(a) Income-tax-----

----income---Capital or revenue receipt---Acquisition of land ---Assessee owning factory and carrying on business of manufacture of glassware---Part of land on which business carried on acquired by Government---Land acquired was capital asset---Payment of compensation therefore constitutes capital receipt.

(b) Income-tax---

----Accrual---Acquisition of land---Interest received for delay in payment of compensation---Mercantile system of accounting---Only interest accruing for a particular year to be taxed in that year.

The assessee which owned a factory carried on business in the manufacture of glassware in the previous year relevant to the assessment year 1973-74. The Government acquired a part of the land possessed by the assessee under the Land Acquisition Act for the purpose of constructing a railway siding. The Income-tax Officer held that the compensation received by the assessee from the Government was a trading receipt. The Appellate Assistant Commissioner, on appeal, held that the compensation was a capital receipt. The Tribunal found that there was no sale of the trading asset but merely the land on which the business was carried on by the assessee was acquired by the Government and that, therefore, the land acquired by the Government was a capital asset of the assessee. On a reference:

Held, that the payment of compensation was a payment for the acquisition of a capital asset and the receipt of compensation constituted a capital receipt in the hands of the assessee.

CIT v. Vazir Sultan & Sons (1959) 36 ITR 175 (SC) applied.

Held also, that the Tribunal was right in holding that out of the interest of Rs.1,09,492, interest pertaining to the relevant assessment year alone was liable to be included in the assessment.

Mori Lal Chaddami Lal Jain v. CIT (1980) 122 ITR 949 (All.) fol.

CIT v. Bombay Burmah Trading Corporation (1986) 161 ITR 386 (SC) and Golden Horse Shoe (New) Ltd. v. Thurgood (1933) 18 TC 280 (CA) ref.

JUDGMENT

At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was right in the holding that out of the interest of Rs.1,09,492 interest pertaining to this year alone was liable to be included in the assessment?

(2)Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the compensation of Rs.83,700 was the capital receipt and could not be taxed as a revenue receipt?"

So far as the first question is concerned, that is fully covered by an inter-parties decision in Mori Lal Chaddami Lal Ran v. CIT (1980) 122 ITR 949 (All.) in which the question was answered by this Court in favour of the Revenue. Following the said decision, question No. l is answered in the affirmative, that is, in favour of the Revenue and against the assessee.

Turning to question No.2, the facts, in brief, are that the assessee-- a Hindu undivided family ---(HUF), owns a factory, styled as Vimal Glass Works near Firozabad in which the business of manufacture of glassware was carried on in the previous year, relevant to the assessment year 1973-74. By a notification issued under section 4 of the Land Acquisition Act, 1894, on December 11, 1948, the District Collector, Agra, acquired a part of the land, passed by the assessee, admeasuring 1,835 acres for the purpose of construction of a railway siding at Firozabad. The possession of this land was taken on May 26. 1949, from the assessee and a total compensation to the tune of Rs.83,700 was awarded to the assessee.

The Income-tax Officer held that the compensation received by the assessee was liable to be taxed in its hands as a trading receipt. On appeal by the assessee, the Appellate Assistant Commissioner found that the compensation awarded to the assessee constituted a capital receipt. On appeal by the Revenue to the Appellate Tribunal the view taken by the Appellate Assistant Commissioner was accepted.

The short question for consideration before us is whether the compensation awarded under the Land Acquisition Act, constituted a capital receipt.

The question is, no doubt, ticklish, but not without a guideline.-In CIT v. Vazir Sultan & Sons (1959) 36 ITR 175, the Supreme Court approvingly reproduced the principles as stated by Romer L.J. In Golden Horse Shoe (New) Ltd. v. Thurgood (1933) 18 TC 280, 300 (CA) as follows (page 183):

"The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and 'sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas." (under lining by the Court).

The fact found by the Appellate Tribunal are that the assessee carried on its business on the land, which was acquired and that no business was carried on by the assessee in such land. In the instant case, there was no sale of the trade asset, but merely the land on which the business was carried on by the assessee was acquired and, therefore, following the case of Vazir Sultan & Sons (1959) 36 ITR 175 (SC), we hold that the land acquired by the authorities, was a capital asset of the assessee.

In CIT v. Bombay Burmah Trading Corporation (1986) 161 ITR 386, the Supreme Court said with perspicacity (page 401):

"It is therefore, necessary as mentioned hereinbefore, to examine whether the acquisition of forest leases by the assessee were acquisition of capital assets. Though we will refer to some of the decisions to which our attention was drawn and which were referred to by the High Court, it is well to bear in mind the basic principles. These are: if there was only capital asset and if there was any, payment made for the acquisition of that capital asset, such payment would amount to a capital payment in the hands of the payee... "(Emphasis supplied).

The payment of compensation in the instant case was payment for acquisition of the capital asset and, therefore, we hold that the receipt of compensation constituted capital receipt in the hands of the assessee.

For the reasons, we hold that the view taken by the Appellate Tribunal, is right.

Question No.2 is, therefore answered in the affirmative, that is, in favour of the assessee and against the Revenue.

M.B.A./1677/FC Order accordingly.