Enhanced Compensation & Tax Implications : A Study in Reference to Compulsory Acquisition of Land

Introduction

Acquisition of land is a right inherent in every sovereign to take all appropriate private property belonging to individual citizens for public use. This right, which is described as Eminent Domain in the American Law, is liken the power of taxation and off-spring of political necessity, and it is supposed to be based upon an implied reservation by Government that private property by its citizens under its protection may be taken or its use for public benefit irrespective of the wishes of the owner. Article 31(2) of the Constitution prescribes a two-fold limit within which such superior right of the State should be exercised. One limitation imposed upon acquisition of private property which is implied in the clause is that such taking must be done for a public purpose. The other is that no property can be taken, unless the law which authorizes such appropriation contains a provision for payment of compensation in the manner laid down in the clause. It cannot be disputed that acquisition means and implies the acquiring the entire the title of the expropriated owner, whatever the nature or extent of that title might be. The entire bundle of rights which were vested in the original holder would pass on the acquisition to the holder would pass on acquisition to the acquirer leaving nothing in the former. The simple definition of power to acquire compulsorily or of term “eminent domain” is the power of the sovereign to take property for public use without owner’s consent. The concept of public use has been inextricably related to an appropriate exercise of power and is considered essential in any statement of it meaning. Payment of compensation, though not an essential element of such connotation of the term is an essential element of valid exercise of power. Therefore the obligation to pay just compensation is a necessary incident of the power of compulsory acquisition of power.

Procedure of Land Acquisition and Awarding of Compensation

The method of land acquisition and the compensation paid for these acquisitions is given in the following paragraphs.

A Cadastral survey is conducted for obtaining the details of extent of land, persons affected and the number of owners. Based on the outcome of the survey, a requisition is submitted to the District Collector (authority nominated by the Government under the Land Acquisition Act, 1894) for acquiring the identified land. The District Collector designates a Tahsildar to take care of this land acquisition. The Tahsildar on behalf of the Government publishes a notice under the Survey and Boundaries Act, 1961. A Gazette notification is also issued identifying the land for a public purpose. Thereafter, notices are issued to land owners and a hearing is conducted. In the meantime, the Tahsildar fixes value of land after assessing the local prevailing market rate. Buildings are valued based on the schedule of rates of Public Works Department. Trees are valued based on the norms fixed by the state forest department. The District Collector (or the State Government in case the compensation is above Rs. 2 crore to a single person) approves the values fixed by the Tahsildar. A Gazette declaration regarding the acquisition of land for public purpose is issued. The Tahsildar, thereafter, issues a notice intimating the company, i.e., the requisitionist, to remit the money to the Government treasury. After the remittance, the possession of the land is handed over to the company by the Tahsildar. As per the provisions of the Land Acquisition Act, 1894, any interested person who has not accepted the award may, by application to the District Collector, require that the matter be referred for determination of the Court. In such cases, it is mandatory for the Tahsildar to refer all the land acquisition cases to the Sub-Court. These are called the Land Acquisition Reference (LAR) cases. Additional (enhanced) compensation is paid for the land acquired, strictly as per the decree passed by the Courts, under the provisions of the Land Acquisition Act, 1894.[1]

3. As per the querist, the typical package for enhanced compensation in LAR cases decreed by the Court is as follows:

(a) On receipt of a reference, the Sub-Court may provide for enhanced compensation (by determining the market value) to be awarded for land acquired under the Land Acquisition Act, 1894, after considering various factors.

(b) In addition to the market value of the land determined, the Court shall, in every case, award an amount calculated at the rate of 12% p.a. for the period commencing on and from the date of publication of notification to the date of Award or the date of taking possession of the land, whichever is earlier. This is provided for bringing the value of the land to its market value as on the date of possession of land or award of compensation, as the case may be.

(c) Further, a sum of 30% on such market value is provided as solatium, in consideration of the compulsory nature of the acquisition.

(d) The Court also directs to pay interest on such excess compensation at the rate of 9% p.a. from the date on which the possession of the land is taken to the date of payment to the Court.

(e) If the enhanced compensation is paid to the Court after the date of expiry of one year from the date of possession, interest at the rate of 15% p.a. shall be payable from the date of expiry of the said period of one year till the payment of such enhanced compensation to the Court.

(f) If the company prefers to appeal against the decree of the Sub-Court, it can move the High Court. In the meantime, the claimants file execution petitions before the Sub-Court praying for attachment of the common properties. The High Court ordinarily orders conditional stay against the decree of the Sub-Court/execution petitions. The stay orders will be effective, say, on payment of 50% of the total of enhanced compensation decreed by the Sub-Court (i.e., the total of (a) to (e) above) into the Sub-Court.

(g) On disposal of the appeal by the High Court, balance compensation if awarded shall also be remitted to the Sub-Court. In a few cases, when the enhanced compensation decided by the High Court on final disposal of the appeal is less than the amount ordered while granting stay, necessary refund applications would also be filed before the Sub-Court.

4. The querist has also provided a typical computation of enhanced compensation as shown below for easy reference:

5. According to the querist, the company settles for the land compensation as per the decree of the Sub-Court and accordingly, the amount is deposited with the Court. The appeal, if any, filed by the company against the decree of the Sub-Court is disposed off at a later date by the High Court either at the same rate as already remitted or at a lower or higher amounts as may be decided by the High Court.[2]

Compulsory Acquisition

Once a declaration of public purpose is made under Section 6 of the Land Acquisition Act, the declaration becomes conclusive by force of statute. The only way in which the said finality can be got rid is by proving what in law is regarded as fraud on power. The fundamental right consists in this, namely, that a person shall not be deprived of his property except for a public purpose.[3] If, as a matter of fact, a public purpose did exist for making a compulsory acquisition, the acquisition itself will be beyond reproach that it is in violation of any fundamental right. Once an acquisition is therefore perfectly valid, it will be too wide a proposition to state that possibility of some land being surplus or unnecessary for the original purpose for which it was acquired could operate retrospectively, to invalidate the acquisition either fully or in part. The position in regard to the utilization of surplus land has to be dealt with upon considerations which are quite consistent with the fact that original acquisition is perfectly valid.

An owner of property can claim even a higher price than the market price for his property; and simply because he is willing to sell his property and because he will get a proper price if his property is acquired, his property cannot be compulsorily acquired. Compulsory acquisition can be affected only in accordance with the acquisition law, because it is an inroad into a citizen’s right to own property. Such inroad can be made only in strict compliance with the law authorizing it. [5] Except by following the procedure lid down under in the Land Acquisition Act, the government have no right to deprive the citizens of their property by making an ex gratia payment. The Government has to make requisite notification under Section 4 and Section 6, and give notices to persons interested in the said land as prescribed under Section 9 so that they may put their claims o compensation for their interest in the land. Then an enquiry has t be provided under Section 11 an award has to be made by the collector and it has to be filled in the Collector’s Office. There are further provisions, for the persons who do not accept the compensation or award to have the mater taken up to the courts.[6] Where the petitioners have been deprived of all these opportunities before they were dispossessed from their lands there can be no doubt that the action of the respondents has been arbitrary and in violation of Article 31 of the Constitution and also of the provisions of the Land Acquisition Act.

Objections- Objections of the persons interested are to be heard and disposed off under sec.5-A in all L.A cases. The persons interested are entitled to file objections before the L.A.O. suo-motu within 30 days from the date of publication of the notification. There should be a clear interval of 15 days from the date of service of notice in form-III and the date fixed for 5-A enquiry. This notice should be published on the notice board of the Land Acquisition Officer; M.R.O; M.D.O; Police Station; Sub Registrar’s Office and also in the village and the published copies should be kept in the L.A. file. Hence the date fixed for conduct of Enquiry u/s 5-A shall not be within the said 30 days period, and the enquiry can be conducted from the 31st day onwards. The objections filed during the conduct of the enquiry shall be examined after obtaining specific remarks of the Requisitioning Authority. Authority competent to approve D.D. is competent either to accept or reject the objection. The Land Acquisition Officer should maintain docket-entries for the 5-A Enquiry which should also accompany the record of enquiry to be submitted along with the proposals for approval of the D.D. u/s 6 of the Act.

Re-determination of the compensation on the basis of award of the court -Enhanced Compensation  

According to Section 28-A, there is a provision for claim for redetermination of the compensation by the awardees on the basis of a court judgment passed on the claims put in by any other awardee covered by the same notification though they might not have made a request for a court reference earlier. The claim for redetermination of the amount of compensation should be made to the L.A.O. within 3 months from the date of the award of the court. On such a reference, the L.A.O. shall issue notice to all the persons interested give them a reasonable opportunity of being heard, conduct an enquiry and make an award determining the compensation payable to such applicants.[9] Even after this award, if they are not satisfied with the re-determined compensation, they may apply for a reference to the court as provided for in the Act.

The Supreme Court held that the additional benefit provided by Amendment Act will also apply to the Award passed by Land Acquisition officer or order passed by Court between the period from 30-4-82 to 24-9-84. The Govt. in their Memo No. 25646/LA (A2)/2002 dated 12.11.2002 have issued instructions among other things for payment of interest on the aggregate amount of compensation including Addl. Market value and solatium while passing the awards by L.A.O., in compliance with the judgment of Supreme Court of India in Civil Appeal No. 6271/98 dated 9.9.2001.

In the case of compulsory acquisition of property, in most cases, at the initial stage, compensation is awarded [original compensation], which is received by the person whose property is acquired owner. In most such cases, there is always a dispute with regard to the quantum of compensation originally awarded and the disputes remain in litigation for a long time. In a large number of such cases, by and large, the owners succeed and secure additional compensation from the Courts Enhanced Compensation. Generally, in most such cases, the State continues to litigate the quantum of Enhanced Compensation till the Apex Court and the issues get finally resolved after a very long time. In most cases, once the Enhanced Compensation is determined/approved by the Courts say, the High Court, the amount of such Enhanced Compensation is deposited with the Courts and the owners are permitted to withdraw the same against some security say, bank guarantee, or even without any security, notwithstanding the fact that the disputes remain pending before the higher courts say, Apex Court.

Interest under section 28 of Land Acquisition Act, additional amount under section 23(1A) and solatium under section 23(2) of said Act form part of enhanced compensation under section 45(5)(b); even in cases where pending appeal, Court/Tribunal/authority before which appeal is pending, permits claimant to withdraw against security, or otherwise enhanced compensation (which is in dispute), the same is liable to be taxed under section 45(5) - Section 45(5) deals with transfer(s) by way of compulsory acquisition and not by way of transfers by way of sales, etc., covered by section 45(1). Secondly, section 45(5) talks about enhanced compensation or consideration which in terms of Land Acquisition Act, 1894, results in payment of additional compensation.[11] It is true that ‘interest’ is not compensation. It is equally true that section 45(5) of the 1961 Act refers to compensation. But, one has to go by the provisions of the 1894 Act which awards ‘interest’ both as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28, unlike interest under section 34, is an accretion to the value; hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. So also additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act form part of enhanced compensation under section 45(5)(b). Section 45(5), read as a whole, including clause (c), not only deals with reworking but also with the change in the full value of the consideration (computation) and since the enhanced compensation/consideration (including interest under section 28 of the 1894 Act) becomes payable/paid under the 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under section 155(16), later on. Hence, the year in which enhanced compensation is received is the year of taxability. Consequently even in cases where pending appeal, the Court/Tribunal/Authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under section 45(5). This is the scheme of section 45(5) and section 155(16). Even before the insertion of section 45(5)(c) and section 155(16) with effect from 1-4-2004, the receipt of enhanced compensation under section 45(5)( b) was taxable in the year of receipt which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt. It is important to note that compensation, including enhanced compensation/consideration under the 1894 Act is based on the full value of property as on date of notification under section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under section 23(1A), or section 23(2) or under section 28 of the 1894 Act it is on the basis that award of the Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification.

Section 45 refers to compensation determined as per award of Collector - Words ‘the compensation awarded’ in the first instance occurring in clause (a) of sub-section (5) refer to compensation determined by the Collector as per his award and the words ‘such compensation or part thereof…received by the assessee’ occurring in the said clause refer to amounts received pursuant to the award passed by the Collector, and not the amount received earlier to the award.[13] Where any amount is received after stay of award in pursuance of an interim order - If any amount is received after stay of award, in pursuance of an interim order as a payment subject to final result, it will not be an amount received as enhanced compensation contemplated under section 45(5)(b), but only an interim payment received subject to final decision.

When asset is not ‘capital asset’ at the time of transfer - If at the time of transfer the asset does not fall within the definition of ‘capital asset’, there is no occasion to treat the enhancement of compensation in a subsequent year as capital gain under section 45(5). The question whether an asset is a capital asset or not has to be determined in the year in which the asset is acquired or any compensation or part thereof is first received. Where the revenue has accepted that the land in question was agricultural land not falling within the definition of capital asset at the time when compensation was first received, revenue could not be permitted to open this question in a subsequent year when the enhanced compensation was received and to take a contrary view in respect of the same asset.

Mere claim for enhanced compensation will not suffice - The streamlining of the provision of section 45 amply makes it clear that the assessability of the enhanced compensation chargeable under the head ‘Capital gains’ is only with reference to the previous year in which such amount is received on a final settlement of the quantum of compensation by the Court. Mere claim cannot be regarded as a receipt to attract provisions of section 45(5)(b). Where claim for enhanced compensation is under dispute and same is pending during assessment year under consideration, conditional receipt does not bestow character of income under section 45(5)(b).

In case of interim order - Even if compensation is enhanced by interim order, it will be taxable on receipt basis under section 45(5)(b).

Others - Where pending appeals filed against award of compensation for acquisition of land, assessee withdrew award amounts as per interim order of Calcutta High Court, amount received by assessee could not be assessed before appeals pending before Calcutta High Court reached their finality.

Tax Implications

There is a dispute regarding the year of taxability of the Enhanced Compensation when such disputed compensation was received by the owner on furnishing security as the amount received is liable to be repaid, if, the higher court decides the issue against the owner fully or partly.

Before the introduction of Sec. 45(5) from the A.Y. 1988-89  (Pre-1988 Law), the Apex Court in the case of Hindustan Housing Land Development Trust Limited[19]  had taken a view that such receipt of disputed Enhanced Compensation cannot be taxed in the year of receipt on the grounds that the same has not accrued to the assessee as the amount awarded is disputed by the Government in the final appeal.

To resolve the above issue, Sec. 45(5) was introduced from the A.Y. 1988-89, which, effectively, provided that where the capital gain arises on account of compulsory acquisition on account of transfer of such assets for which the consideration was determined or approved by the Central Government or the Reserve Bank of India and the compensation or the consideration for such transfer is enhanced or further enhanced by any court etc., the capital gain computed at the first instance based on the original compensation or, consideration originally determined or approved by the Central Government/RBI, is chargeable to tax in the previous year of receipt of such Enhanced Compensation or part thereof. It is also provided that if any such Compensation is enhanced or further enhanced by the Court etc., then the amount of such Enhanced Compensation shall be deemed to be income chargeable as capital gain of the previous year in which such enhanced amount is received by the assessee (Post-1988 Law).

As mentioned earlier, in many cases, such enhanced amount is disputed by the payer before the higher authority/court etc. and the amount of such disputed compensation is deposited with the Court and the assessee, in most cases, is allowed to withdraw the same on furnishing some security such as bank guarantee etc. or even without that [Disputed Enhanced Compensation]. The amendment of 1988 was primarily made to resolve the issue of the year of taxability of such Disputed Enhanced Compensation. However, various Benches of the Tribunal as well as various High Courts, even under Post-1988 Law, followed the principle laid down in the judgment of the Apex Court in the above referred case of Hindustan Housing & Land Development Trust Limited [hereinafter referred to as Hindustan Housing’s case] and took the view that unless the Enhanced Compensation is received without any embargo, leaving thereby no scope or likelihood of returning the same, such Disputed Enhanced Compensation cannot be taxed in the year of receipt. Some contrary views were also found on this issue. Accordingly, by and large, in spite of the introduction of section 45(5), the issue with regard to receipt of Disputed Enhanced Compensation continued and was under debate.

The above issue had become very relevant from the assessee’ point of view because if such Disputed Enhanced Compensation is taxed in the year of receipt and subsequently, the amount of such Compensation gets reduced on account of any order of the higher authority/court etc. and if, the assessee is required to refund the excess amount received by him, then there was no specific mechanism in the Income-Tax Act [the Act], whereby the effect of such reduction in the amount of such Enhanced Compensation can be given in the assessment of the assessee. To address this issue, the Finance Act, 2003 introduced Clause (c) in section 45(5) and section 155(16) (w.e.f. A.Y. 2004-05) to provide that in such an event, a proper rectification will be carried out in the assessment of relevant assessment year, in which such Disputed Enhanced Compensation was taxed on account of the receipt thereof (Post-2003 Law).

After the amendment made in Sec.45(5) by the Finance Act, 2003, the issue was considered by the Special Bench of ITAT (Delhi) in the case of Kadam Prakash – HUF[22]  in the context of the assessment year prior to A.Y. 2004-05 under the Post-1988 Law. In this case, the Special Bench of ITAT considered the effect of amendment of 2003 and took the view that such Disputed Enhanced Compensation can be taxed in the year of receipt and the amendment of 2003 will also apply to earlier years. At that time, it was felt that perhaps the issue should now be treated as almost settled. However, as it happens, subsequently, the Madras High Court in the case of Anil Kumar Firm (HUF)[23] and connected appeals had an occasion to consider the above mentioned issue . In that case, even after noticing the amendment of 2003, the High Court still took the view that such Disputed Enhanced Compensation cannot be taxed in the year of receipt. On the other hand, the Kerala High Court in the case of C.P. Jacob[24]  took a contrary view and went a step further and held that even without the aid of amendment of 2003, the assessee is entitled to get assessment rectified, if additional compensation assessed on receipt basis is ordered to be repaid in appeal by the Court. According to the Kerala High Court, the assessee was not without remedy, if an additional compensation received through the Court would have been cancelled or reduced in further appeals by the Court and the final judgment in the matter of compensation was delivered by the Court beyond the period of limitation provided for rectification of an assessment. According to the Kerala High Court, the assessee, in such cases, is not helpless because as a last resort, the assessee can approach the High Court under Article 226 of the Constitution to redress his grievance against the judgment. Accordingly, the Kerala High Court took the view that it is clear from section 45(5) (i.e. Pre-2004 Law) that the statute provides for assessment of such capital gain in the acquisition proceedings on receipt basis and such Disputed Enhanced Compensation can be taxed in the year of receipt. Under the circumstances, the issue with regard to year of taxability of receipt of Disputed Enhanced Compensation continued.

Recently, the Apex Court in the case of Ghanshyam [HUF] in the context of A.Y. 1999-2000 and other appeals under the Pre-2003 Law and the issue was decided. Considering the importance of the issue which is under debate for a long time, it is thought fit to consider this judgment in this column.

Conclusion

The Apex Court settled  a very old controversy with regard to the year of taxability of the receipt of Disputed Enhanced Compensation is now resolved and the same is taxable in the year of receipt, notwithstanding the fact that the dispute with regard to the ultimate right of receiving such compensation under the L.A. Act is finally not settled. The judgments of the Apex Court in the above cases also make it clear that the above position with regard to the taxability of receipt of such compensation will apply under the Post-1988 Law. In the context of the year of taxability of interest on compensation or on enhanced compensation, the Act is now specifically amended by the Finance Act, 2009 w.e.f. the A.Y. 2010-11 [Ref. sections 145A(b), 56(2)(viii) and 57(iv)]. Under the amended provisions, effectively, 50% of the interest received by the assessee on compensation or on Enhanced Compensation is taxable in the year of receipt. These provisions do not distinguish between the interest received u/s 28 or 34 of the L.A. Act. In fact, these provisions also do not make any reference to compulsory acquisition or to the L.A. Act. Therefore, some issues are likely to come up for consideration with regard to the applicable provisions for the taxability of such interest and in particular, in the context of interest awarded u/s 28 of the L.A. Act.

But inspite of these guidelines laid by the Apex Court the dispute on the very issue of relevance of enhanced compensation and refute persists which often results in the incorrect usage of the provision and undue advantage are taken. Not to forget the inherent limitations of the statute because of its age. The Land Acquisition Act is more than 150 years old nod and its provision need to be amended drastically, especially in matters relating to compensation and their tax implications. With the taxation laws and rules changing by the day, it is very difficult o keep a harmony and find a way to draw relevant conclusions on its application. The problem is also not properly dealt properly in the new Land Acquisition Bill. So the only solution at the disposal is a dynamic Act, in-competence with the ever-changing issues arising.

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Land Uses & Terminology in Mumbai

I. Introduction

Real estate is a sector which touches almost everyone’s life.  One often comes across concepts such as land reservation, nature of land, etc., while dealing with the real estate sector. Further, while dealing with taxation issues connected with real estate, such as s.80-IB(10), knowledge of these terms is of immense value. The types of uses for which land in Mumbai can be used are explained in the Development Control Regulations for Greater Bombay, 1991 (“the DC Regulations”). The Regulations have been framed under the Maharashtra Regional and Town Planning Act, 1966 (“ the MRTP Act”). As the name suggests, these Regulations are applicable only for the City and suburbs of Mumbai. The MRTP Act provides for the town planning and the development of land for public purposes within the State of Maharashtra. This Article gives a bird’s eye-view of the land usage provided under the DC Regulations.

II. Division into Zones

2.1 As per the town planning scheme for Mumbai, the entire city has been divided into various zones and sub-zones. Accordingly, land has been designated or reserved for certain development purposes. This is to ensure an equitable distribution of the available land for different purposes. Some of the important land uses specified in the DC Regulations are as under:

(a) Residential (R)

(i)  Residential (R-1)

(ii) Residential with Shopping Line (R-2)

(b) Commercial (C)

(i)  Local Commercial (C-1)

(ii) District Commercial (C-2)

(iii) Shopping Centre (SC)

(c) Industrial (I)

(i)  Service Industries (I-1)

(ii) General Industries (I-2)

(iii) Special Industries (I-3)

(iv) Industrial Estate (IE)

(d) Public / Semi-Public

(i)  School – Primary / Secondary

(ii) College

(iii) Recreation Ground (RG)

(iv) Playground (PG)

(v) Garden (G)

(vi)Park (P)

The Municipal Corporation, which administers the DC Regulations, decides the purpose for which certain land is to be used depending upon various factors, such as, the need for green spaces in every locality, provision of public amenities like theatres, schools, etc. in residential areas, open spaces in industrial zones, etc.

2.2 Although, the names of the zones specify the type of usage permitted in that zone, certain ancillary uses are also permitted in these zones, subject to the fulfillment of certain conditions. Some of the important ancillary uses permitted are as follows:

(a) Pure Residential Zone (R-1) : An area up to 50% of the floor space of the principal zone may also be used for clinics of doctors / dentists, nursing homes, students’ hostels, bus shelters, crematoriums, police stations, etc.  Further, convenience shopping is allowed at the rate of one shop per 15 tenements on the ground floor. Such shopping line will not be permitted in more than two adjoining plots in any locality and shall not cover more than 5% of the plot area. “Convenience shopping” is defined to mean shops, each with a carpet area not exceeding 20 sq. m. except where otherwise indicated and comprising those dealing with day to day requirements, as distinguished from wholesale trade or shopping.  It  includes, foodgrain or ration shops, each with carpet area not exceeding 50 sq. m., dry cleaners, tailors, groceries, beauty parlours,  bakeries, restaurants and eating houses each with a carpet area not exceeding 50 sq.m, shoes and sports shops each with a carpet area not exceeding 75 sq.m.

(b) Residential Zone with Shopping Line (R-2) : In addition to the uses permitted under R-1 zone, certain additional uses are allowed, such as, retail stores, professional offices not exceeding 100 sq.m. in area,  restaurants and eating houses each with a carpet area not exceeding 200 sq.m. on the ground floor, establishments of a larger size than those permitted in a R-1 zone, etc. The shopping line must confirm to certain additional restrictions, e.g., the area of any shop cannot exceed 100 sq.m., they must only be on the ground floor, etc. Most of these shopping lines have been the bone of contention in cases u/s. 80-IB(10) of the Income-tax Act. Developers in Mumbai have constructed shopping lines in accordance with the permissible limits under the DC Regulations.

2.3 Recreation/Amenity Open Spaces – In residential and commercial layouts  certain open spaces must be earmarked for recreational areas. In any layout or sub-division of vacant land in a residential and commercial zone, open spaces shall be provided as under :

(i)    Area from 1001 sq. m. to 2500 sq.m.  ..   ..   15%.

(ii)   Areas from 2501 sq. m. to 10,000 sq.m.  ….   20% (ii)   Areas above 10,000 sq. m. ..    ..  ..   25%

These open spaces shall be exclusive of areas of accesses/internal roads/designations or reservations development plan roads and areas for road-widening and shall as far as possible be provided in one place.  Where however, the area of the layout or sub-division is more than 5000 sq.m., open spaces may be provided in more than one place, but at least one of such places shall be not less than 100 sq. m. in size.  Such recreational spaces will not be necessary in the case of land used for educational institutions with attached independent playgrounds. The minimum area of such recreational space shall not be less than 125 sq. m.

2.4The maximum permissible Floor Space Index or FSI earmarked for some of the areas in Mumbai are as under :

No.	Area and type of Occupancy	FSI permissible
1.	Residential Zone & Commercial Zone
(a)	Island City of Mumbai (i.e., from South Mumbai to Mahim)	1.33
(b)	Suburbs	Ranges from 0.5 to 1.00
2.	Service Industrial Zone	1.00
3.	Educational Buildings, Medical Institutions and Institutional Buildings
(a)	Island City of Mumbai (i.e., from South Mumbai to Mahim)	1.33
(b)	Suburbs	1.00

Under the DC Regulations, the plot size for the FSI computation is done as under :

No.	Plot size	Area for FSI computation
1.	Residential and Commercial Zones
(a)	Up to 1,000 sq.m.	Total Area
(b)	1,001 – 2,500 sq.m.	Total Area subject to maximum of 2,125 sq. m.
(c)	2,501 sq.m. and above	Total Area (-) 15% of the area for recreational / amenity open space
2.	Industrial Plots
(a)	Up to 1,000 sq.m.	Total Area subject to maximum of 900 sq. m
(b)	Above 1,000 sq. m	Total Area (-) 10% of the area for recreational / amenity open space

2.5Many times a land falls within the zones demarcated or areas reserved for public purpose / additional amenities in the development plan prepared under the MRTP Act.  These are known as reservations under the DC Regulations. In such a case the Town Planning Authorities require the plot of land for carrying out their developmental activities, such as reservation for garden area, road widening, construction of schools, parks, playgrounds, etc. Thus, there are conflicting objectives of the BMC / Town Planning authorities on one hand who want to use the land for reservation purpose and the Owner of the land on the other hand who wants to use the land to construct residential / commercial, other projects. These divergent objectives are balanced by Transferrable Development Rights or TDRs.

Thus, where an owner whose land is reserved for any town planning purpose under the MRTP Act has surrendered his land free of cost to the BMC in the manner specified under the DC Regulations, then he is eligible for FSI in the form of Development Rights. The FSI by way of Development Rights would be of the like manner and to the same extent had the land not been  reserved. Alternatively, the Owner may be granted TDR after he has completed the development of the reservation and surrendered the same to the BMC. The Development Rights are granted in the form of a Development Rights Certificate which the owner may either use himself or he can transfer it to any other person.  If the owner instead of merely surrendering his land to the BMC, also develops or constructs the amenity on the surrendered plot at his own cost and then hands over the developed/constructed amenity to the BMC, free of cost, then he is eligible for additional Development Rights. These additional Development Rights would be  equal to the FSI equal to the area of the constructed by him.

V. How a CA can help?

Although an Auditor is not supposed to enquire about the compliance of DC Regulations, etc., it would be of great utility to him if he has a basic understanding of the provisions of the law in this respect. The Auditor may be able to use this knowledge in judging whether the going concern of an entity which is engaged in real estate construction has been affected because of severe violations of these Regulations. Further, while providing tax advise to clients on matter such as the provisions of s.80-IB(10), knowledge of these provisions would be of great assistance.

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Administrative instructions

Administrative instructions:

Over fifty years back Holmes J in Bain Peanut Company of Texas V Dave Pinson (1930) 75 Law Ed.482 at page 491 said that “we must remember that the machinery of the Government would not work, if it were not allowed a little play in its joints. We should not allow administrative or executive efficiency to flounder on the rock of avoidable technicality. It is well to remember that administrative and executive efficiency or exigency should not be too readily sacrificed”. Such should be the result, if the instruction is given a mandatory force. State would be completely deprived of much needed play in its joints. Absolute enactments must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled substantially.

In bigger form of administration, issuance of administrative direction is an essential element. Without the directions, it would be impossible for the Government to run the administration that effectively. The constitution provides for the “Executive Function”. Specified authority may issue directions, as it may deem fit and proper to harmonize and properly guide the downstream. Generally, the administrative officers have to deal with the matters and they have to face the day to day problems. Every time, it may not be possible to enact the ‘legislative code’. The directions are issued by the government in the form of circulars, resolutions, bylaws, trade notices and similar other forms. These directions would bring desired flexibility in the administration coupled with certainty or uniformity in identical matters.

Once the Government has issued the directions, the subordinate executives have to discharge their responsibility consistently with the directions and those directions are binding upon the state officers. The discretion has to be governed preliminary on the basis of the administrative policy contained in the circular, Resolution or such other similar instrument. Any attempt to disobey the direction of the department may expose the concerned officer for disciplinary actions and remedies for breach of direction is inter departmental.

Enforceability and identification:

It is not necessary that for issuing “direction” source of statutory power is required. Ordinarily, field is covered under the “Executive Function” of the Government. The Government also derives powers under the “Rules of Business”. These directions have confused the area in administrative law. The courts are interpreting the same from time to time and from case to case. The directions are normally not enforceable, but courts have drawn certain exception.

Interpreting or holding that the executive instructions are directory does not mean that they can be ignored with impunity. Even directory provisions are not meant to be violated. It was held in Pratap v. Shri Krishna Gupta AIR 1956 SC 140 that some rules are vital and go to the root of the matter; they cannot be broken; others are only directory and a breach of them can be overlooked provided there is substantial compliance with the rules read as a whole and no prejudice ensues; and when legislature does not itself state which is which Judges must determine the matter and, exercising a nice discrimination, sort out one class from the other along broad based, commonsense lines.

Some administrative directions are held to have the statutory force while some directions are held to have mere administrative force or character. The administrative domain is using the words like code, regulations, bylaws and the rules, but they may not be real “Delegated Legislation”. Indiscriminate use of these substitutions results in confusion. At the same time, some Judgments of the Court have also created confusion. The lawyers in the administrative field are busy to seek identification of directions. They are keen to see how the courts interpret the particular directions. It is the interpretation of the direction upon which the ultimate right of the litigating party depends. If these directions have, statutory force then there is hardly any scope for dispute. They are simply enforceable and courts may consequent upon such violation of the directions grant suitable relief. The situation would be converse, if they are held merely administrative directions having no statutory force.

G. J. Fernandez

In G. J. Fernandez, the Mysore Public works Department Code was held to have contained mere administrative instructions though coached as “code”.

The Court observed that:

“Article 162 does not confer any power on the state government to frame rules and it only indicates the scope of the executive power of the state. Of course, under such executive power, the state can give administrative instructions to its serventies how to act in certain circumstances, but that will not make such instructions statutory rules that are justifiable in certain circumstances. In order that such executive instructions have the force of statutory rules, it must be shown that they have been issued either under the authority covered on the state Government by some statute or under some provision of the constitution providing therefore. There is no statute that confers any authority on the state Government to issue rules in matters with which the Mysore Public Works Department Code is concerned. Thus, the instructions contained in the code are mere administrative instructions and not statutory rules. Therefore, even if there has been any breach of such executive instructions that does not confer any right on any member of the public to ask for a right against Government by a petition under Art. 226. It is a matter between the State Government and its servant.”

V. T. Khanzode’s Case

This is an interesting matter decided by the supreme Court of India dealing with the questions firstly, whether the Reserve Bank of India (Staff) Regulations, 1948 are statutory in character, secondly, whether it is competent for the Bank to provide conditions of service of its staff by administrative circulars, and thirdly, whether the impugned circular and seniority list offend against the provision of Articles 14 and 16 of the Constitution. The contention of the petitioner was that the Regulations were framed under section 58 of the Reserve Bank of India Act, 1934, that they cannot be altered by administrative circulars, that conditions of service cannot be framed by administrative circulars but must be made by Regulations made under section 58 of the Act etc.

Section 58(1) provides that:

“The Central board may, with the previous sanction of the Central Government, make regulations consistent with this act to provide for all matters for which provision is necessary or convenient for the purpose of giving effect to the provisions of this Act.”

Sub section 2 of the Act provides that without prejudice to the generality of the foregoing provision, such regulation may provide for all or any of the matters mentioned in various clauses of that sub section.

It was contended that the Central Board had no inherent power and they must seek and find their power and obligation under the Act (Charter of Creation). Therefore, the argument proceeded that it is imperative on the Bank to provide the conditions of service only by way of regulations duly framed and cannot be framed by administrative circular issued in the exercise of non-statutory power or authority.

In this connection reliance was placed on Halsbury:

“Corporations may be either statutory or non-statutory, and a fundamental distinction exists between the powers and liabilities of the two classes, statutory corporations have such rights and can do such acts only as are authorized directly or indirectly by the Statutes creating them, non-statutory corporation, speaking generally can do everything that an ordinary individual can do unless restricted directly or indirectly by statute.’’

“The powers of a corporation created by statute are limited and circumscribed by the statute which regulate it, and extend no further that is expressly stated therein, or is necessarily and properly regard for carrying out into effect the purposes of its corporations incorporation’s, or may be fairly regarded as incidental to, or consequential upon, those things which the legislature has authorized, what the statute does not expressly or impliedly authorize is to be taken to be prohibited.”

The statement of law in Halsbury puts an emphasis on the limitation on powers of statutory corporations in light of the provisions of statutes under which they are constituted.

The language of the Regulation 58(1) is very clear, the court held that so long as the regulations governing conditions of service are not framed, the central Board had the authority under section 7(2) of the Act to issue administrative circulars and thus govern the conditions of service. The Court held that:

“It would therefore be wrong to deny to the Central Board the power to issue administrative directions of service of the Bank’s staff. To read into the provisions of 5.58(1) a prohibition against the issuance of such administrative directions or circulars is patently to ignore the scope of the wholesome powers conferred upon the Central Board of Directors by 2, 7(2) of the Act. Indeed. This section brings the impugned circular and seniority list within the rule mentioned in Halsbury: they have the authority of the statute.” (Para 19 of reports)

In Para 20 of the reports, the Court further held that:

“While issuing the administrative circular governing the staff’s conditions of service, the Central Board of Directors has neither violated any statutory injunction nor indeed has it exercised a power which is not conferred upon by the statute. The circulars are strictly within the confines of S, 7(2).”

K. P. Joseph’s Case

In this case, the Union of India issued a memorandum fixing the salary of the re-employed Civil Servants. The Respondent contended that the memorandum is enforceable and his pay should be fixed accordingly. The Government took the contention that the memorandum is not enforceable, as the same does not confer any enforceable right in view of the fact that it has no statutory force. It was argued that the same was having a flavour of administrative character.

The Supreme Court said that:

“Generally speaking, an administrative order confer no justifiable right, but this rule, like all other general rules is subject to exception. To say that an administrative order can never confer any right would be too wide a proposition. There are administrative orders which confer rights and impose duties.”

The Supreme Court said that the Respondent had a right to claim his salary fixed in accordance with the memorandum issued by the government, but at the same time observed that the Court is not laying down a general proposition.

Anglo Afghan Agencies Case

In this case, the Supreme Court enforced the administrative instructions holding that the Union of India was not justified in falling back on the promise held out to the Citizens.

The Textile Commissioner published a Scheme called “Export Promotion Scheme” providing for incentives to exporters of woolen goods. Under the scheme, the Exporter was required to be registered and in that case, only he could get the “entitlement certificate for 100% import of goods.” The Import Entitlement Certificate was given at a reduced rate under the direction of the executive wing. The petitioner instituted a petition challenging the legality and validity of the impugned action. The petitioner succeeded in the petition. The Union of India then filed an appeal before the Supreme Court and attempted to relieve itself from the solemn promise. The Court held that:

“Granting that it was executive in character, the Courts have the powers in appropriate cases to compel performance of the obligation imposed by the schemes upon the departmental authorities. It could not be said that the executive necessity releases promises relying upon which citizens have acted to their detriment. Under the constitutional set up, no person may be deprived of his right or liberty except in due course of and by authority of law, if a member of the executive seeks to deprive a citizen of his right or liberty otherwise than in exercise of power derived from the law common or statute the courts will be competent to, and indeed would be bound to protect the rights of the aggrieved citizen”.

In the present case the scheme was published under the Imports and Exports (Control) Act, 1947, but it was held to be administrative in character. Court also took into consideration that there is no pattern of order or logical sequence in the policy statement. It is a jumper of executive instructions and matters that impose several restrictions and restrictions upon the rights of the citizens. Some of the provisions that impose restrictions upon citizens in the exercise of their right to carry on trade without statutory limits may be open to serious objections. The Supreme Court, however, did not answer the question on this count but held the government bound on the basis of the representation made by the union of India under the Scheme.

Sukhdev Singh v. Bhagatram

The contention of the employees in this case was that “Regulations” are made under the statute. Origin and source of power to make Regulation is statutory. Regulations are self-binding in character. Regulations have the force of law, in as much as; the statutory authorities have no right to make any departure from the regulations. As against this, the contention of the State was that regulations framed under powers given by the statute affecting matters of internal management, regulations do not have the statutory binding character. Terms and conditions laid down in the regulations are not matters of statutory obligations. Regulations are not binding as law but as contract. Regulations provide for the terms and conditions of employment and thereafter the employment of each person is contractual. If the regulations are held to be administrative in character, the contention should have prevailed. But the Supreme Court took it otherwise. Rules, Regulations, bylaws, orders made under the statutory powers are all comprised in delegated legislation. The need for delegated legislation is that statutory rules are framed with care and minuteness when the statutory authority making the rules after the coming into force of the act in a better position to adapt the act to special circumstances. Delegated legislation permits utilization of experience and consultation with interests affected by the practical operations of statutes. A person or body by virtue of the powers conferred by a statute makes subordinate legislation. Bylaws are made in the main by local authorities or similar bodies or by statutory or other undertakings for regulating the conduct of persons within their area or resorting to their undertakings. Regulations may determine the class of cases in which the exercise of the statutory power by any such authority constitutes the making of statutory rule. The word “rules” and “regulations” are used to limit the power of the statutory bodies. They are controlled and restricted by their statutes that create them and the rules and regulations framed thereunder. Any action of such bodies in excess of their power of or in violation of the restrictions placed in their powers is ultra vires. The reason is that it goes to the root of the power of such corporations and the declaration of nullity is the only relief that is granted to the aggrieved party.

In England subordinate legislation has, if validly made, the full force and effect of a statute, but it differs from a statute in that its validity whether as respects form or substance is normally open to challenge in the courts. The subordinate legislation has full force as if enacted like statute. The Supreme Court observed that:

“The noticeable feature is that there statutory bodies have no free hand in framing the conditions and terms of service of their employees. These statutory bodies are bound to apply the terms and conditions as laid down in the regulations. The statutory bodies are not free to make such terms, as they think fit and proper. Regulations prescribe the terms of appointment, conditions of service and procedure for dismissal.”

The Court further observed it that:

“Broadly stated, the distinction between rules and regulations on the one hand and administrative instructions on the other hand is that rules and regulations can be made only after reciting the source of power whereas administrative instructions are not issued after reciting source of power, second the executive power of a state is not authorized to frame rules under Article 162. This court held that the public works department code was not a subordinate legislation’s (See G. J. Fernandez v. State of Mysore, 1967 3 SCR 636= (AIR 1967 SC 1753. The rules under Article 309 on the other hand constitute not only the constitutional rights of relationship between the state and the Government Servants but also establish that there must be specific power to frame rules and regulations.” (Para 24)

The Supreme Court held that the regulations so framed assumed statutory force and therefore enforceable at law. The employees of the corporation were thus held entitled for relief of reinstatement etc.

Sant Ram’s Case

The Petitioner before the Supreme Court challenged the legality and validity of the Impugned action superseding him from the post of Inspector General of Police. Indian Police Service (Regulation of Seniority) Rules, 1954 came into force and accordingly the gradation list of all officers concerned had to be prepared in order to ascertain the chances of promotion. The Petitioner complained that he was discriminated and that he has a right for promotion to the post. The Government according to administrative practice issued letters and/or directions saying that:

“If a person, though senior in the gradation list, is appointed to the selection post later than his junior, this is presumable because he is superseded as a matter of selection. If this is so, it would certainly not be justified to regard the officer so selected earlier, though junior in the gradation list, as senior to the other officers, as far as the selection posts are concerned”.

Another communication runs like this:

“All super-time scale posts are selection posts and appointment thereto need not follow the order of seniority.”

It was contended on behalf of the petitioner that in the absence of statutory provision in the rule, the Government cannot issued the administrative instructions and also cannot impose restrictions by making administrative directions not found in the rules.

The Court held that:

“It is true that there is no specific provision in the rules laying down the principle of promotion of junior or senior grade officers to selection posts. But that does not mean that till statutory rules are framed in this behalf the Government cannot issue administrative instructions regarding the principle to be followed in promotions of the officers concerned to selection grade posts. It is true that Government cannot amend or supersede statutory rules by administrative instructions, but if the rules are silent on any particular point Government can fill up the gaps and supplement the rules and issue instructions not inconsistent with the rules already framed.”

The court thus held that the Government has power to issue such administrative instructions in the absence of statutory rules framed in regard to principle to be followed and simultaneously observed that the administrative instructions should be so issued which should not supersede the vigor of the rule or say such instructions should not be inconsistent with the statutory rules already framed. Thus Government can issue the instructions under its administrative powers to fill up the gap where the rules are silent or the rules are not framed.

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