPADIA, J.

1. Delay condoned.

2. Leave granted.

3. The controversy in the present batch of civil appeals pertains  

to the interpretation of Section 45(5) of the Income-tax Act, 1961,  

as it stood prior to 1.4.2004.  

FACTS IN THE LEAD MATTER

Civil Appeal No.         of 2009 – Arising out of S.L.P. (C)  No.17640 of 2008   –    Commissioner of Income Tax, Faridabad    v. Ghanshyam (HUF).      

4. Assessee received enhanced compensation on its lands being  

acquired by Haryana Urban Development Authority (HUDA) as also  

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interest thereon during the previous year relevant to assessment  

year 1999-2000.

5. Assessee filed its return on income for the assessment year  

1999-2000  in  which  he  did  not  offer  the  amount  of  enhanced  

compensation and the interest received thereon during the previous  

year relevant to the assessment year for taxation, on the plea that  

the amount of enhanced compensation received had not accrued to  

the assessee during the year of receipt as the entire amount was in  

dispute in appeal before the High Court which appeal stood filed by  

the  State  against  the  order  of  the  Reference  Court  granting  

enhanced compensation.  The amount was received by the assessee  

in  terms  of  the  interim  order  of  the  High  Court  against  the  

assessee’s furnishing security to the satisfaction of the executing  

court.  The interest received on enhanced compensation during the  

previous year was also, according to the assessee, not chargeable to  

tax on the same plea.

6. The A.O. did not accept the contentions of the assessee on the  

ground that in terms of Section 45(5) of the Income-tax Act, 1961  

(“1961 Act”, for short) enacted w.e.f. 1.4.88, the amount by which  

compensation  or  consideration  stood  enhanced  or  further  

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enhanced by the Court,  is  deemed income chargeable under the  

head “Capital Gains” of the previous year in which the said amount  

came  to  be  received.   The  A.O.  accordingly  brought  to  tax  the  

amount of enhanced compensation of Rs.87,13,517/- received by  

the assessee during the previous year relevant to the assessment  

year 1999-2000.  Similarly, interest on enhanced compensation of  

Rs.1,47,575/- received by the assessee during the previous year  

was also brought to tax in the year of receipt.  The assessee filed  

appeal  against  the  order  of  the  A.O.  in  which  he  reiterated  the  

above contention.  Assessee also placed reliance on the judgment of  

this Court in  Commissioner of Income-tax, West Bengal-II  v.  

Hindustan Housing and Land Development Trust Ltd. – (1986)  

161 ITR 524 (SC).  CIT (A) came to the conclusion that since the  

enhanced  compensation  received  was  in  dispute  in  the  pending  

First  Appeal,  both,  the  enhanced  compensation  as  well  as  the  

interest thereon had not accrued to the assessee during the year of  

receipt as the entire amount was in dispute in First Appeal and  

that  the  assessee  had  received  the  said  amount  only  against  

security furnished to the satisfaction of the executing court.  At this  

stage,  it  may  be  mentioned  that  the  amount  of  enhanced  

compensation sought to be taxed under Section 45(5) of the 1961  

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Act  was  Rs.87,13,517/-  whereas  the  interest  on  enhanced  

compensation  which  was  also  sought  to  be  taxed  was  

Rs.1,47,575/-.

7. Aggrieved  by  the  decision  of  the  CIT(A),  the  Department  

moved  Income-tax  Appellate  Tribunal  (ITAT)  which  following  its  

order upheld the order of the CIT(A) and dismissed the appeal of  

the  Department.   Aggrieved  by  the  decision  of  the  Tribunal  the  

matter was carried in appeal to the High Court under Section 260A  

of the 1961 Act.  By the impugned judgment it has been held that  

the case is squarely covered by the judgment of the Supreme Court  

in the case of Hindustan Housing (supra).  According to the High  

Court, when the State is in appeal against the order of enhanced  

compensation  and  interest  thereon  the  receipt  of  additional  

compensation and interest thereon was not taxable as income as  

the said two items were disputed by the Government  in appeal.  

Consequently, the Department’s appeal was dismissed by the High  

Court, hence this civil appeal is filed by the Department.

ISSUE

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8. The short question to be decided in this batch of civil appeals  

is  :  whether  ITAT  was  right  in  ordering  deletion  of  enhanced  

compensation and interest  thereon from the total  income of  the  

assessee on the ground that the said two items, awarded by the  

Reference Court, was under dispute in First Appeal before the High  

Court.

Analysis of provisions of the 1961 Act

9. We quote hereinbelow Section 2(47)  of  the 1961 Act which  

reads as under:

“2 - Definitions  

In this Act, unless the context otherwise requires,-

(47) "transfer", in relation to a capital asset, includes,-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof  into,  or  is  treated  by  him  as,  stock-in-trade  of  a  business  carried on by him, such conversion or treatment; [or]

(v) any transaction involving the allowing of the possession of  any  immovable  property  to  be  taken  or  retained  in  part  performance of a contract of the nature referred to in Section  53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member  of, or acquiring shares in, a co-operative society, company or  other association of persons or by way of any agreement or any  

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arrangement or  in any other manner whatsoever)  which has  the effect  of transferring,  or enabling the enjoyment of,  any  immovable property.

Explanation.-For the purposes of sub-clauses (v) and (vi),  "immovable property" shall  have the same meaning as in  clause (d) of Section 269UA.”

10. We also quote hereinbelow Section 45(1) of the 1961 Act as it  

stood prior to 1.4.2004 which reads as under:

“45 - Capital gains  

(1)  Any profits or gains arising from the transfer of a capital asset  effected  in  the  previous  year  shall,  save  as  otherwise  provided  in  sections [***] [54, 54B, [***] [54D, [54E, [54EA, 54EB,] 54F [, 54G  and 54H]]]]], be chargeable to income-tax under the head "Capital  gains", and shall be deemed to be the income of the previous year in  which the transfer took place.”

11. We also quote hereinbelow Section 45(5) of the 1961 Act as it  

stood prior to 1.4.2004 which reads as under:

“45 - Capital gains  

(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 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  

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"Capital  gains"  of  the  previous  year  in  which  such  amount  is  received by the assessee;”

12. We also quote hereinbelow Section 45(5) of the 1961 Act after  

1.4.2004 which reads as under:

“45 - Capital gains

(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 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 purposes 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;

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(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.”

(emphasis supplied by us)

13. We also quote hereinbelow Section 155(16) of the 1961 Act  

after 1.4.2004 which reads as under:

“PROCEDURE FOR ASSESSMENT

155. Other amendments (16) Where in the assessment for any year, a capital gain arising 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, is computed by taking the compensation or  consideration as referred to in clause (a) or, as the case may be, the  compensation  or  consideration  enhanced  or  further  enhanced  as  referred to in clause (b) of sub-section (5) of Section 45, to be the full  value of consideration deemed to be received or accruing as a result of  the  transfer  of  the  asset  and  subsequently  such  compensation  or  consideration is reduced by any court, Tribunal or other authority, the  Assessing  Officer  shall  amend  the  order  of  assessment  so  as  to  compute the capital gain by taking the compensation or consideration  as so reduced by the court, Tribunal or any other authority to be the  full value of consideration; and the provisions of Section 154 shall, so  far as may be, apply thereto, and the period of four years shall be  reckoned  from  the  end  of  the  previous  year  in  which  the  order  reducing the compensation was passed by the court, Tribunal or other  authority.”   

14. The  following  conditions  need  to  be  satisfied  for  taxing  a  

transaction  as  capital  gains,  viz.,  the  subject-matter  must  be  a  

capital  asset,  the  transaction  must  fall  in  the  definition  of  

“transfer”, there must be profit or loss called “Capital Gains” and  

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that the taxpayer has claimed exemption in whole or in part by  

complying with legal provisions (Like Section 54F).

15. Section  45(1)  of  the  1961  Act  speaks  about  capital  gains  

arising out of “transfer” of a capital  asset.  The definition of the  

expression “transfer” is contained in Section 2(47) of the 1961 Act.  

It has very wide meaning.  What is taxable under Section 45(1) of  

the  1961  Act  is  “profits  and  gains  arising  from a  transfer  of  a  

capital asset” and the charge of income-tax on the capital gains is a  

charge on the income of the previous year in which the transfer  

took place.  Capital gain(s) is an artificial income.  It is created by  

the 1961 Act.  Profit(s) arising from transfer of capital asset is made  

chargeable  to  income-tax  under  Section  45(1)  of  the  1961  Act.  

From the scheme of Section 45, it is clear that capital gains is not  

an income which accrues from day-to-day during a specific period  

but  it  arises  at  fixed  point  of  time,  namely,  on  the  date  of  the  

transfer.  In short, Section 45 defines capital gains, it makes them  

chargeable to tax and it allots the appropriate year for such charge.  

It also enacts a deeming provision.  Section 48 lays down mode of  

computation of capital gains and deductions therefrom.

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16. The  question  which  arises  for  determination  is  –  why  was  

Section  45(5)  inserted  by  the  Finance  Act,  1987,  w.e.f.  1.4.88?  

Under Section 45(1), profits or gains arising from the transfer of a  

capital asset effected in the previous year is taken to be the income  

of  the previous  year  in  which the  transfer  took place  and such  

profits  are  chargeable  to  tax  under  the  head  “Capital  Gains”.  

However, it was noticed that in cases where capital gains accrued  

or  arose  by  way  of  compulsory  acquisition,  the  additional  

compensation  stood  awarded  in  several  stages  by  different  

appellate authorities which necessitated rectification of the original  

assessment  at  each  stage.   To  provide  for  rectification  of  the  

assessment  of  the  year  in  which  capital  gains  was  originally  

assessed, Section 155(7A) was also introduced.  However, as stated  

above, since additional compensation under the Land Acquisition  

Act, 1894 was awarded in several stages multiple rectifications had  

to be made to the original assessment which cause great difficulty  

in  carrying  out  the  required  rectification  and  in  effecting  the  

recovery of additional demand.  It was also noticed that repeated  

rectifications  of  assessment  on  account  of  enhancement  of  

compensation  by  different  courts  often  resulted  in  mistakes  in  

computation  of  tax.   Therefore,  with  a  view  to  remove  these  

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difficulties, the Finance Act 1987 inserted Section 45(5) to provide  

for  taxation  of  additional  compensation  in  the  year  of  receipt  

instead of in the year of transfer of the capital asset.  Accordingly,  

additional  compensation  is  treated  as  “deemed  income”  in  the  

hands of the recipient even if the actual recipient happens to be a  

person different from the original transferor by reason of death, etc.  

For this purpose, the cost of acquisition in the hands of the receiver  

of the additional compensation is deemed to be nil.  However, the  

compensation awarded in the first instance would continue to be  

chargeable  as  income  under  the  head  “Capital  Gains”,  in  the  

previous year in which transfer took place.  At this stage, it may be  

noted, that, Section 45(1) stood further amended (w.e.f. 1.4.91) so  

as to include reference to Section 54H and Section 45(5)(a) which,  

as  stated  above,  stood  amended  (w.e.f.  1.4.88).   The  scope  and  

effect  of  the  above  amendments  made  in  Section  45,  as  also  

insertion of Section 54H, by Finance Act 1991, has been elaborated  

in the following portion of the Departmental Circular No.621 dated  

19.12.91:

‘‘Streamlining the provisions relating to exemption for roll- over of capital gains-

Capital  gains  are  deemed  to  be  income  of  the  previous year in which the transfer  giving rise  to the  

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gains  takes  place  except  where  otherwise  provided.  According  in  the  case  of  compulsory  acquisition  of  assets, the capital gains included in the compensation,  as originally awarded, is charged to tax in the year in  which  the  transfer  by  way  of  compulsory  acquisition  takes place, but additional compensation is brought to  tax only in the year in which it is received.

It  has  been  brought  to  the  notice  of  the  Government that in case of  compulsory acquisition of  assets, at times there is a considerable gap between the  dates of acquisition and payment of compensation.  The  result  is  that  the  existing  provisions  of  capital  gains  taxation  operate  harshly  inasmuch  as  the  affected  persons are unable to avail  of  the exemption for  roll- over  of  capital  gains,  within the specified time period  through investment in specified assets.

Section 45 of  the Income-tax Act has,  therefore,  been amended to provide that capital gains arising from  the transfer of the capital asset by way of compulsory  acquisition under any law shall be charged to tax in the  previous  year  in  which  the  compensation  is  first  received.

This amendment takes effect retrospectively from  1st April, 1988.

Further, a new section 54H has been inserted in  the  Income-tax  Act,  to  provide  that  in  cases  where  compensation  in  respect  of  any  asset  acquired  compulsorily is received after the date of such transfer,  the  period  for  investment  in  specified  assets  shall  be  reckoned from the date of receipt of such compensation.  However,  where  the  compensation  was  first  received  before  1st April,  1991,  and  the  period  for  making  investment in any specified asset has expired before 1st  October, 1991, such period shall stand extended up to  31st December, 1991.

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This amendment takes effect from the 1st day of  October, 1991.”

17. The  important  point  to  be  noted  is  that  in  the  case  of  

compulsory  acquisition  of  an  asset,  the  capital  gains  in  the  

compensation, as originally awarded, is charged to tax in the year  

in which the transfer by way of compulsory acquisition takes place,  

but additional compensation is brought to tax only in the year in  

which it is received.

18. Thus,  Section  45(5)  enacts  overriding  provisions and takes  

care of a situation :  

--where the capital gains 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 consideration for such transfer is  enhanced or further enhanced by any court, tribunal or  other authority.

In such a situation, the capital  gain so arising is,  for  and from assessment year 1988-89, to be dealt with as  under:-

(a) the capital gain computed with reference to—

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--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

is  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 is to be deemed to be  the income chargeable under the head “Capital gains” of  the previous year in which such amount is received by  the assessee.

Analysis of the provisions of L.A. Act, 1894

19. At the outset we quote hereinbelow Sections 23(1), 23(1A) and  

23(2) of the 1894 Act which read as under:

“23 - Matters to be considered in determining compensation  

(1) In determining the amount of compensation to be awarded for  land acquired under this Act, the court shall take into consideration--

first, the market-value of the land at the date of the publication of  the notification under section 4, sub-section (1);

secondly,  the  damage  sustained  by  the  person  interested,  by  reason of the taking of any standing crops or trees which may be  on the land at the time of the Collector's taking possession thereof;

thirdly, the damage (if any), sustained by the person interested, at  the time of the Collector's taking possession of the land, by reason  of severing such land from his other land;

fourthly, the damage (if any), sustained by the person interested,  at  the time of  the Collector's  taking possession  of  the land,  by  

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reason of the acquisition injuriously affecting his other property,  movable or immovable, in any other manner, or his earnings;

fifthly,  if,  in  consequence  of  the  acquisition  of  the  land by  the  Collector,  the  person  interested  is  compelled  to  change  his  residence or place of business, the reasonable expenses (if any)  incidental to such change; and

sixthly, the damage (if any) bona fide resulting from diminution of  the profits of the land between the time of the publication of the  declaration under section 6 and the time of the Collector's taking  possession of the land.

(1A) In addition to the market value of the land above provided, the  Court shall in every case award an amount calculated at the rate of  twelve per centum per annum on such market-value for the period  commencing on and from the date of the publication of the notification  under section 4, sub-section (1), in respect of such land to the date of  the award of the Collector or the date of taking possession of the land,  whichever is earlier.

Explanation.-In  computing  the  period  referred  to  in  this  sub- section, any period or periods during which the proceedings for the  acquisition of  the land were held up on account of  any stay or  injunction by the order of any court shall be excluded.

(2) In addition to the market-value of the land as above provided, the  court shall in every case award a sum of thirty per centum on such  market-value,  in  consideration  of  the  compulsory  nature  of  the  acquisition.”

20. We also quote hereinbelow Section 28 of the 1894 Act which  

reads as under:

“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.”

21. We  also  quote  hereinbelow  Section  34  of  the  1894  which  

reads as under:

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“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.”

22. Section 23(1A) was introduced in the 1894 Act to mitigate the  

hardship caused to the owner of the land who is deprived of its  

enjoyment by taking possession from him and using it for public  

purpose, because of considerable delay in making the award and  

offering payment thereof  [See :  Assistant Commissioner, Gadag  

Sub-Division, Gadag v.  Mathapathi Basavannewwa and others -  

AIR 1995 SC 2492].  To obviate such hardship, Section 23(1A) was  

introduced and the Legislature envisaged that the owner is entitled  

to 12% per annum additional amount on the market value for a  

period  commencing  on  or  from  the  date  of  publication  of  the  

notification under Section 4(1) of the 1894 Act upto the date of the  

award of the Collector or the date of taking possession of the land,  

whichever is earlier.  The additional amount payable under Section  

23(1A) of the 1894 Act is neither interest nor solatium.  It is an  

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additional compensation designed to compensate the owner of the  

land,  for  the  rise  in  price  during  the  pendency  of  the  land  

acquisition  proceedings.   It  is  a  measure  to  offset  the  effect  of  

inflation and the continuous rise in the value of properties.  [See:  

State of Tamil Nadu and others etc.  v.  L. Krishnan and others  

etc. -  AIR 1996 SC 497].  Therefore,  the amount payable under  

Section 23(1A) of the 1894 Act is an additional compensation in  

respect to the acquisition and has to be reckoned as part of the  

market  value  of  the  land.   Sub-section  (1A)  of  Section  23  was  

introduced  by  Land  Acquisition  (Amendment)  Act,  1984.   It  

provides that in every case the Court shall  award an amount as  

additional  compensation  at  the  rate  of  12% per  annum on  the  

market value of the land for the period commencing on and from  

the date of publication of the notification under Section 4(1) to the  

date  of  the  award  of  the  Collector  or  to  the  date  of  taking  

possession of the land, whichever is earlier.  In other words sub-

section  (1A)  of  Section  23 provides  for  additional  compensation.  

The said sub-section takes care of increase in the value at the rate  

of 12% per annum.   

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23. In addition to the market value of the land, as above provided,  

the Court shall in every case award a sum of 30% on such market  

value,  in  consideration  of  the  compulsory  nature  of  acquisition.  

This is under Section 23(2) of the 1894 Act.  In short, Section 23(2)  

talks about solatium.  Award of solatium is mandatory.  Similarly,  

payment of additional amount under Section 23(1A) is mandatory.  

The  award  of  interest  under  Section  28  of  the  1894  Act  is  

discretionary.   Section  28  applies  when  the  amount  originally  

awarded has been paid or deposited and when the Court awards  

excess  amount.   In  such cases  interest  on that  excess  alone  is  

payable.  Section 28 empowers the Court to award interest on the  

excess  amount of  compensation awarded by it  over  the  amount  

awarded by the Collector.  The compensation awarded by the Court  

includes  the  additional  compensation  awarded  under  Section  

23(1A) and the solatium under Section 23(2) of the said Act.  This  

award of interest is not mandatory but is left to the discretion of  

the Court.  Section 28 is applicable only in respect of the excess  

amount, which is determined by the Court after a reference under  

Section 18 of the 1894 Act.  Section 28 does not apply to cases of  

undue delay in making award for compensation [See: Ram Chand  

& others etc v. Union of India & Ors. - 1994(1) SCC 44].  In the  

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case of Shree Vijay Cotton & Oil Mills Ltd. v.  State of Gujarat –  

(1991)  1 SCC 262, this  Court  has held that interest  is  different  

from compensation.

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.

25. It  is  clear  from  reading  of  Sections  23(1A),  23(2)  as  also  

Section 28 of the 1894 Act that additional benefits are available on  

the market value of the acquired lands under Section 23(1A) and  

23(2)  whereas  Section  28  is  available  in  respect  of  the  entire  

compensation.   It  was  held  by  the  Constitution  Bench  of  the  

Supreme Court in Sunder v. Union of India – (2001) 7 SCC 211,  

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that  “indeed the language of  Section 28 does  not  even remotely  

refer to market value alone and in terms it talks of compensation or  

the  sum  equivalent  thereto.   Thus,  interest  awardable  under  

Section 28, would include within its ambit both the market value  

and the statutory solatium.  It would be thus evident that even the  

provisions of Section 28 authorise the grant of interest on solatium  

as well.”  Thus solatium means an integral part of compensation,  

interest would be payable on it.   Section 34 postulates award of  

interest at 9% per annum from the date of taking possession only  

until it is paid or deposited.  It is a mandatory provision.  Basically  

Section 34 provides for payment of interest for delayed payment.

Taxability of additional  compensation and interest  under Section 45(5) of the 1961 Act in the context  of the provisions of L.A. Act, 1894

26. The question before this Court is : whether additional amount  

under Section 23(1A), solatium under Section 23(2), interest paid  

on  excess  compensation  under  Section  28  and  interest  under  

Section  34  of  the  1894  Act,  could  be  treated  as  part  of  the  

compensation under Section 45(5) of the 1961 Act?

27. In  the  case  of  Hindustan  Housing (supra)  certain  lands  

belonging to the assessee-company, which was in the business of  

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dealing in land and which maintained its account on mercantile  

system, were first requisitioned and then compulsorily acquired by  

the  State  Government.   The  Land  Acquisition  Officer  awarded  

Rs.24,97,249/- as compensation.  On appeal the Arbitrator made  

an award at Rs.30,10,873/- with interest at 5% from the date of  

acquisition.  Thereupon, the State preferred an appeal to the High  

Court.  Pending the appeal, the State Government deposited in the  

Court  Rs.7,36,691/- being the additional  amount payable  under  

the  award  and  the  assessee  was  permitted  to  withdraw  that  

additional amount on furnishing a security bond for refunding the  

amount in the event of the said Appeal being allowed.  On receiving  

the amount, the assessee credited it in its suspense account on the  

same date.  The question was : whether the additional amount of  

Rs.7,24,914/- could be taxed as the income on the ground that it  

became  payable  pursuant  to  the  award  of  the  Arbitrator.   The  

Tribunal held that the amount did not accrue to the assessee as its  

income  and  was,  therefore,  not  taxable  in  the  assessment  year  

1956-57.  The financial year in which the additional amount came  

to be withdrawn ended on 31.3.56.  It was held by this Court that  

although award was made on 29.7.1955, enhancing the amount of  

compensation payable to the assessee, the entire amount was in  

2 2

dispute in the appeal filed by the State.  Therefore, there was no  

absolute right to receive the amount at that stage.  It was held that  

if the Appeal was to be allowed in its entirety, the right to payment  

of enhanced compensation would have fallen altogether.  Therefore,  

according  to  this  Court,  the  extra  amount  of  compensation  of  

Rs.7,24,914/- was not income arising or accruing to the assessee  

during the previous year relevant to the assessment year 1956-57.   

28. The  question  is  :  whether  the  judgment  of  this  Court  in  

Hindustan Housing (supra) would apply to the present case which  

arises under the Income-tax Act, 1961?  At the outset, it may be  

noted  that  the  judgment  of  this  Court  in  Hindustan  Housing  

(supra) was  delivered  on  29.7.86.   It  was  prior  to  1.4.88  when  

Section 45(5) stood incorporated by Finance Act 1987 w.e.f. 1.4.88.  

Further, the judgment of this Court in Hindustan Housing (supra)  

has been given in respect of assessment year 1956-57 under the  

Income-tax  Act,  1922  whereas,  in  the  present  case,  we  are  

concerned with the 1961 Act which defines the word “transfer” in  

much wider  sense  under  Section  2(47).   Lastly,  for  the  reasons  

given  hereinafter,  particularly  in  the  context  of  introduction  of  

Section 45(5)  of  the  1961 Act  w.e.f.1.4.88 a  totally  new scheme  

2 3

stood introduced keeping in mind cases of compulsory acquisition  

under  the  1894  Act  under  which  compensation  is  payable  at  

multiple  stages  and amounts  stand withdrawn by  the  assessee-

claimants  and  used  by  the  assessee(s)  for  several  years,  during  

which litigation is pending.  It is in the context of Section 45(5) that  

we need to decide the year of taxability.  It is significant to note that  

Section  12B  of  1922  Act  did  not  contain  specific  reference  to  

compulsory acquisition as contained in Section 2(47) of the 1961  

Act.   Therefore,  in  our  view,  the  judgment  of  this  Court  in  

Hindustan Housing (supra) is not applicable to the present case.  

29. From Section 45 it is clear that capital gains are not income  

accruing from day to day.  It is deemed income which arises at a  

fixed  point  of  time,  viz,  date  of  transfer.   Section  45(5),  newly  

inserted by the Finance Act, 1987, w.e.f. 1.4.88 and subsequently  

amended, retrospectively w.e.f. 1.4.88, by the Finance Act, 1991,  

enacts overriding provision and takes care of a situation –  

where  the  capital  gains  arise  from  the  transfer of  a  capital  asset,  being  a  transfer  by  way  of  compulsory  acquisition and the compensation for  such transfer  stands  enhanced in stages by any court, tribunal or authority.  In  such a situation, the capital gains so arising is, for and from  assessment year 1988-89, has to be dealt with as under : -  

2 4

(i) the  capital  gains  computed  with  respect  to  the  compensation awarded in  the  first  instance  would  be  chargeable as Income under the head “Capital Gains” of  the previous year in which such compensation or part  thereof was first received; and

(ii) amount by which  compensation or consideration  is enhanced or further enhanced by the court, tribunal  or authority is to be Deemed Income chargeable under  the head “Capital Gains” of the previous year in which  such amount is received by the assessee.

30. For the said purpose, the cost of acquisition is to be taken as  

Nil [See: Explanation (i)].  Also, where the enhanced compensation  

is received by any person, other than the transferor by reason of  

the death of the transferor or for any reason, the amount of such  

additional  compensation  or  additional  consideration  is  to  be  

deemed to be the income of the recipient of the previous year in  

which such amount is received by him.

31. Two aspects need to be highlighted.  Firstly, Section 45(5) of  

the  1961  Act  deals  with  transfer(s)  by  way  of  compulsory  

acquisition and not by way of transfers by way of sales etc. covered  

by Section 45(1) of the 1961 Act.  Secondly, Section 45(5) of the  

1961  Act  talks  about  enhanced  compensation  or  consideration  

which in terms of L.A. Act 1894 results in payment of additional  

compensation.   

2 5

32. The issue to be decided before us – what is the meaning of the  

words “enhanced compensation/consideration” in Section 45(5)(b)  

of  the 1961 Act?  Will  it  cover “interest”?  These questions also  

bring in the concept of the year of taxability.

33. It is to answer the above questions that we have analysed the  

provisions of Sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act.  

As discussed hereinabove,  Section 23(1A)  provides for  additional  

amount.  It takes care of increase in the value at the rate of 12 %  

per annum.  Similarly, under Section 23(2) of the 1894 Act there is  

a provision for solatium which also represents part of  enhanced  

compensation.   Similarly,  Section  28  empowers  the  court  in  its  

discretion to award interest on the excess amount of compensation  

over  and  above  what  is  awarded  by  the  Collector.   It  includes  

additional  amount  under  Section  23(1A)  and  solatium  under  

Section 23(2) of the said Act.  Section 28 of the 1894 Act applies  

only in respect of the excess amount determined by the court after  

reference under Section 18 of the 1894 Act.  It depends upon the  

claim, unlike interest under Section 34 which depends on undue  

delay  in  making  the  award.   It  is  true  that  “interest”  is  not  

compensation.  It is equally true that Section 45(5) of the 1961 Act  

2 6

refers to compensation.  But as discussed hereinabove, we have to  

go by the provisions of the 1894 Act which awards “interest” both  

as an accretion in the value of the lands acquired and interest for  

undue  delay.   Interest  under  Section  28  unlike  interest  under  

Section  34  is  an  accretion  to  the  value,  hence  it  is  a  part  of  

enhanced compensation or consideration which is not the case with  

interest  under  Section  34  of  the  1894  Act.   So  also  additional  

amount under Section 23(1A) and solatium under Section 23(2) of  

the 1961 Act forms part of enhanced compensation under Section  

45(5)(b) of the 1961 Act.  In fact, what we have stated hereinabove  

is reinforced by the newly inserted clause (c) in Section 45(5) by the  

Finance  Act,  2003  w.e.f.1.4.2004.   This  newly  added  clause  

envisages a situation 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)  of section 45(5) or, as the case may be,

-enhanced compensation or consideration referred to in  clause (b) of section 45(5),

and subsequently such compensation or consideration  is reduced by any court, Tribunal or other authority.

2 7

34. In such a situation, 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.   For  giving  effect  to  such  

recomputation,  the  provisions  of  the  newly  inserted  (w.e.f.  

1.4.2004) section 155(16) by the Finance Act, 2003 (32 of 2003),  

have been enacted.

35. It was urged on behalf of the assessee that Section 45(5)(b) of  

the 1961 Act deals only with re-working, its object is not to convert  

the  amount  of  enhanced  compensation  into  deemed  income  on  

receipt.  We find no merit in this argument.  The scheme of Section  

45(5) of the 1961 Act was inserted w.e.f. 1.4.88 as an overriding  

provision.   As  stated  above,  compensation  under  the  L.A.  Act,  

1894,  arises  and  is  payable  in  multiple  stages  which  does  not  

happen in cases of transfers by sale etc.  Hence, the legislature had  

to step in and say that as and when the assessee-claimant is in  

receipt of enhanced compensation it shall be treated as “deemed  

income” and taxed on receipt basis.  Our above understanding is  

supported by insertion of clause (c) in Section 45(5) w.e.f. 1.4.04  

and Section 155(16) which refers to a situation of  a subsequent  

2 8

reduction  by  the  Court,  Tribunal  or  other  authority  and  

recomputation/amendment of the assessment order.  Section 45(5)  

read  as  a  whole  (including  clause  “c”)  not  only  deals  with  re-

working  as  urged  on  behalf  of  the  assessee  but  also  with  the  

change  in  the  full  value  of  the  consideration  (computation)  and  

since the enhanced compensation/consideration (including interest  

under Section 28 of  the 1894 Act)  becomes payable/paid  under  

1894  Act  at  different  stages,  the  receipt  of  such  enhanced  

compensation/consideration is to be taxed in the year of  receipt  

subject to adjustment, if  any, under Section 155(16) of the 1961  

Act, later on.  Hence, the year in which enhanced compensation is  

received  is  the  year  of  taxability.   Consequently,  even  in  cases  

where pending appeal, the Court/Tribunal/Authority before which  

appeal  is  pending,  permits  the  claimant  to  withdraw  against  

security  or  otherwise  the  enhanced  compensation  (which  is  in  

dispute), the same is liable to be taxed under Section 45(5) of the  

1961 Act.  This is the scheme of Section 45(5) and Section 155(16)  

of the 1961 Act.  We may clarify that even before the insertion of  

Section 45(5)(c)  and Section 155(16)  w.e.f.  1.4.04,  the receipt  of  

enhanced compensation under Section 45(5)(b) was taxable in the  

year of receipt which is only reinforced by insertion of clause (c)  

2 9

because the right to receive payment under the 1894 Act is not in  

doubt.   It  is  important  to  note  that  compensation,  including  

enhanced  compensation/consideration  under  the  1894  Act,  is  

based on the full value of property as on date of notification under  

Section 4 of that Act.  When the Court/Tribunal directs payment of  

enhanced compensation under Section 23(1A), or Section 23(2) or  

under Section 28 of the 1894 Act it is on the basis that award of  

Collector or the Court, under reference, has not compensated the  

owner for the full value of the property as on date of notification.

36. Having settled the controversy going on for last two decades,  

we are of the view that in this batch of cases which relate back to  

assessment years 1991-92 and 1992-93, possibly the proceedings  

under the L.A. Act 1894 would have ended.  In number of cases we  

find that proceedings under the 1894 Act have been concluded and  

taxes have been paid.  Therefore, by this judgment we have settled  

the law but we direct that since matters are decade old and since  

we are not aware of what has happened in Land Acquisition Act  

proceedings in pending appeals, the recomputation on the basis of  

our judgment herein, particularly in the context of type of interest  

under  Section  28  vis-à-vis  interest  under  Section  34,  additional  

3 0

compensation  under  Section  23(1A)  and solatium under  Section  

23(2) of the 1894 Act, would be extremely difficult after all these  

years, will not be done.

37. Subject  to  what  is  stated  hereinabove,  we  allow  the  civil  

appeal of the Department with no order as to cost.                       

Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17644 of 2008  Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17643 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17645 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17642 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17641 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17647 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.17646 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.8350 of 2009

Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.8451 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.4832 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.4833 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.4834 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.4835 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.20657 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.20658 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.20659 of 2008

Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.7599 of 2009

Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.3054 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.3717 of 2009 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.4174 of 2009 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.31566 of 2008 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.713 of 2009 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.5300 of 2009 Civil Appeal No.         of 2009 – Arising out of S.L.P. (C) No.6378 of 2009

38. For  the  reasons  given  and  also  subject  to  what  is  stated  

hereinabove in Civil Appeal No.         of 2009 – Arising out of S.L.P.  

3 1

(C) No.17640 of 2008   –    Commissioner of Income Tax, Faridabad v.    

Ghanshyam (HUF),  the civil appeals filed by the Department stand  allowed with no order as to costs.

……………………………J.                                    (S.H. Kapadia)

……….………………….J.                                     (AFTAB ALAM)   

New Delhi; July  16, 2009.   

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