1. The reference in ITRC No. 101 of 1978 under s. 256(1) of the I.T. Act, 1961 (to be referred to as 'the Act'), arises out of the appellate order dated March 31, 1977 of the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, in I.T. Appeal No. 82 (Bang)/76-77.
2. The other eight connected references arise out of corresponding appeals disposed of by the Tribunal following its order in I.T. Appeal No. 82(Bang)/76-77.
3. The question referred for the opinion of this court in ITRC No. 101/78 is:
'Whether in law and on facts, the Appellate Tribunal was justified in holding that compensation for injurious affection of the remaining land, i.e., the land not acquired, cannot be regarded as forming part of the full value of the consideration for the land acquired for the purpose of computation of capital gains under section 48 of the Income-tax Act, 1961 ?'
4. Though there are some terminological variations in the questions formulated in the other references, the propositions, in substance, are the same and admit of being dealt with together.
5. The assessments relate to the assessment year 1973-74. The assessees were co-owners of property No. 7/3, Sankey Road, Bangalore. Portions of this property abutting the main road were acquired by the Corporation of the City of Bangalore for the construction of an under- bridge on, and widening of, the Sankey Road.
6. The Land Acquisition Officer determined the market value of the acquired land at Rs. 100 per sq yd. under the 1st head of s. 23(1) of the Land Acquisition Act. Included in the compensation finally awarded as compensation were sums calculated at the rate of Rs. 10 per sq. yd. in respect of unacquired portions of the property towards damage sustained by the owners by reason of the acquisition injuriously affecting that property.
7. For the relevant assessment year, the ITO computed the capital gains taking into account only the market value of the land quantified under the first head of s. 23(1) of the L.A. Act and the statutory allowance thereon, but excluding the award for injurious affection of the unacquired land under the 4th head of compensation under s. 23(1) of the L.A. Act. The Addl. Commissioner, who considered this assessment erroneous and prejudicial to the interests of the revenue, exercised powers of revision under s. 263 of the Act and after affording an opportunity to the assessee of being heard in the matter, directed the ITO to take into account damages awarded under the 4th head of s. 23(1) of the L.A. Act also for purposes of computation of capital gains.
8. The assessees took the matter up in appeal before the Tribunal. The Tribunal, by its order dated March 31, 1977, was persuaded to the view that the compensation awarded under the 4th head of s. 23(1) for the injurious affection of the unacquired land could not be regarded as forming part of the consideration for the acquired land for purposes of capital gains under s. 48 of the Act. The Tribunal was of the opinion that, at all events, the matter admitted of two reasonably possible views and that, in the circumstances, the one favouring the taxpayer should be preferred. The Tribunal, accordingly, allowed the appeals and restored the order of the ITO.
9. Before adverting to the contentions urged on the respective sides, it is relevant to notice some of the statutory provisions.
10. Section 23(1) of the L.A. Act provides:
'23. Matters to be considered in determining compensation. - (1) In determining the amount of compensation to be awarded for land acquired under this Act, the court shall take into consideration -
First, the market value of the land at the date of the publication of the notification under section 4, sub-section (1);
secondly.... (Omitted as unnecessary)
thirdly, the damage (if any) sustained by the person interested, at the time of the Deputy Commissioner's taking possession of the land, by reason of severing such land from his other land;
Fourthly, the damage (if any) sustained by the person interested, at the time of the Deputy Commissioner's taking possession of the land, by reason of the acquisition injuriously affecting his other property, movable or immovable, in any other manner, or his earning;
Fifthly... } Sixthly... } Omitted as unnecessary.'
11. Section 2(14) of the I.T. Act, 1961, defines 'capital asset' inclusively as meaning 'property of any kind held by an assessee whether or not connected with his business or profession'.
12. Section 2(47) of the Act provides a statutory definition of the term 'transfer'. It says:
' 'Transfer', in relation to the capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'
13. Section 48 of the Act provides thus:
'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.'
14. Under s. 23(1) of the L.A. Act, though several criteria are referred to under the heads 'First' to 'Sixth' for quantifying compensation, however, the exercise is one of determination of compensation to be awarded for the land acquired under this Act. The acquisition is of all interests capable of being held in the land. The first-head under s. 23(1) of the L.A. Act relates to market value. Compensation payable for the 'land acquired' is not merely its market value, but includes several quantifications in addition to market value. On the question whether the determination of sums under the first head of compensation is or is not full value of the consideration for the 'transfer', the Tribunal held:
'......... Injurious affection merely means depreciation in value of the remaining land. The compensation for injurious affection of the remaining land, i.e., the land not acquired cannot, therefore, in our opinion, be regarded as forming part of the full value of consideration for the land acquired for purposes of computation of capital gains under section 48 of the Income-tax Act, 1961......' (vide para. 9 of the Tribunal's order).
15. This observation runs in the teeth to the statutory provisions in s. 23(1) of the L.A. Act and the judicial understanding of the nature of the right to compensation for damages for severance and injurious affection.
16. In Cripps on Compulsory Acquisition of Land, 11th Edn., it is stated:
'The right to compensation for severance and injurious affection is not evolved, as is compensation for disturbance, by judicial decision as part of the value of the land to the owner, but is a right given expressly by statute in addition to the value of the land. It is, however, part of the purchase money (purchase money and compensation being the same thing under different names) and the statutory right has, in effect, been construed as part of the value of the land to the owner.' (vide page 942. para. 4-248) (underlining ours).
17. In Halsbury's Laws of England, (4th Edn.), the nature of compensation under this head is described thus:
'318. Right to compensation: severance. The Lands Clauses Acts and the Compulsory Purchase Act, 1965, provide that in assessing the purchase money or compensation to be paid by the acquiring authority regard must be had not only to the value of the land to be purchased by the acquiring authority, but also to the damage, if any, to be sustained by the owner of the land by reason of the severing of the land taken from the other land of such owner, or otherwise, injuriously affecting that other land by the exercise of the statutory powers.
The compensation is in effect part of the value of the land to the owner and is part of the purchase money, purchase money and compensation being the same thing under different names.' (vide Vol. 8, p. 225, para. 318) (underlining supplied).
18. If this is so, the amount awarded as compensation qualifies for being considered as 'full value of the consideration received or accruing as a result of the transfer of the capital asset' within the meaning of s. 48 of the Act. We are unable to approve the first reason adopted by the Tribunal in support of a different view.
19. Secondly, the Tribunal in reaching the conclusion that the award for injurious affection was not a part of the full consideration for the transfer, took into account, what according to it were, the ordinary business or commercial considerations, which should condition the approach to such matters. The Tribunal said:
'...... If we apply the standard of an ordinary man of business, then the compensation for injurious affection of the remaining land cannot be said to be compensation for the land transferred. A man of business is bound to view the two separately and differently.'
20. It is no doubt true that in working out capital gains or capital losses, the considerations that apply are those applicable generally to commercial transactions.
21. In the present case, the compulsory acquisition of the frontage is stated to have resulted in depriving the unacquired house and the appurtenant land, of direct approach to the highway affecting its view and value. After the acquisition, it is said, the approach from the assessee's house was through an inconspicuous service road which joined the highway at a considerable distance. It is not uncommon that if out of a composite unit of immovable property, which by virtue of its enjoyment as such, commands certain advantages and amenities, a portion is sold leaving the remaining portion denuded of those advantages and amenities or imposing disadvantages in enjoyment, the fixation of the sale price, in the usual run of business and practical considerations, is necessarily informed not only by the market value of the portion sold, but also by the consequent diminution of the value of or loss of advantages and amenities respecting the remaining portions. The price stipulated in such a case would still be a price for the portion sold though it takes into account loss of dis advantages imposed as a result of the severance on the remaining portion.
22. Could such a transaction be described as amounting really to two transactions-one as respects the portion sold and the other relating to the benefits secured to the transferor to the detriment of the unsold portion-so as to require an apportionment of the consideration between the two The advantage enjoyed by the portions sold in its attracting a higher price is just another incident of severance which offsets the dis advantages which the unsold portion is left behind with and the price paid, cannot, by commercial considerations, be said to involve two sets of price.
23. Thirdly, the Tribunal observed that Rs. 10 per sq. yd. for injurious affection could be treated as capital loss and deducted from the amount of compensation. The Tribunal stated:
'... If we work out the compensation in the manner the Supreme Court did in Miss Dhun Kapadia's case : 63ITR651(SC) , then also this amount for injurious affection of the remaining property cannot be included for computing capital gains...... The amount of Rs. 10 per sq. yd. for injurious affection of the remaining land could be treated as capital loss and deducted from the entire amount of compensation.'
24. This aspect is not reflected in the question of law as formulated. We may, however, examine it as a cognate proposition.
25. It is to be pointed out that a mere depreciation of the value of land, otherwise than in consequence of the transfer of a capital asset or extinguishment of a right therein, does not involve the concept of capital loss by the statutory standards, though in a commercial sense it could be said that there is a depreciation of value. The premise on which the Tribunal proceeds might indeed lead to anomalous results or corollaries. In a converse case, if a piece of land comes to enjoy an added importance owing to its location by the formation of a new promenade or by the improvement of the general tone of the neighbourhood, can there be a capital gain though there may be an appreciation of the value Amongst other things to occasion capital gain or loss there must be a transfer or extinguishment of the capital asset or any interest therein. In the present case, though under the 4th head of s. 23(1) some amount is quantified for the injurious affection of the unacquired portion, it is just another head of computation of the consideration payable for the transfer of the land acquired. We do not think that the present case involves the transfer or extinguishment of any right or interest of the owners in the unacquired land. At all events, whatever is paid is also compensation for the land acquired.
26. In reaching its conclusion, the Tribunal relied almost entirely upon certain observations of the Supreme Court in Miss Dhun Dadabhai Kapadia v. CIT : 63ITR651(SC) . Sri G. Sarangan, learned counsel for the assessee, strongly relied upon this decision in his endeavour to support the order of the Tribunal. We may now refer to that case.
27. Appellant, Miss Dhun Kapadia, inherited 710 ordinary shares of the face value of Rs. 75 each in the Tata Iron and Steel Co. Ltd. Pursuant to certain decisions of the company, every shareholder of the company, in respect of every share held as on April 26, 1956, came to be entitled to what were known as 'right shares' in the proportion 1: 1 at a premium of Rs. 30 per share above the face value. Accordingly, Miss Dhun Kapadia became entitled to an additional allotment of 710 shares upon payment of Rs. 105 for each share. She was also given the option to renounce that right in favour of a third party, a right she, in fact, availed herself of, for a consideration of Rs. 45,262.50 which, it was not disputed, was a capital gain. As a result of the issue of the right shares, the number of shares doubled while the assets of the company remained stationary. Consequently, the value of the shares which before the new issue were quoted at Rs. 253 in the share market, depreciated to Rs. 198.75 per share. Accordingly, appellant's original holding of 710 shares depreciated in value by Rs. 37,630. Miss Dhun kapadia claimed a set-off of this depreciation of Rs. 37,630 against the capital gains of Rs. 45,262.50.
28. The ITO and the successive statutory appellate authorities negatived her claim. A reference on this question before the Bombay High Court was also answered against the assessee. Assessee's case before the Supreme Court was this (p. 653):
'...... the right to receive these new ordinary shares was a right which was embedded in her old ordinary shares and, consequently, when she realised the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from this amount realised the value of the embedded right which became liquidated.' (underlining ours)
29. A careful attention to the judgment of the Supreme Court would show, this approach to the matter was approved. The Supreme Court, in holding that the assessee was entitled to the deduction of Rs. 37,630 in the capital gains, said (p. 654):
'At the time of her transaction, her old shares were valued at Rs. 253 per share, so that the capital asset in her possession can be treated to be the cash value of 710 multiplied by Rs. 253 of the old shares plus this right to obtain new shares. After she had transferred this right to obtain new shares, the capital assets that came into her hands were the 710 old shares, which became valued at Rs. 198.75 per share, together with the sum of Rs. 45,262.50. The net capital gain or loss to the appellant obviously would be the difference between the value of the capital asset and the cash in her hands after she had renounced her right and realised the cash value in respect of it, and the value of the capital asset including the right which she possessed just before these new shares were issued and before she realised any cash in respect of the right by renouncing it in favour of some other person... Thus, the capital gain or loss would be worked out at Rs. 45,262.50 after deducting from it the sum worked out at 710 multiplied by the difference between Rs. 253 and Rs. 198.75.' (underlining ours)
30. Sri Sarangan, however, relied upon the following further observation (p. 655):
'A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right.'
31. Relying on the latter observation, Sri Sarangan contended that the depreciation of the value of the remaining unacquired land which was quantified at Rs. 10 per sq. yd. was a depreciation consequent upon the severance and, therefore, ought to be set off against the capital gain resulting from the acquisition.
32. It appears to us that the 'capital asset' concerned in that case was in substance a composite one consisting of and constituted by two components, one of which was the 710 original shares held by Miss Dhun Kapadia plus the second, namely, the embedded and inbuilt, concomitant right stemming from the original holding to buy the 710 right shares. The renouncement or transfer of the option, which was component a part of the original capital asset, against a consideration of Rs. 45,262.50 amounted to a transfer of one element of the original composite capital asset and after such transfer the original asset suffered qualitative diminution in value. The operation of the principle could be projected thus:
1. Before renouncement Rs. Rs.The value of the original 710 shares atRs. 253 per share 1,79,360.00Cost of acquisition of the right to purchasethe 'right shares' upon payment of only Rs. 105per share Nil------------Total Asset 1,79,630.002. After renouncementThe value of 710 shares originally heldat the depreciated value of Rs. 198.75 each 1,41,112.50------------38,517.50(a) Capital loss(b) Net capital gain:(1) Cash consideration received from theperson in whose favour the right to purchase 710'right shares' was renounced. 45,262.50(2) Less: Capital loss in respect oforiginal 710 shares difference. 38,517.50------------6,745.00
33. The figures demonstrate that, by the issue of new ordinary shares to the shareholders in the ratio of 1 : 1 at the rate of Rs. 105 per share, with the right to renounce those shares in favour of any other person, which the appellant in that case got the right to purchase, or renounce for valuable consideration 710 'right shares', at the same time it adversely affected the value of the original shares in that the value per share came down from Rs. 253 to Rs. 198.75. Having regard to these facts and circumstances, the Supreme Court held that the loss so suffered must be deducted from the consideration received from the person in whose favour the right to purchase 710 'right shares' was renounced by the appellant.
34. After a careful consideration of the matter, we find it difficult to apply the principle and analogy of Miss Dhun Dadabhai Kapadia's case : 63ITR651(SC) , in the present context. The incidents of the concept of a composite capital asset, a part of which after the transfer stands qualitatively diminished, cannot be imported to the present case at all because all that has happened in this case is that out of a larger plot, the front portion was carved out and acquired leaving the common owner with certain disadvantages in the matter of access from the highway to the unacquired portion.
35. It is true that in computing the compensation paid for the acquired portion, the injurious effect on the unacquired portion has been taken into account in view of the fourth head specified under s. 23(1) of the L.A. Act. But the fact remains, having regard to the plain language of the provision, that it is compensation paid for the property acquired. Therefore, the assessee is not entitled to claim that what is awarded under the fourth head of s. 23(1) of the L.A. Act is not a part of the full consideration or that it should be deducted as a 'capital loss' in respect of the unacquired land. Both of such claims would be conceptually incorrect. We think that the view taken by the Tribunal on this question is not supportable in law.
36. Before concluding, it should be observed that in the view we have taken, it follows that in a case of this type in the matte of ascertainment and apportionment of the cost of acquisition between the acquired and the unacquired portions, the cost of acquisition of the acquired portion should be assessed not on an average of the original common cost of acquisition but by placing a corresponding premium on the acquired portion because it fetched a higher price owing to its advantages, location and also because the portion left behind would not enjoy the same advantage or would come under certain disadvantages not originally existing.
37. As in this cost, the cost of acquisition of the acquired portion has not been fixed on this basis, the Tribunal would have to recompute the capital gains after determining the cost of acquisition of the acquired portion in the light of this order after hearing the parties.
38. Subject to the above, we answer the question referred for the opinion of this court in the negative and in favour of the revenue.