Capital gain tax on Income from Land Acquisition chargeable from the date of award: SC

The SC on August 25, 2020 {RAJ PAL SINGH vs. COMMISSIONER OF INCOME TAX} held that capital gains shall be deemed to have accrued: (a) upon making of the award, in the case of ordinary acquisition referable to Section 16; and (b) after expiration of fifteen days from the publication of the notice mentioned in Section 9 (1), in the case of urgency acquisition under Section 17.

It was held by the Bench, comprising of Justice A.M. KHANWILKAR, Justice HEMANT GUPTA & Justice DINESH MAHESHWARI, that the contents of the then existing Section 45 of the Income-tax Act, 1961 read with the relevant definitions would make it clear that such profits or gains are chargeable to income-tax as “capital gains” that arise out of the transfer of a capital asset by any of the recognized modes, including sale, exchange, relinquishment and even compulsory acquisition; and, by fiction, it has been provided that such profits or gains shall be deemed to be the income of the previous year in which transfer took place. It was held that capital gains of an assessee, arising from transfer of capital asset, are chargeable to tax as income of the previous year in which transfer had taken place.

The issue before the SC in the present case was whether capital gains arising out of land acquisition compensation were chargeable to income-tax under Section 45 of the Act of 1961 for the previous year referable to the date of award of compensation i.e., 29.09.1970 and not the date of notification for acquisition. Thus, the root question was as to whether, on the facts and in the circumstances of the present case, the High Court was right in taking the date of award as the date of accrual of capital gains for the purpose of Section 45 of the Act of 1961?

It was held that concepts of “transfer” and “transfer of property” to the facts of the present case, it could be readily found that when the subject land has been compulsorily acquired, its transfer from the assessee-appellant to the Government is directly covered by Section 2(47) of the Act of 1961.

The SC held that brief overview of the scheme of the Land Acquisition Act, 1894, as existing at the relevant point of time, makes it clear that publication of preliminary notification under Section 4 by itself did not vest the property in the Government; it only informed about the intention of the Government to acquire the land for a public purpose. It was held that after this notification, in the ordinary course, under Section 5A, the Land Acquisition Collector was required to examine the objection, if any, to the proposed acquisition; and after examining his report, if so made, the Government was to issue declaration under Section 6, signifying its satisfaction that the land was indeed required for public purpose. It was held that these steps were to be followed by notice under Section 9, stating that the Government intended to take possession of the land and inviting claims for compensation. Thereafter, it was held that the Collector was to make his award under Section 11. It was held that as per Section 16 of the Act of 1894, the Land Acquisition Collector, after making the award, could have taken possession of the land under acquisition and thereupon, the land vested in the Government free from all encumbrances.

The SC held that in the matters relating to compulsory acquisition of land under the Act of 1894, completion of transfer with vesting of land in the Government essentially correlates with taking over of possession of the land under acquisition by the Government. It was held that where possession is taken over before arriving of the relevant stage for such taking over, capital gains shall be deemed to have accrued upon arrival of the relevant stage and not before. 

It was held that, in the present case, the land in question was subjected to acquisition under the Act of 1894 by adopting the ordinary process leading to award under Section 11. It was also held that ordinarily, capital gains would have accrued upon taking over of possession after making of the award. Consequently, it was held that capital gains to the assessee-appellant for the acquisition in question could not have accrued before the date of award i.e., 29.09.1970.

It was also held that where the time period of any lease of immovable property is limited, it determines by efflux of such time, as per Section 111(a) of the Act of 1882. Further, it was held that in terms of Section 108(q) of the Act of 1882, on determination of lease, the lessee is bound to put the lessor into possession of the leased property. It was held that in case where lessee does not deliver possession to the lessor after determination of the lease but the lessor accepts rent or otherwise assents to his continuing in possession, in the absence of an agreement to the contrary, the status of such lessee is that of tenant holding over, in terms of Section 116 of the Act of 1882. It was held that in the absence of acceptance of rent or otherwise assent by the lessor, the status of lessee is that of tenant at sufferance.

It was held by the SC that the principles, when applied to the present case, leave nothing to doubt that in relation to that part of the land in question which was given on lease, possession of the College, after determination of the lease on 31.08.1967, was only that of a tenant at sufferance because it has not been shown if the lessor i.e., the appellant accepted rent or otherwise assented to the continuation of lease. It was held that the possession of College over the part of land in question being only that of tenant at sufferance, had the corresponding acknowledgment of the title of the appellant and of the liability of the College to pay mesne profits for use and occupation. It was held that the same status of the parties qua the land under lease existed on the date of notification for acquisition i.e., 15.05.1968 and continued even until the date of award i.e., 29.09.1970. In other words, it was held that even until the date of award, the appellant-assessee continued to carry its status as owner of the land in question and that status was not lost only because a part of the land remained in possession of the College. It was held that in this view of the matter, the suggestion that the land vested in the Government on the date of initial notification remains totally baseless and could only be rejected.

It was held by the SC that viewed from any angle, it is clear that accrual of capital gains in the present case had not taken place on 15.05.1968. It was held that if at all possession of the College was to result in vesting of the land in the Government, such vesting happened only on the date of award i.e., 29.09.1970 and not before. In other words, it was held that the transfer of land from the assessee-appellant to the Government reached its completion not before 29.09.1970 and hence, the earliest date for accrual of capital gains because of this acquisition was the date of award i.e., 29.09.1970. Therefore, it was held that the assessment of capital gains as income of the appellant for the previous year relevant to the assessment year 1971-1972 does not suffer from any infirmity or error.

It was held by the SC  that, the answer to Point is clearly in the negative i.e., against the assessee-appellant and in favour of the revenue that on the facts and in the circumstances of the present case, transfer of the capital asset (land in question), for the purposes of Section 45 of the Act of 1961, was complete only on 29.09.1970, the date of award and not on 15.05.1968, the date of notification for acquisition under Section 4 of the Act of 1894; and hence, capital gains arising out of such acquisition have rightly been charged to tax with reference to the date of award i.e., 29.09.1970.