Enhanced Compensation & Tax Implications : A Study in Reference to Compulsory Acquisition of Land

Introduction

Acquisition of land is a right inherent in every sovereign to take all appropriate private property belonging to individual citizens for public use. This right, which is described as Eminent Domain in the American Law, is liken the power of taxation and off-spring of political necessity, and it is supposed to be based upon an implied reservation by Government that private property by its citizens under its protection may be taken or its use for public benefit irrespective of the wishes of the owner. Article 31(2) of the Constitution prescribes a two-fold limit within which such superior right of the State should be exercised. One limitation imposed upon acquisition of private property which is implied in the clause is that such taking must be done for a public purpose. The other is that no property can be taken, unless the law which authorizes such appropriation contains a provision for payment of compensation in the manner laid down in the clause. It cannot be disputed that acquisition means and implies the acquiring the entire the title of the expropriated owner, whatever the nature or extent of that title might be. The entire bundle of rights which were vested in the original holder would pass on the acquisition to the holder would pass on acquisition to the acquirer leaving nothing in the former. The simple definition of power to acquire compulsorily or of term “eminent domain” is the power of the sovereign to take property for public use without owner’s consent. The concept of public use has been inextricably related to an appropriate exercise of power and is considered essential in any statement of it meaning. Payment of compensation, though not an essential element of such connotation of the term is an essential element of valid exercise of power. Therefore the obligation to pay just compensation is a necessary incident of the power of compulsory acquisition of power.

Procedure of Land Acquisition and Awarding of Compensation

The method of land acquisition and the compensation paid for these acquisitions is given in the following paragraphs.

A Cadastral survey is conducted for obtaining the details of extent of land, persons affected and the number of owners. Based on the outcome of the survey, a requisition is submitted to the District Collector (authority nominated by the Government under the Land Acquisition Act, 1894) for acquiring the identified land. The District Collector designates a Tahsildar to take care of this land acquisition. The Tahsildar on behalf of the Government publishes a notice under the Survey and Boundaries Act, 1961. A Gazette notification is also issued identifying the land for a public purpose. Thereafter, notices are issued to land owners and a hearing is conducted. In the meantime, the Tahsildar fixes value of land after assessing the local prevailing market rate. Buildings are valued based on the schedule of rates of Public Works Department. Trees are valued based on the norms fixed by the state forest department. The District Collector (or the State Government in case the compensation is above Rs. 2 crore to a single person) approves the values fixed by the Tahsildar. A Gazette declaration regarding the acquisition of land for public purpose is issued. The Tahsildar, thereafter, issues a notice intimating the company, i.e., the requisitionist, to remit the money to the Government treasury. After the remittance, the possession of the land is handed over to the company by the Tahsildar. As per the provisions of the Land Acquisition Act, 1894, any interested person who has not accepted the award may, by application to the District Collector, require that the matter be referred for determination of the Court. In such cases, it is mandatory for the Tahsildar to refer all the land acquisition cases to the Sub-Court. These are called the Land Acquisition Reference (LAR) cases. Additional (enhanced) compensation is paid for the land acquired, strictly as per the decree passed by the Courts, under the provisions of the Land Acquisition Act, 1894.[1]

3. As per the querist, the typical package for enhanced compensation in LAR cases decreed by the Court is as follows:

(a) On receipt of a reference, the Sub-Court may provide for enhanced compensation (by determining the market value) to be awarded for land acquired under the Land Acquisition Act, 1894, after considering various factors.

(b) In addition to the market value of the land determined, the Court shall, in every case, award an amount calculated at the rate of 12% p.a. for the period commencing on and from the date of publication of notification to the date of Award or the date of taking possession of the land, whichever is earlier. This is provided for bringing the value of the land to its market value as on the date of possession of land or award of compensation, as the case may be.

(c) Further, a sum of 30% on such market value is provided as solatium, in consideration of the compulsory nature of the acquisition.

(d) The Court also directs to pay interest on such excess compensation at the rate of 9% p.a. from the date on which the possession of the land is taken to the date of payment to the Court.

(e) If the enhanced compensation is paid to the Court after the date of expiry of one year from the date of possession, interest at the rate of 15% p.a. shall be payable from the date of expiry of the said period of one year till the payment of such enhanced compensation to the Court.

(f) If the company prefers to appeal against the decree of the Sub-Court, it can move the High Court. In the meantime, the claimants file execution petitions before the Sub-Court praying for attachment of the common properties. The High Court ordinarily orders conditional stay against the decree of the Sub-Court/execution petitions. The stay orders will be effective, say, on payment of 50% of the total of enhanced compensation decreed by the Sub-Court (i.e., the total of (a) to (e) above) into the Sub-Court.

(g) On disposal of the appeal by the High Court, balance compensation if awarded shall also be remitted to the Sub-Court. In a few cases, when the enhanced compensation decided by the High Court on final disposal of the appeal is less than the amount ordered while granting stay, necessary refund applications would also be filed before the Sub-Court.

4. The querist has also provided a typical computation of enhanced compensation as shown below for easy reference:

5. According to the querist, the company settles for the land compensation as per the decree of the Sub-Court and accordingly, the amount is deposited with the Court. The appeal, if any, filed by the company against the decree of the Sub-Court is disposed off at a later date by the High Court either at the same rate as already remitted or at a lower or higher amounts as may be decided by the High Court.[2]

Compulsory Acquisition

Once a declaration of public purpose is made under Section 6 of the Land Acquisition Act, the declaration becomes conclusive by force of statute. The only way in which the said finality can be got rid is by proving what in law is regarded as fraud on power. The fundamental right consists in this, namely, that a person shall not be deprived of his property except for a public purpose.[3] If, as a matter of fact, a public purpose did exist for making a compulsory acquisition, the acquisition itself will be beyond reproach that it is in violation of any fundamental right. Once an acquisition is therefore perfectly valid, it will be too wide a proposition to state that possibility of some land being surplus or unnecessary for the original purpose for which it was acquired could operate retrospectively, to invalidate the acquisition either fully or in part. The position in regard to the utilization of surplus land has to be dealt with upon considerations which are quite consistent with the fact that original acquisition is perfectly valid.[4]

An owner of property can claim even a higher price than the market price for his property; and simply because he is willing to sell his property and because he will get a proper price if his property is acquired, his property cannot be compulsorily acquired. Compulsory acquisition can be affected only in accordance with the acquisition law, because it is an inroad into a citizen’s right to own property. Such inroad can be made only in strict compliance with the law authorizing it. [5] Except by following the procedure lid down under in the Land Acquisition Act, the government have no right to deprive the citizens of their property by making an ex gratia payment. The Government has to make requisite notification under Section 4 and Section 6, and give notices to persons interested in the said land as prescribed under Section 9 so that they may put their claims o compensation for their interest in the land. Then an enquiry has t be provided under Section 11 an award has to be made by the collector and it has to be filled in the Collector’s Office. There are further provisions, for the persons who do not accept the compensation or award to have the mater taken up to the courts.[6] Where the petitioners have been deprived of all these opportunities before they were dispossessed from their lands there can be no doubt that the action of the respondents has been arbitrary and in violation of Article 31 of the Constitution and also of the provisions of the Land Acquisition Act.[7]

Objections- Objections of the persons interested are to be heard and disposed off under sec.5-A in all L.A cases. The persons interested are entitled to file objections before the L.A.O. suo-motu within 30 days from the date of publication of the notification. There should be a clear interval of 15 days from the date of service of notice in form-III and the date fixed for 5-A enquiry. This notice should be published on the notice board of the Land Acquisition Officer; M.R.O; M.D.O; Police Station; Sub Registrar's Office and also in the village and the published copies should be kept in the L.A. file. Hence the date fixed for conduct of Enquiry u/s 5-A shall not be within the said 30 days period, and the enquiry can be conducted from the 31st day onwards. The objections filed during the conduct of the enquiry shall be examined after obtaining specific remarks of the Requisitioning Authority. Authority competent to approve D.D. is competent either to accept or reject the objection. The Land Acquisition Officer should maintain docket-entries for the 5-A Enquiry which should also accompany the record of enquiry to be submitted along with the proposals for approval of the D.D. u/s 6 of the Act. [8]

Re-determination of the compensation on the basis of award of the court - Enhanced Compensation  

According to Section 28-A, there is a provision for claim for redetermination of the compensation by the awardees on the basis of a court judgment passed on the claims put in by any other awardee covered by the same notification though they might not have made a request for a court reference earlier. The claim for redetermination of the amount of compensation should be made to the L.A.O. within 3 months from the date of the award of the court. On such a reference, the L.A.O. shall issue notice to all the persons interested give them a reasonable opportunity of being heard, conduct an enquiry and make an award determining the compensation payable to such applicants.[9] Even after this award, if they are not satisfied with the re-determined compensation, they may apply for a reference to the court as provided for in the Act.[10]

The Supreme Court held that the additional benefit provided by Amendment Act will also apply to the Award passed by Land Acquisition officer or order passed by Court between the period from 30-4-82 to 24-9-84. The Govt. in their Memo No. 25646/LA (A2)/2002 dated 12.11.2002 have issued instructions among other things for payment of interest on the aggregate amount of compensation including Addl. Market value and solatium while passing the awards by L.A.O., in compliance with the judgment of Supreme Court of India in Civil Appeal No. 6271/98 dated 9.9.2001.

In the case of compulsory acquisition of property, in most cases, at the initial stage, compensation is awarded [original compensation], which is received by the person whose property is acquired owner. In most such cases, there is always a dispute with regard to the quantum of compensation originally awarded and the disputes remain in litigation for a long time. In a large number of such cases, by and large, the owners succeed and secure additional compensation from the Courts Enhanced Compensation. Generally, in most such cases, the State continues to litigate the quantum of Enhanced Compensation till the Apex Court and the issues get finally resolved after a very long time. In most cases, once the Enhanced Compensation is determined/approved by the Courts say, the High Court, the amount of such Enhanced Compensation is deposited with the Courts and the owners are permitted to withdraw the same against some security say, bank guarantee, or even without any security, notwithstanding the fact that the disputes remain pending before the higher courts say, Apex Court.

Interest under section 28 of Land Acquisition Act, additional amount under section 23(1A) and solatium under section 23(2) of said Act form part of enhanced compensation under section 45(5)(b); even in cases where pending appeal, Court/Tribunal/authority before which appeal is pending, permits claimant to withdraw against security, or otherwise enhanced compensation (which is in dispute), the same is liable to be taxed under section 45(5) - Section 45(5) 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). Secondly, section 45(5) talks about enhanced compensation or consideration which in terms of Land Acquisition Act, 1894, results in payment of additional compensation.[11] It is true that ‘interest’ is not compensation. It is equally true that section 45(5) of the 1961 Act refers to compensation. But, one has 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 1894 Act form part of enhanced compensation under section 45(5)(b). Section 45(5), read as a whole, including clause (c), not only deals with reworking 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 the 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), 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). This is the scheme of section 45(5) and section 155(16). Even before the insertion of section 45(5)(c) and section 155(16) with effect from 1-4-2004, 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) 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 the Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification.[12]

Section 45 refers to compensation determined as per award of Collector - Words ‘the compensation awarded’ in the first instance occurring in clause (a) of sub-section (5) refer to compensation determined by the Collector as per his award and the words ‘such compensation or part thereof...received by the assessee’ occurring in the said clause refer to amounts received pursuant to the award passed by the Collector, and not the amount received earlier to the award.[13] Where any amount is received after stay of award in pursuance of an interim order - If any amount is received after stay of award, in pursuance of an interim order as a payment subject to final result, it will not be an amount received as enhanced compensation contemplated under section 45(5)(b), but only an interim payment received subject to final decision.[14] 

When asset is not ‘capital asset’ at the time of transfer - If at the time of transfer the asset does not fall within the definition of ‘capital asset’, there is no occasion to treat the enhancement of compensation in a subsequent year as capital gain under section 45(5). The question whether an asset is a capital asset or not has to be determined in the year in which the asset is acquired or any compensation or part thereof is first received. Where the revenue has accepted that the land in question was agricultural land not falling within the definition of capital asset at the time when compensation was first received, revenue could not be permitted to open this question in a subsequent year when the enhanced compensation was received and to take a contrary view in respect of the same asset.[15] 

Mere claim for enhanced compensation will not suffice - The streamlining of the provision of section 45 amply makes it clear that the assessability of the enhanced compensation chargeable under the head ‘Capital gains’ is only with reference to the previous year in which such amount is received on a final settlement of the quantum of compensation by the Court. Mere claim cannot be regarded as a receipt to attract provisions of section 45(5)(b). Where claim for enhanced compensation is under dispute and same is pending during assessment year under consideration, conditional receipt does not bestow character of income under section 45(5)(b).[16] 

In case of interim order - Even if compensation is enhanced by interim order, it will be taxable on receipt basis under section 45(5)(b).[17]

Others - Where pending appeals filed against award of compensation for acquisition of land, assessee withdrew award amounts as per interim order of Calcutta High Court, amount received by assessee could not be assessed before appeals pending before Calcutta High Court reached their finality.[18] 

Tax Implications

There is a dispute regarding the year of taxability of the Enhanced Compensation when such disputed compensation was received by the owner on furnishing security as the amount received is liable to be repaid, if, the higher court decides the issue against the owner fully or partly.

Before the introduction of Sec. 45(5) from the A.Y. 1988-89  (Pre-1988 Law), the Apex Court in the case of Hindustan Housing Land Development Trust Limited[19]  had taken a view that such receipt of disputed Enhanced Compensation cannot be taxed in the year of receipt on the grounds that the same has not accrued to the assessee as the amount awarded is disputed by the Government in the final appeal.

To resolve the above issue, Sec. 45(5) was introduced from the A.Y. 1988-89, which, effectively, provided that where the capital gain arises on account of compulsory acquisition on account of transfer of such assets for which the consideration 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 etc., the capital gain computed at the first instance based on the original compensation or, consideration originally determined or approved by the Central Government/RBI, is chargeable to tax in the previous year of receipt of such Enhanced Compensation or part thereof. It is also provided that if any such Compensation is enhanced or further enhanced by the Court etc., then the amount of such Enhanced Compensation shall be deemed to be income chargeable as capital gain of the previous year in which such enhanced amount is received by the assessee (Post-1988 Law).[20]

As mentioned earlier, in many cases, such enhanced amount is disputed by the payer before the higher authority/court etc. and the amount of such disputed compensation is deposited with the Court and the assessee, in most cases, is allowed to withdraw the same on furnishing some security such as bank guarantee etc. or even without that [Disputed Enhanced Compensation]. The amendment of 1988 was primarily made to resolve the issue of the year of taxability of such Disputed Enhanced Compensation. However, various Benches of the Tribunal as well as various High Courts, even under Post-1988 Law, followed the principle laid down in the judgment of the Apex Court in the above referred case of Hindustan Housing & Land Development Trust Limited [hereinafter referred to as Hindustan Housing’s case] and took the view that unless the Enhanced Compensation is received without any embargo, leaving thereby no scope or likelihood of returning the same, such Disputed Enhanced Compensation cannot be taxed in the year of receipt. Some contrary views were also found on this issue. Accordingly, by and large, in spite of the introduction of section 45(5), the issue with regard to receipt of Disputed Enhanced Compensation continued and was under debate.[21]

The above issue had become very relevant from the assessee’ point of view because if such Disputed Enhanced Compensation is taxed in the year of receipt and subsequently, the amount of such Compensation gets reduced on account of any order of the higher authority/court etc. and if, the assessee is required to refund the excess amount received by him, then there was no specific mechanism in the Income-Tax Act [the Act], whereby the effect of such reduction in the amount of such Enhanced Compensation can be given in the assessment of the assessee. To address this issue, the Finance Act, 2003 introduced Clause (c) in section 45(5) and section 155(16) (w.e.f. A.Y. 2004-05) to provide that in such an event, a proper rectification will be carried out in the assessment of relevant assessment year, in which such Disputed Enhanced Compensation was taxed on account of the receipt thereof (Post-2003 Law).

After the amendment made in Sec.45(5) by the Finance Act, 2003, the issue was considered by the Special Bench of ITAT (Delhi) in the case of Kadam Prakash – HUF[22]  in the context of the assessment year prior to A.Y. 2004-05 under the Post-1988 Law. In this case, the Special Bench of ITAT considered the effect of amendment of 2003 and took the view that such Disputed Enhanced Compensation can be taxed in the year of receipt and the amendment of 2003 will also apply to earlier years. At that time, it was felt that perhaps the issue should now be treated as almost settled. However, as it happens, subsequently, the Madras High Court in the case of Anil Kumar Firm (HUF)[23] and connected appeals had an occasion to consider the above mentioned issue . In that case, even after noticing the amendment of 2003, the High Court still took the view that such Disputed Enhanced Compensation cannot be taxed in the year of receipt. On the other hand, the Kerala High Court in the case of C.P. Jacob[24]  took a contrary view and went a step further and held that even without the aid of amendment of 2003, the assessee is entitled to get assessment rectified, if additional compensation assessed on receipt basis is ordered to be repaid in appeal by the Court. According to the Kerala High Court, the assessee was not without remedy, if an additional compensation received through the Court would have been cancelled or reduced in further appeals by the Court and the final judgment in the matter of compensation was delivered by the Court beyond the period of limitation provided for rectification of an assessment. According to the Kerala High Court, the assessee, in such cases, is not helpless because as a last resort, the assessee can approach the High Court under Article 226 of the Constitution to redress his grievance against the judgment. Accordingly, the Kerala High Court took the view that it is clear from section 45(5) (i.e. Pre-2004 Law) that the statute provides for assessment of such capital gain in the acquisition proceedings on receipt basis and such Disputed Enhanced Compensation can be taxed in the year of receipt. Under the circumstances, the issue with regard to year of taxability of receipt of Disputed Enhanced Compensation continued.

Recently, the Apex Court in the case of Ghanshyam [HUF] in the context of A.Y. 1999-2000 and other appeals under the Pre-2003 Law and the issue was decided. Considering the importance of the issue which is under debate for a long time, it is thought fit to consider this judgment in this column.[25]

Conclusion

The Apex Court settled  a very old controversy with regard to the year of taxability of the receipt of Disputed Enhanced Compensation is now resolved and the same is taxable in the year of receipt, notwithstanding the fact that the dispute with regard to the ultimate right of receiving such compensation under the L.A. Act is finally not settled. The judgments of the Apex Court in the above cases also make it clear that the above position with regard to the taxability of receipt of such compensation will apply under the Post-1988 Law. In the context of the year of taxability of interest on compensation or on enhanced compensation, the Act is now specifically amended by the Finance Act, 2009 w.e.f. the A.Y. 2010-11 [Ref. sections 145A(b), 56(2)(viii) and 57(iv)]. Under the amended provisions, effectively, 50% of the interest received by the assessee on compensation or on Enhanced Compensation is taxable in the year of receipt. These provisions do not distinguish between the interest received u/s 28 or 34 of the L.A. Act. In fact, these provisions also do not make any reference to compulsory acquisition or to the L.A. Act. Therefore, some issues are likely to come up for consideration with regard to the applicable provisions for the taxability of such interest and in particular, in the context of interest awarded u/s 28 of the L.A. Act.

But inspite of these guidelines laid by the Apex Court the dispute on the very issue of relevance of enhanced compensation and refute persists which often results in the incorrect usage of the provision and undue advantage are taken. Not to forget the inherent limitations of the statute because of its age. The Land Acquisition Act is more than 150 years old nod and its provision need to be amended drastically, especially in matters relating to compensation and their tax implications. With the taxation laws and rules changing by the day, it is very difficult o keep a harmony and find a way to draw relevant conclusions on its application. The problem is also not properly dealt properly in the new Land Acquisition Bill. So the only solution at the disposal is a dynamic Act, in-competence with the ever-changing issues arising.