IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE CHANDRA POOJARI, ACCOUNTANT MEMBER & SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 584/HYD/2011 ASSESSMENT YEAR 2007-08 THE ITO WARD NO.2, KHAMMAM VS SRI CHANDRAKANI GATTAIAH, KHAMMAM (PAN AJFPG 0464J) APPELLANT RESPONDENT APPELLANT BY : SMT. NIVEDITA BISWAS RESPONDENT BY : SHRI M.V. ANIL KUMAR DATE OF HEARING : 31.1.2012 DATE OF PRONOUNCEMENT : 15.2.2012 ORDER PER ASHA VIJAYARAGHAVAN, JM . THIS APPEAL PREFERRED BY THE REVENUE IS DIRECT ED AGAINST THE ORDER PASSED BY THE CIT(A) VIJAYAWADA DATED 31.01.2 011 AND PERTAINS TO THE ASSESSMENT YEAR 2007-08. 2. BRIEF FACTS OF THE CASE ARE THAT DURING THE YEA R, THE ASSESSEE RECEIVED RS.20,06,545/- AS COMPENSATION FR OM REVENUE AUTHORITIES AS PER NOTICE OF AWARD U/S 12(2 ) OF LAND ACQUISITION OF LAND ACT, 1984 AND AS PER AWARD 1/20 07 DATED 16.1.2007 FOR ACQUISITION OF LAND IN KHANAPURAM HAV ELI KHAMMAM URBAN, KHAMMAM DISTRICT IN SURVEY NO.287/2G , 288/2 TO THE EXTENT OF 0.29 GUNTAS. AS THE ASSESSE E HAD CLAIMED THE ENTIRE AMOUNT RECEIVED AS EXEMPT FROM T AX ON THE GROUND THAT IT WAS IN LIEU OF COMPULSORY ACQUISITIO N OF AGRICULTURAL LAND, HE WAS REQUIRED DURING THE ASSES SMENT PROCEEDINGS TO ESTABLISH THAT THE COMPENSATION RECE IVED WAS ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 2 EXEMPT FROM TAX. IN RESPONSE, IT WAS SUBMITTED THA T THE ASSESSEES FATHER SRI CHANDRAKANI LADARAIAH, AN AGR ICULTURALIST, HAD PURCHASED THE SAID AGRICULTURAL LAND THROUGH RE GISTERED DOCUMENT NO.4003/75. AFTER THE LAND WAS TAKEN OVER BY THE REVENUE OFFICIALS, HIS FATHER HAD ENTERED INTO A PR OLONGED LITIGATION AND FINALLY THE COMPENSATION WAS AWARDED . IT WAS FURTHER SUBMITTED THAT THE ASSESSEES FATHER EXPIRE D ON 9.6.2006 AND BEING THE ONLY SON, THE CHEQUE TOWARDS COMPENSA TION WAS ISSUED IN THE ASSESSEES NAME. HOWEVER, THE ASSESS ING OFFICER OBSERVED THAT THE ASSESSEE DID NOT PRODUCE ANY DOCU MENTARY EVIDENCE TO ESTABLISH THAT THE COMPENSATION RECEIVE D UNDER COMPULSORY ACQUISITION OF LAND WAS EXEMPT FROM TAX UNDER ANY PROVISIONS OF THE IT ACT. ADDITIONALLY IT WAS HELD BY THE ASSESSING OFFICER THAT AS THE LAND ACQUIRED WAS WIT HIN THE MUNICIPAL LIMITS OF 8 KMS OF KHAMMAM MUNICIPALITY, THE COMPENSATION RECEIVED WAS TAXABLE. ACCORDINGLY, TH E LONG TERM CAPITAL GAINS WAS COMPUTED AT RS.19,65,025/-. 3. BEFORE THE CIT(A), THE ASSESSEES LEARNED AUTHO RIZED REPRESENTATIVE FILED THE WRITTEN SUBMISSIONS WHICH ARE AS FOLLOWS: DURING THE FINANCIAL YEAR 1986-87 ON 27.10.1986, AGRICULTURAL LAND BELONGING TO YOUR ASSESSEES FATH ER LATE CHANDRAKANI LADARAIAH WAS ACQUIRED BY THE COMMISSIONER, KHAMMAM MUNICIPALITY IN 1986 ITSELF. THE PROPOSALS WERE APPROVED AND THE DRAFT NOTIFICATION WAS PUBLISHED IN THE DISTRICT GAZETTE NO.65 DATED 5.12. 1997 IN NEWS PAPERS I.E. EENADU DATED 29.12.1997 AND PRAJASHAKTI DATED 30.12.97. YOUR ASSESSEES FATHER LATE CHANDRAKANI LADARAIAH WAS A SMALL FARMER AND WAS CARRYING ON AGRICULTURAL OPERATIONS IN THE LAND WHI CH WAS ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 3 ACQUIRED FOR ROAD FORMATION DURING 1986-87. THOUGH LAND WAS ACTUALLY ACQUIRED AND TAKEN POSSESSION IN 1986, DETERMINATION AND PAYMENT OF ORIGINAL COMPENSATION WAS DELAYED AND WAS ACTUALLY DETERMINED AND PAID DURING JANUARY, 2007, RELEVANT TO ASSESSMENT YEAR 2007-08. IN THE MEANTIME, YOUR ASSESSEES FATHER CHANDRAKANI L. FROM WHOM THE LAND WAS ACQUIRED IN 1986-87, EXPIRED ON 9.6.2006. IT WAS SUBMITTED BEFORE THE ASSESSING OF FICER THAT THE LAND ACQUIRED WAS AGRICULTURAL LAND AND WA S OUTSIDE SCOPE OF LEVY OF CAPITAL GAINS TAX. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATIO N OFFERED BY YOUR ASSESSEE AND COMPLETED AND ASSESSMENT TREAT ING THE ENTIRE COMPENSATION AS CONSIDERATION RECEIVED A ND RAISED A NET DEMAND OF RS.4,37,024/-. FURTHER THE ASSESSEE HAS SUBMITTED THAT HIS CASE IS SQUARELY COVERED BY THE PROVISIONS OF SECTION 10(37 ) OF THE IT ACT. ADDITIONALLY IT WAS HELD BY THE ASSESSING OFFICER T HAT AS THE LAND ACQUIRED WAS WITHIN THE MUNICIPAL LIMITS OF 8 KMS OF KHAMMAM MUNICIPALITY, THE COMPENSATION RECEIVED WAS TAXABLE. 4. THE CIT(A) HAS HELD AS FOLLOWS: THE CIT(A) BELONGS TO THE ASSET BELONGED TO THE ASS ESSEES LATER FATHER SRI CHANDRAKANI LADARAIAH AT THE TIME OF ACQ UISITION BY THE KHAMMAN MUNICIPALITY. ON ACCOUNT OF THE DEMISE OF THE ASSESSEES FATHER ON 9.6.2006 BEING THE OWNER OF TH E ACQUIRED LAND, THE CONTENTION THAT THE COMPENSATION RECEIVED IN THE ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 4 PERIOD RELATING TO THE ASSESSMENT YEAR 2007-08 BY T HE ASSESSEE IS TO BE CONSIDERED ONLY AS CAPITAL RECEIPT BEING T HE LEGAL HEIR AND NOT ON ACCOUNT OF ANY TRANSFER OF A CAPITAL ASS ET BY HIM DURING THE RELEVANT PERIOD IS TO BE ACCEPTED. THE C IT(A), THEREFORE HELD THAT IN SUCH CIRCUMSTANCES, SECTION 45(1), BEING THE CHARGING SECTION FOR CAPITAL GAINS IS INAPPLICA BLE TO THE ASSESSEE. FURTHER, THE CIT(A), HELD THAT THE PROVI SIONS OF SECTION 10(37) OF THE ACT ARE ALSO APPLICABLE AS THE CONDIT IONS PRESCRIBED THEREIN HAVE BEEN MET. THE CIT(A) POINTED OUT THAT THE ASSESSEE HAS PRODUCED EVIDENCE DURING THE APPEAL PROCEEDINGS TO SHOW THAT THE LAND WAS BEING USED FOR AGRICULTURAL PURPO SES PRIOR TO THE ACQUISITION. ALTERNATIVELY, AS PER SECTION 45( 5) OF THE ACT, THE FIRST COMPENSATION RECEIVED SHOULD HAVE BEEN CONSID ERED FOR TAXATION IN THE HANDS OF THE LATE FATHER. HOWEVER, THE PRESENT PROCEEDINGS HAVE BEEN INITIATED AGAINST THE ASSESSE E IN HIS INDIVIDUAL CAPACITY AND NOT AS LEGAL REPRESENTATIVE OF HIS LATE FATHER. THE CIT(A) HELD THAT THE TAXATION OF THE C OMPENSATION PAID ON ACCOUNT OF LAND ACQUISITION IS NOT SUSTAINA BLE IN THE HANDS OF THE ASSESSEE AND DELETED THE ADDITION. 5. AGGRIEVED, THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THE CIT(A) ERRED IN LAW BY DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. 2. THE CIT(A) OUGHT NOT TO HAVE CONSIDERED THAT THE COMPENSATION RECEIVED BY THE ASSESSEE IS TO BE CONS IDERED AS CAPITAL RECEIPT BEING THE LEGAL HEIR AND NOT ON ACCOUNT OF ANY TRANSFER OF A CAPITAL ASSET BY HIM DURING THE R ELEVANT PERIOD. 3. THE CIT(A) ERRED IN HOLDING THAT SECTION 45(1) I S INAPPLICABLE TO THE ASSESSEE SINCE THE ASSESSEE HAS RECEIVED THE COMPENSATION ON BEHALF OF THE ASSESSEE S LATE ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 5 FATHER AND IF AT ALL CAPITAL GAIN IS TO BE CHARGED, IT IS TO BE CHARGED UNDER THE PROVISIONS OF SECTION 45(5) OF TH E ACT. 4. THE CIT(A) ERRED IN HOLDING THAT THE CAPITAL GAI N IS TO BE CHARGED IN THE HANDS OF THE ASSESSEES LATE FATHER SINCE HE EXPIRED ON 9.6.2006 AND THE ASSESSEE GOT FULL RIGHT S ALONG WITH EASEMENT RIGHTS AS THEY STOOD ON THAT DATE ON THE OF AWARD I.E. 4.11.2006 AND THAT THE ASSESSEE HIMSELF HAS REPRESENTED BEFORE THE LAND ACQUISITION OFFICER AND GOT THE COMPENSATION AND HENCE IT CANNOT BE SAID THAT THE A SSESSEE ACTED ON BEHALF OF THE ASSESSEES FATHER AS A LEGAL REPRESENTATIVE. 5. THE CIT(A) OUGHT TO HAVE CONSIDERED THE FACT THA T ANY TRANSACTION WITH REGARD TO IMMOVABLE PROPERTY WILL BE CONSIDERED FINAL ONLY WHEN THE CONSIDERATION IS FIN ALISED AND RECEIVED. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT DURING THE FINAN CIAL YEAR 1986- 87 ON 27.10.1986 AGRICULTURAL LAND BELONGING TO ASS ESSEES FATHER LATE CHANDRAKANI LADARAIAH WAS ACQUIRED BY T HE KHAMMAM MUNICIPALITY FOR THE PURPOSE OF FORMATION OF 100 FT. ROAD. THE COMPENSATION WAS PAID ONLY IN JANUARY, 2 007 RELEVANT ASSESSMENT YEAR 2007-08 AFTER DELAY OF NEA RLY 10 YEARS. MEANWHILE, CHANDRAKANI GATTAIAH EXPIRED ON 9.6.2006 . WE FIND THAT THIS CASE IS SQUARELY COVERED BY THE PROVISION S OF SECTION 10(37) OF THE IT ACT. SECTION 10(37) OF THE IT ACT WAS INSERTED BY THE FI NANCE (NO.2), ACT, 2004, W.E.F. 1.4.2005 AND READS AS FOL LOWS: (37) IN THE CASE OF AN ASSESSEE, BEING AN INDIVIDU AL OR A HINDU UNDIVIDED FAMILY, ANY INCOME CHARGEABLE UNDER THE HEAD CAPITAL GAINS ARISING FROM THE TRANSFER OF AGRICULTURAL LAND, WHERE (I) SUCH LAND IS SITUATED IN ANY ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 6 AREA REFERRED TO IN ITEM (A) OR ITEM (B) OF SUB CLA USE (III) OF CLAUSE (14) OF SECTION 2 II) SUCH LAND, DURING THE PERIOD OF TWO YEARS IMMED IATELY PRECEDING THE DATE OF TRANSFER, WAS BEING USED FOR AGRICULTURAL PURPOSES BY SUCH HINDU UNDIVIDED FAMIL Y OR INDIVIDUAL OR A PARENT OF HIS; III) SUCH TRANSFER IS BY WAY OF COMPULSORY ACQUISIT ION UNDER ANY LAW, OR A TRANSFER THE CONSIDERATION FOR WHICH IS DETERMINED OR APPROVED BY THE VENTRAL GOVT. OR THE RBI. IV) SUCH INCOME HAS ARISEN FROM THE COMPENSATION OR CONSIDERATION FOR SUCH TRANSFER RECEIVED BY SUCH AS SESSEE ON OR AFTER THE 1 ST DAY OF APRIL, 2004. EXPLANATION: FOR THE PURPOSES OF THIS CLAUSE, THE EXPRESSION COMPENSATION OR CONSIDERATION INCLUDES THE COMPENSATION OR CONSIDERATION ENHANCED OR FURTHER ENHANCED BY ANY COURT, TRIBUNAL OR OTHER AUTHORITY. 7. WE FIND THAT THE LAND ACQUIRED IS AGRICULTURAL LAND AND THE ASSESSEE HAS ENCLOSED ENOUGH PROOF FOR THE LAND BEI NG ASSESSED TO LAND REVENUE AND THAT AGRICULTURAL OPERATIONS WE RE BEING CARRIED ON IN THE LAND. THEREFORE, THE CAPITAL GAI NS ARISING FROM OUT OF THE COMPULSORY ACQUISITION OF AGRICULTURAL L AND BELONGING TO THE FATHER OF THE ASSESSEE IS EXEMPTED FROM LEVY OF INCOME TAX AS PER PROVISIONS OF SECTION 10(37) ACT. WE FIND TH AT THE DEPARTMENT HAS NOT RAISED IN THE GROUND OF APPEAL A NY SPECIFIC GROUND AGAINST THE APPLICATION OF PROVISIONS OF SEC TION 10(37) EVEN THOUGH THE CIT(A) HAS CLEARLY DISCUSSED IN ITS ORDER ABOUT THE ABOVE APPLICABILITY OF SECTION 10(37). EVEN OTHERWISE AS PER THE EXPLANATION 3 TO 45 (5) W HICH READ AS FOLLOW: (III) WHERE BY REASON OF THE DEATH OF THE PERSON W HO MADE THE TRANSFER, OR FOR ANY OTHER REASON, THE ENHANCED ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 7 COMPENSATION OR CONSIDERATION IS RECEIVED BY ANY OT HER PERSON, THE AMOUNT REFERRED TO IN CLAUSE (B) SHALL BE DEEMED TO BE THE INCOME, CHARGEABLE TO TAX UNDER TH E HEAD CAPITAL GAINS OF SUCH OTHER PERSON. READING EXPLANATION III TO SEC.45 (5) IT IS CLEAR T HAT: THE FIRST RECEIPT OF COMPENSATION IS COVERED BY CL AUSE (A) OF SECTION 45(5) AND IS ALWAYS SUBJECT TO CAPITAL GAIN S TAX ONLY IN THE HANDS OF TRANSFEROR OF CAPITAL ASSET AND ONL Y ENHANCED COMPENSATION COVERED BY CLAUSE (B) OF SECT ION 45(5) IS SUBJECT TO CAPITAL GAINS TAX IN THE HANDS OF THE PERSON WHO EVER RECEIVES THE ENHANCED COMPENSATION ON ACCOUNT OF DEATH OF THE ORIGINAL TRANSFEROR. 8. IT IS FURTHER SUBMITTED THAT THE COMPENSATION R ECEIVED BY THE ASSESSEE WAS COMPENSATION RECEIVED IN THE FIRST INSTANCE AND COVERED BY CLAUSE (A) OF SECTION 45(5). HENCE IT C OULD HAVE BEEN SUBJECTED TO CAPITAL GAINS ONLY IN THE HANDS OF HIS FATHER LATE CHANDRAKANI LADARAIAH. THE EXPLANATION (III) TO SE CTION 45(5) DOES NOT COVER THE FIRST RECEIPT OF COMPENSATION BY LEGAL HEIRS OF THE TRANSFEROR OF CAPITAL ASSET. HENCE WE CONFIRM THE ORDER OF THE CIT(A) THAT TAXATION OF COMPENSATION PAID ON AC COUNT OF LAND ACQUISITION IS NOT SUSTAINABLE IN THE HANDS OF THE ASSESSEE AND THE ADDITION MADE IN ASSESSMENT ORDER IS TO BE DELE TED. 7. IN THE RESULT THE APPEAL OF THE ASSESSEES IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON: 15.2.2 012 SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER DATED THE 15 TH FEBRUARY, 2012 ITA NO.584/H/2011 SRI CHANDRAKANI GATTAIAH, KHAMMAM 8 COPY FORWARDED TO: 1. THE ITO, WARD 2, KHAMMAM 2. SRI CHANDRAKANI GATTAIAH, H.NO.2-3-210, WYRA ROAD, KHAMMAM 3. THE CIT(A)- VIJAYAWADA 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/