MODEL TOWN SOCIETY LTD. VS INCOME TAX AUTHORITY TRIBUNAL, 2006 PTD-SUPREME-COURT 2456 (2005)

(On appeal from the judgment, dated 15-1-2003 of the Lahore High Court, Lahore, passed in I.T.As. Nos.198 to 201 of 1998).

Income Tax Ordinance (XXXI of 1979)---

----S. 27---Acquisition of assessee's land---Agreement between parties stipulating payment of balance price in instalments with interest at specified rate---Receipt of interest/compensation by assessee for delayed payments of balance price---Validity---Nature of receipt would be determined by its character in receiver's hands, while its nature in payer's hands or source from which payment was made, would not be relevant---Such receipt could not be treated as a compensation for land acquired---Whatever was received by assessee over and above actual price of land on account of delayed payments, was not part of sale price---Such receipt for not being part of sale price could not be treated as capital receipt and would be liable to tax---Principles.

C.I.T. West Bengal-II v. Kamal Beharilal Singha (1971) 82 ITR 460 and C.I.T. Bengal Muffassil v. Burdhan Kuti Wards Estate (1960) 2 Tax (Suppel-1) rel.

Dr. Shamlal Narula, v. Commissioner of Income Tax 1965 PTD 61 distinguished.

M. Iqbal Hashmi, Advocate for Appellants (in all cases).

Nasir Saeed Sheikh, D.A.-G., Ch. Muhammad Aslam, Advocate-on-Record and Shaukat Ali Sheikh, Commissioner Income-tax for Respondents.

Date of hearing: 16th November, 2005.

JUDGMENT

M. JAVED BUTTAR, J.---These appeals, by leave, are directed against judgment, dated 15-1-2003 passed by a Division Bench of Lahore High Court, whereby the appeals of the appellants/the Society/ the assessee (hereinafter referred to as assessee) against the order dated 19-3-1998 passed by the Income Tax Appellate Tribunal, were decided. The only question pressed before the learned Judges of the High Court, which has been reproduced below, was answered in the affirmative. The said question reads as under:--

"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified to hold that interest received by the appellant from L.D.A. on the delayed payment had been rightly charged to tax?"

2. The relevant facts are that in the. year 1975-76 certain property of the assessee was acquired under the Land Acquisition Act No.1 of 1894, for the establishment of housing scheme known as "Model Town Extension Scheme" and the possession of the land so acquired was taken over by the Lahore Development Authority (hereinafter referred to as L.D.A.). The assessee assailed the transaction through, a constitutional petition before Lahore High Court. On 6-2-1980 the parties compromised. The L.D.A. agreed to pay a total sum of Rs.7,32,38,280 to the assessee out of which Rs.32,38,280 was to be paid immediately on completion and execution of the agreement and the remaining amount of Rs.7,00,00,000 was payable in instalments as follows:

".... The balance amount (Rs.7,00,00,000) shall be payable to the second party in five half yearly equal instalments along with simple interest at the bank rate prevailing on the date of execution of this agreement including' interest on aforesaid retained amount. First instalment shall be payable by 31st August, 1980."

3. In the assessment year 1980-81, the Assessing Officer, while assessing the income of the assessee, included the additional sum of Rs.7,97,54,370 and made it subject to tax, as a difference between the cost and sale price of the aforesaid land. The assertion of the society that the deal was not in the nature of an adventure in trade, therefore, the surplus was not liable to tax, was not accepted by the Assessing Officer. The assessee's appeals were dismissed by the Commissioner of Income Tax. The second appeals, however, were accepted by the Appellate Tribunal vide its order, dated 5-5-1986. It was found that the transaction between the assessee and the L.D.A. was not in the ordinary course of business of the assessee and that the revenue had failed to establish that it was an adventure in the nature of trade, therefore, the surplus accrued to the assessee was a capital receipt not liable to tax.

4. Subsequently, the case was reopened for the assessment years 1980-81 to 1983-84, on the ground that during this period, the assessee was in the receipt of interest of Rs.27,08,904, 42,79,837, 37,82,120 and 11,75,461 in terms of the aforesaid clause of the agreement. The claim of the assessee that the interest was settled as compensation for delayed payment of the sale price, therefore, it formed part of the price of the land, was not accepted by the Revenue. The assessee failed before the first appellate authority, the Tribunal, and also before the High Court. The concluding paragraph of the impugned judgment reads as follows:

"16. Learned Members of the Tribunal also made a correct distinction between a capital and a revenue receipt by rejecting the arguments that a receipt, capital or revenue has to maintain a consistent character both in the hands of the payer and the payee. The principle expounded by the Supreme Court of India in re: C.I.T. West Bengal-II v. Kamal Beharilal Singha (1971) 82 ITR 460 needs to be reproduced to clinch the issue: --

"It is now well-settled that in order to find out whether a receipt is a capital receipt or a revenue receipt one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of the receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly out of capital, and the receiver receives it as income on his part, the entire receipt is taxable in the hands of the receiver.

17. For these and other reasons stated above, we will return an affirmative answer to the question."

5. We have heard learned counsel for the parties and have also seen the available record.

6. The learned counsel for the assessee has submitted that the interest received by the assessee on account of delayed payments of compensation for the acquired land, formed part of the sale price and thus, remained a capital receipt not liable to tax, that till the transfer of title, irrespective of the delivery possession, all sums received by the assessee are to be treated as compensation, forming part of the price of land (placed his reliance on Dr. Shamlal Narula v. Commissioner of Income Tax 1965 PTD 61) a judgment delivered by Supreme Court of India on 9-4-1964 and that the nature of payment must remain the same both in the hands of the payer as well as the receiver. The contentions have been opposed.

7. We find no force in these appeals. The judgment relied upon by the learned counsel for the appellants is distinguishable and is not applicable to the facts of the present case. No provision of law or principle of accounting was quoted either before us or before the High Court that the nature of payment capital or revenue, must remain the same both in the hands of the payer as well as the receiver. It has been correctly held by the forums below that the interest received on account of delayed payment did not form part of the sale price and could not be treated as a capital receipt. It could not be treated as a compensation for the land acquired. In our view, whatever was received over and above the actual price of land, settled between the parties, on account of delayed payments, was not part of the sale price. It was in fact compensation for not receiving the sale price in time because the Society was deprived of the use and enjoyment of the sale price for the said period. Furthermore the payment of interest was avoidable by paying the remaining sale price in lump sum at any time after the execution of the agreement. In C.I.T. Bengal Muffassil v. Burdhan Kuti Wards Estate (1960) 2 Tax (Suppel-1), relied upon by the High Court it was held that compensation paid to the assessee for delivery of possession of land to the Government, under a lease agreement, was a revenue and not a capital receipt. The other argument that till actual transfer of title all the sums received by the appellants, are to be treated as compensation and part of the price of land, has also no force. This aspect has been competently dealt with by the High Court, in the impugned judgment. The possession was taken over by the L.D.A. It was correctly held by High Court that the agreement, dated 6-2-1980 reached between the L.D.A. and the assessee, registered with the Sub-Registrar, Lahore on 14-2-1980, by itself, can be treated as a document effecting transfer of property. It was acted upon long ago as a transfer document because thereafter, the said land was treated and used, without any objection from the appellant side, as a property belonging to L.D.A., which distributed the same to the allotees, conferred proprietary rights on them who thereafter made constructions on the said land and the housing scheme stood completed. The nature of receipt is determinable by its character in the hands of the receiver and the source from which the payment is received has no relevance to the question in hand. Similarly, its nature in the hands of payer has no relevance. It need not be the same both in the hands of the payer as well as the receiver. As far as the payer is concerned, the amount in question may be paid wholly or partly out of capital, whereas the receiver may be receiving the same as an income, as, in the present case, on the sale price settled or paid. The issue was exhaustively dealt with by the Supreme Court of India in Commissioner of Income Tax, West Bengal-II v. Kamal Behari Lal Singh (and others cases) (supra) (relevant para. reproduced above) and we are also of the same view. Therefore, the payments received by the appellants, on account of delayed payments of the sale price, which was settled between the parties, were not part of the sale price and were liable to tax.

In view of the above mentioned, we find no merit in these appeals which are accordingly dismissed, leaving the parties to bear own costs.

S.A.K./M-144/SCAppeals dismissed.