ITAT Surat decides: Can negotiated-compensation given in lieu of acquisition, turn compulsory acquisition u/s 10(37) to a voluntary sale transaction?
Issue: Whether CIT(A) erred in confirming the AO’s decision of levying Long term capital gain tax?
Case name: Ishwarbhai Patel v. ITO-Ward
- The assessee along with other co-owners sold the immovable property on 29.09.2008 for INR 3,80,40,000 in which assessee`s share was 1/3rd which worked out to INR 1,26,80,000.
- AO considered long term capital gain and sent a notice to the assessee under Section 148.
- The assessee replied the original return of income filed may be treated as filed in response to notice under section 148 of the Act.
- The assessee claimed that land was a compulsory acquisition by Surat Municipal Corporation (SMC) hence, thereon is exempt under section 10(37) of the Act.
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Forum: Surat ITAT
Cases relied on:
- Balakrishnan V. Union of India & others
- CIT V. Amrutbhai S. Patel
- ITO V. Dipak Kalidas Pauwala
- AO was of the view that the land was purchased by the SMC and not compulsorily acquired, as the land was sold upon execution of sale deed between the owners and SMC.
- The AO, therefore, held that by choosing a route through execution of sale deed the assessee has forgone the choice/option for going through compulsory acquisition route which is eligible for exemption under section 10(37) of the Act.
- Hence, the land was subject to Long Term Capital Gains Tax.
- Aggrieved, the assessee appealed to the CIT(A). CIT(A) observed that the exemption under section 10(37) is available where the assessee has been carrying on agricultural operation during the period of two years immediately preceding from the date of transfer and the land was acquired under compulsory acquisition. CIT(A) further noted that the land was put under the category of reserved for the purposes of sewage treatment plant construction. Hence, the CIT(A) held that reservation cannot be termed as acquisition and rejected the AO’s appeal.
- Hence, the assessee filed the appeal before the tribunal.
- The execution of sale deed with SMC does not amount to compulsory acquisition.
- The sale was voluntary and not under compulsory acquisition as the SMC does not have the power to acquire land under compulsory acquisition unless approval of government is taken.
- CIT (A) was right to confirm the action of the AO in disallowing the exemption.
- The agricultural land was compulsory acquired by the SMC under section 77 of BPMC Act and who had full power and authority given by the Central Government for the acquisition of immovable property and was declared trustee & custodian of the said acquired property.
- The appellant further relied on the letter No. ACT/SR/NO.286 dated 12.08.2010 from SMC wherein it has been clearly mentioned the TDS certificate dated 11.04.2008 bearing certificate No. 7195 wherein it is stated under “NATURE OF PAYMENT “as Contractor Bill may be read as “Compulsory acquisition” (Land/Building). Hence, assessee argued that the agricultural land in question was acquired under compulsory acquisition hence; no long-term capital gain is chargeable on the same.
- The CIT (A) has wrongly observed that the sale of agricultural land to SMC under compulsory acquisition.
- The exemption under section 10(37) would be available even if the land is situated in the municipal area and is not cultivated by the assessee himself but by the tenants.
- The assessee further relied on the decision of Balakrishnan v. Union of India, wherein it was held that, “…Merely because the compensation amount is agreed upon would not change the character of acquisition, from that of compulsory acquisition to the voluntary sale…”
- The Tribunal referred to letter no. TBT/OUT/4089/ 22 dated. 23.09.2014 that assessee’s land was placed under reservation by the Government of Gujarat vide order dated Notification No. GH/V/100 of 2004/DVP/1403/3307/L dated. 02.09.2014 under the provision of section 20 of Gujarat Town Planning & Urban Development Act 1976. The reserved land was placed at the disposal of the SMC to acquire the land under section 77 of Bombay Provincial Municipal Corporation Act for the erection of Sewerage Treatment Plant.
- As prior to the execution of sale deed between the assessee and SMC, a communication was issued for compulsory acquisition of land owned by the assessee, all transactions between SMC and the assessee can only be said to have taken place pursuant to such communication. Thus assessee’s action of agreeing to a price with SMC and executing a private sale deed cannot be termed as a ‘voluntary’ sale. The execution of sale deed was done merely to agree on a price and avoid litigation on the quantum of compensation otherwise awarded by the concerned government authorities. The execution of a sale deed, in such circumstances, cannot take away the elements of compulsory acquisition in respect of assessee’s land.
- In particular, it has been clearly mentioned by the SMC in the TDS receipt issued to assessee that nature of payment was “compulsory acquisition” (Land/ Building).
- Accordingly, the assessee was eligible to claim an exemption under section 10(37) of the Income Tax Act, 1961.
- The appeal was allowed.