The Judgment of the Court was delivered by
P.C Balakrishna Menon, J.:— The Income-tax Appellate Tribunal, Cochin Bench, has referred the following questions for decision by this court under section 256(1) of the Income-tax Act:
“1. Whether, on the facts and circumstances of the case, the cost of acquisition of the lands compulsorily acquired should be taken as their market value as on April 1, 1970, as claimed by the assessee or as their market value as on April 1, 1954, as contended by the Department?
2. Whether, on the facts and circumstances of the case, Rs. 25,240 being solatium awarded for the compulsory acquisition of the lands should also be taken as forming part of the consideration for the transfer involved in the compulsory acquisition thereof?
3. Whether, on the facts and circumstances of the case, the expenditure incurred by the assessee for getting enhanced compensation should be considered as expenditure incurred wholly and exclusively;in connection with the transfer involved in the compulsory acquisition of the lands?
4. Whether, on the facts and circumstances of the case, Rs. 7,500 being the severance compensation awarded to the assessee for the depletion in value of the property should also be taken as consideration relating to the transfer involved in such compulsory acquisition?”
Questions Nos. 1 and 2 are referred at the instance of the assessee and questions Nos. 3 and 4 at the instance of the Revenue.
2. Agricultural lands of 2.50 acres in extent situated within the municipal area of Kayamkulam town belonging to the assessee was acquired by the Government as per the provisions of the Kerala Land Acquisition Act, 1961. The preliminary notification under section 3(1) of the Act was published in the Gazette dated March 2, 1971. The Land Acquisition Officer awarded compensation for the land acquired and also solatium at 15% of the market value fixed. On a reference under section 20 of the Land Acquisition Act at the instance of the assessee, the Subordinate Judge, Mavelikara, enhanced the land value and solatium and also awarded a sum of Rs. 7,500 for the injurious effect on account of severance to the remaining extent of land in the possession of the assessee. The transfer by way of acquisition was during the accounting period relevant to the assessment year 1973–74. The Income-tax Officer passed an order of assessment on the income received by the assessee by way of capital gains and in the matter of computation of capital gains, the compensation for injurious effect as well as solatium received were included as part of the consideration received for the transfer of the capital asset. The Income-tax Officer estimated the market value of the property as on January 1, 1954, as the cost of acquisition of the capital asset by the assessee. In the appeal at the instance of the assessee, the Appellate Assistant Commissioner directed deletion of the compensation for injurious effect in computing the capital-gains. In all other respects, the assessment order was confirmed. The question raised by the assessee in the memorandum of appeal that the expenses incurred in connection with the reference for enhanced compensation should be deducted in computing the capital gains was not considered by the Appellate Assistant Commissioner. Both the assessee and the Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal held that the cost of acquisition of the capital asset is to be reckoned with reference to the market value of the land as on January 1, 1954, and the solatium received by the assessee is part of the compensation for the land acquired and it cannot be excluded from computation. The Tribunal directed that the expenses incurred by the assessee in the land acquisition reference case before the sub-court should be deducted in computing the capital gains. The appeal by the Revenue for inclusion of the compensation for injurious effect in the computation was rejected holding that the compensation in that regard received by the assessee cannot be said to be in any way related to the capital asset acquired.
3. As per section 45 of the Income-tax Act, “any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D, 54E and 54F, be chargeable to income-tax under the head ‘Capital gains and shall be deemed to be the income of the previous year in which the transfer took place The expression “transfer” is defined in section 2(47) of the Act to include the compulsory acquisition of capital asset. Section 48 provides for the mode of computation and deductions admissible in the matter of computation of capital gains. The section reads as follows:
“The income chargeable under the head ‘Capital gains’ shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.”
(Emphasis* supplied)
4. As per sub-section (2) of section 55 as it stood at the relevant time, “cost of acquisition” where the capital asset became the property of the assessee before the 1st day of January, 1954, is to be reckoned as the actual cost of acquisition or the fair market value of the asset on the 1st day of January 1954, at the option of the assessee. Agricultural lands within municipal areas were brought under the definition of “Capital assets” by section 3 of the Finance Act, 1970, with effect from April 1, 1970, and capital gains on transfer of such agricultural lands became exigible to income-tax with effect from that date. Counsel for the assessee, therefore, submits that in the matter of reckoning capital gains, the cost of acquisition of the capital asset to be deducted is as on the date on which the land became a capital asset as mentioned in section 55(2) of the Act and not with reference to any anterior date. The cost of acquisition of a capital asset within the meaning of section 48 is not the cost on the date on which the asset transferred became a capital asset. The incidence of levy under section 45 is on the capital gains to be computed, in the manner provided for in section 48 read with section 55(2) of the Act. The deduction permissible under section 48 is the cost of acquisition of the capital asset transferred for consideration, whether or not it was a capital asset on the date of its acquisition. What is taxable under section 45 are the “profits or gains arising from the transfer of a capital asset” and the charge of income-tax on the capital gains is as income of the previous year in which the transfer took place. It is clear from sections 45 and 48 that exigibility of capital gains to tax is not on the basis that what was transferred was a capital asset on the date of its acquisition, but on the basis that the subject-matter of transfer is a capital asset within the meaning of the Act. In the decision of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel v. CIT, [1971] 81 ITR 446, Bhagwati C.J, as he then was, stated on behalf of the Bench, consisting of himself and Mehta J., at page 456:
“The only condition for attracting the charge to tax which is laid down in section 45 is that the property transferred must be a capital asset at the date of transfer. How the profits or gains arising from the transfer of such property are to be computed is laid down in section 48. Section 48 is not intended to lay down any further condition for attracting the charge to tax. It would not, therefore, be right to construe section 48, clause (ii), as providing that the property, besides being capital asset at the date of transfer as required by section 45, must also satisfy the definition of ‘Capital asset’ at the date of acquisition by the assessee”
5. It was accordingly held that the only condition which must be satisfied in order to attract the charge to tax under section 45 is that the property transferred must be a capital asset on the date of transfer and that it is not necessary that it should have been a capital asset also on the date of its acquisition by the assessee. The decision of the Gujarat High Court was followed by a Division Bench of the Madras High Court in the decision in M. Venkatesan v. CIT, [1983] 144 ITR 886. We, therefore, see no merit in the contention that the cost of acquisition of the capital asset should be reckoned as on the date on which the property transferred became a capital asset.
6. It is next contended on behalf of the assessee that the solatium received on compulsory acquisition of land cannot be considered as profits or gains arising from the transfer of a capital asset and cannot be taken into account in the computation of capital gains. It is pointed out that the solatium payable under the Land Acquisition Act is in consideration of the compulsory nature of the acquisition and it does not form part of the market value of the land acquired. It is true that solatium is an extra payment provided for under the Land Acquisition Act for the reason of the compulsory nature of the acquisition. It is nevertheless compensation and forms part of the consideration received or accruing as a result of the transfer by way of acquisition of a capital asset within the meaning of section 48 of the Act. The solatium received by the assessee as a result of the transfer of the capital asset and forming part of the profits or gains arising therefrom is exigible to tax under section 45 of the Act. A Division Bench of the Gujarat High Court in the decision in Vadilal Soda Ice Factory v. CIT, [1971] 81 ITR 711, stated at page 720:
“The amount of solatium provided under section 23(2) of the Land Acquisition Act, 1894, is undoubtedly given in consideration of the compulsory nature of the acquisition but it still represents consideration for the property acquired. It is because the transfer of the property is involuntary, i.e, against the will of the owner, that section 23(2) says that in addition to the market value of the property, the State shall pay to the expropriated owner a sum of 15 per cent, of such market value. The additional amount directed to be given because of the compulsory nature of the acquisition goes to augment the compensation for the property acquired and it is, therefore, as much part of the compensation for the property acquired as the market value of the property under the first clause of section 23. The amount of solatium would, therefore, form part of the consideration received by the expropriated owner for the compulsory acquisition of the property and it would have to be taken into account in computing capital gain arising to the assessee from such compulsory acquisition.”
7. A later decision of a Division Bench of the Gujarat High Court in Hamidkhan v. Spl, Land Acquisition Officer, AIR 1982 Guj 157, has also expressed the same view. We are, therefore, fully supported in our view that solatium forms part of the consideration for the land transferred by way of acquisition under the Land Acquisition Act.
Question No. 3 referred at the instance of the Revenue is covered by the decision of a Division Bench of this court in Commissioner Of Income-Tax, Kerala-Ii v. Dr. P. Rajendran, [1981] 127 ITR 810, wherein it was held that the expenditure incurred by the assessee in conducting the land acquisition reference case before the civil court was an expenditure wholly and exclusively incurred in connection with the transfer of a capital asset and was an allowable deduction under section 48(i) of the Income-tax Act.
8. The Tribunal was, therefore, right in directing such expenses to be deducted in the matter of computation of capital gains.
9. The compensation for severance for the reason that the acquisition has injuriously affected the property other than the property acquired cannot be treated as part of the consideration received or accrued as a result of the transfer of the capital asset. The compensation for severance is by way of damages for injurious effect of other land belonging to the assessee and is not related to the transfer of the capital asset. We, therefore, answer questions Nos. 1 and 2 in favour of the Revenue and against the assessee. We answer questions Nos. 3 and 4 in favour of the assessee and against the Revenue.
10. A copy of this judgment under the seal of the court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.