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Facts
The assessee, an individual, received compensation and interest on enhanced compensation for land acquisition. The assessee did not file a return of income within the due date, leading to reassessment proceedings. The Assessing Officer (AO) treated a portion of the interest on enhanced compensation as taxable income from other sources.
Held
The Tribunal held that interest received on enhanced compensation for compulsory acquisition of land partakes the character of compensation and is entitled to exemption under Section 10(37) of the Act, aligning with the provisions of the RFCTLARR Act. The Tribunal directed the AO to delete the addition made.
Key Issues
Whether interest received on enhanced compensation for compulsory acquisition of land is taxable as income from other sources or is exempt under Section 10(37) of the Income Tax Act.
Sections Cited
147, 148, 148A, 143(3), 10(37), 56(2)(viii), 57(iv), 45, 145A
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Income Tax Appellate Tribunal, ‘B’ (SMC
Before: SHRI GEORGE GEORGE K
आदेश/ O R D E R This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 16.04.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.
2 -: 2. Brief facts of the case are as follows: The assessee is an individual. For the assessment year 2018- 19, assessee did not file the return of income within the due date prescribed. The Department had information that assessee had received compensation for land acquisition of Rs.58,49,228/- during the relevant assessment year 2018-19 from Special District Revenue Officer, National Highway Authority of India (NHAI). Since no return of income was filed by the assessee, the AO initiated proceedings u/s.148 of the Act and notice u/s.148A(b) of the Act was issued on 21.03.2022 by giving assessee seven days’ time to respond to the notice. However, there was no response to the notice issued u/s.148A(b) of the Act. Hence the AO passed order u/s.148A(d) of the Act on 07.04.2022 and notice u/s.148 of the Act was also issued on 07.04.2022. In response to the notice issued u/s.148 of the Act, assessee filed the return of income on 07.05.2022 admitting total income of Rs.2,79,480/- after claiming exemption u/s.10(37) of the Act. On receipt of the return of income, the AO issued notice u/s.143(2) of the Act on 31.05.2022. Thereafter, notices were issued u/s.142(1) of the Act. On perusal of the replies filed by the assessee, the AO noticed that assessee had received enhanced compensation of Rs.93,28,713/- which included interest on enhanced compensation amounting to Rs.35,99,509/- received from NHAI, Tiruvallur District. The AO noticed that interest on enhanced 3 -: compensation was not offered for taxation. The AO completed the assessment u/s.147 r.w.s. 144 r.w.s.144B of the Act vide order dated 19.02.2024, wherein he treated 50% of such interest income as taxable u/s.56(2)(viii) r.w.s.57(iv) of the Act. Therefore, a sum of Rs.17,99,975/- was treated as ‘income from other sources’ (50% of Rs.35,99,509/-).
Aggrieved by the order passed u/s.143(3) r.w.s. 144 r.w.s.144B of the Act, assessee filed appeal before the First Appellate Authority (FAA). Before the FAA, assessee had raised legal contentions that notice issued u/s.148 of the Act by the Jurisdictional AO is bad in law as the same ought to have been issued by the AO of faceless unit. On merit, the assessee contended that he is entitled to the benefit of section 10(37) of the Act. The FAA however rejected the contentions raised by the assessee both on legal grounds as well as on merits. The relevant finding of the FAA deciding the issue against the assessee on merits read as follows:- 8.1 In these grounds, the appellant claimed that interest of Rs.17,99,975/- is exempt u/s 10(37) of the IT Act as it is a capital receipt. Further, the appellant claimed that the compensation received under FRCTLAR Act 2013 is also exempt. The appellant also relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs Ghanshyam (HUF) in [2009] 182 Taxman 368 (SC). The detailed written submission fled by the appellant are examined. It is to be mentioned here that the appellant received interest on enhanced compensation of Rs. 35,99,509/ out of total compensation of Rs. 93,28,713/. The facts are recorded clearly in para 24 of the assessment order.
4 -: 8.2 The compensation received by the appellant alone is exempt as per RFCTLAR Act 2013 and u/s 10(37) of the IT Act and not the interest amount of Rs. 35,99,509/. The AO dealt this issue elaborately in the assessment order. As per section 56(2)(vii) of the IT Act, income by way of interest received on compensation or enhanced compensation referred to in subsection (1) of section 1458 of the IT Act is to be treated as income from other sources"
This provision was inserted by the Finance Act 2009, w.e.f. 01.04.2010. Hence, the decision relied upon by the appellant in the case of CIT vs Ghanshyam (HUF) in [2009] 182 Taxman 368 (SC) is no longer applicable.
8.3 The AO rightly referred the decision of Hon'ble High Court of Punjab and Haryana in the case of Mahendra Pal Narang vs CBDT dated 19.02.2020 in CWP no. 19791 of 2019 and treated the interest received on enhanced compensation as income from other sources and not under the head capital gain. This was challenged by the appellant before Hon'ble Supreme Court. However, Hon'ble SC dismissed the appeal vide order dated 04.03.2021 in Mahender Pal Narang vs. CBDT, Ministry of Finance in 126 taxmann.com 105 (SC). It is categorically held that the interest received on enhanced compensation has to be treated as income from other source and not under the head capital gains which is reproduced below:
[2021] 126 taxmann.com 105 (SCY2021] 279 Taxman 74 (SC)/[2024] 462 ITR 498 (SC) [04-03-2021] INCOME TAX : SLP dismissed against High Court ruling that interest received on compensation or enhanced compensation under Land Acquisition Act, 1894 is to be treated as 'income from other sources' and not under head 'capital gains’ ------ [2021] 126 taxmann.com 105 (SC) SUPREME COURT OF INDIA Mahender Pal Narang v. Central Board of Direct Taxes, Ministry of Finance* ROHINTON FALI NARIMAN AND HRISHIKESH ROY, JJ.
Section 56, read with sections 10(37), 45 and 145A, of the Income-tax Act, 1961 - Income from other sources - Chargeable as (Interest on enhanced compensation) - Assessment year 2016- 17 - High Court by impugned order held that interest received on compensation or enhanced compensation under Land Acquisition Act, 1894 was to be treated as 'income from other sources' and not an income under head 'capital gains' - Whether special leave petition filed against impugned order was to be dismissed - Held, yes [Para 1] [In favour of revenue] Circulars and Notifications : CBDT's Circular No. 5 of 2010, dated 3- 6-2010 CASE REVIEW Mahender Pal Narang v. CBDT [2020] 120 taxmann.com 400/275 Taxman 222/423 ITR 13 (Punj. & Har.) [SLP dismissed] Pankaj Jain, Sr. Adv., Gaurav Mittal, Adv., Ms. Divya Suri, Adv., Sachin Bhardwaj. Ad., Sandiv Kalia, Adv. and Dr. Sushil Balwada for the Petitioner.
ORDER 1. The Special Leave Petition is dismissed. 2. Pending application stands disposed of.”
8.4 Recently Hon’ble ITAT (G) bench has ruled the same in the case of Veena Shah vs PCIT [2024] 165 taxmann.com 51 on the identical issue. The AO rightly treated the same as income from other sources and given the benefit of deduction of 50% as per section 57(iv) of the IT Act and tax Rs.17,99,975/- as interest income for the AY 2018-19. There is no mistake in the well-reasoned assessment order passed by the AO.”
Aggrieved by the order of the FAA, the assessee has filed the present appeal before the Tribunal. The assessee has filed two sets 6 -: of paper-book. In one set of paper-book, assessee has enclosed the case laws relied on. In the other paper-book, assessee has enclosed therein the written submissions filed before the FAA, the award documents, the working of enhanced compensation, the notices issued during the course of reassessment proceedings, etc. The Ld.AR, as regards the issues on merits submitted that the same is covered in favour of assessee by two orders of Chennai Bench of the Tribunal which had followed the Hon’ble Kerala High Court judgment in the case of Anvar Ali Poolakkodan vs. ITO reported in 173 taxmann.com 633. The two orders of the Chennai Bench of the Tribunal are as follows:- i. Malini vs. ACIT in order dated 27.03.2025 ii. Devaraya Pillai Subramanian vs. ITO in order dated 04.09.2025
The Ld.DR strongly supported the orders of the AO and the FAA.
I have heard rival submissions and perused the material on record. Admitted facts are that assessee’s agricultural property has been compulsorily acquired under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (hereinafter the ‘RFCTLARR Act’). The 7 -: assessee during the relevant assessment year had received enhanced compensation of Rs.93,28,713/- which also included interest on enhanced compensation of Rs.35,99,509/-. By virtue of CBDT Circular No.36/2016, dated 25.10.2016, Compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act, 2013) shall also not be taxable under the provisions of the Income-tax Act even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961. The limited issue for adjudication is regarding whether the interest on enhanced compensation which was not offered for taxation could be brought to tax u/s.56(2)(viii) r.w.s.57(iv) of the Act. The issue raised is no longer res integra, the Chennai Bench of the Tribunal in the case of Malini vs. ACIT, supra, on identical facts had held that interest received on enhanced compensation for compulsory acquisition of land is akin to the compensation for compulsory acquisition of land which is exempt from taxation by virtue of section 96 of RFCTLARR Act. The relevant finding of the Chennai Bench of the Tribunal order in the case of Malini vs. ACIT, supra is as follows:- 9. Heard both the sides, perused the material available on record and gone through the orders of authorities below as well as case law relied on by the assessee. There is no dispute that the assessee has received 8 -: interest on enhanced compensation on compulsory acquisition of agricultural land for the assessment year under consideration. The ld. Counsel for the assessee has brought to our notice about the provisions of section 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 [RFCTLARR Act, 2013] says that no income tax or stamp duty shall be levied on award or agreement made under this Act except under section 46 and no person claiming under any such award or agreement shall be liable to pay any fee for a copy of the same. Therefore, according to section 96 of RFCTARR Act, 2013, the interest received towards delayed payment of compensation for compulsory acquisition of land is exempted from income tax by virtue of enactment of the RFCTARR Act. Further, as per section 3(i) of RFCTARR Act provides cost of acquisition includes amount of compensation which includes solatium any enhanced compensation ordered by the Land resettlement Authority or the Court and interest payable thereon and any other amount determined as payable to the affected families by such Authority or Court. Therefore, the interest awarded by the authority on the enhanced compensation on compulsory acquisition of land is part of the compensation and hence, not taxable under the Income Tax Act by virtue of provisions containing under section 10(37) of the Act.
10. Apart from the above discussions, the assessee also relied on the decision of the Coordinate Bench this Tribunal in the case of ACIT v. M/s. SV Global Mill Ltd. (supra), wherein, it was held that “….we are of the considered view that interest received by the assessee towards delayed payment of compensation for compulsory acquisition of land is akin to compensation for compulsory acquisition of land, which is exempt from income tax by virtue of section 96 of RFCTARR Act, 2013. The ld. CIT(A) after considering relevant facts has rightly deleted additions made by the AO towards interest u/s 56(2)(viii) of the IT Act. There is no error in the finding recorded by the ld. CIT(A) and hence, we are inclined to uphold the order of the CIT(A) and dismiss the appeal filed by the Revenue.
Further, we find that in the case of CIT v. Ghanshyam (HUF) (supra), wherein, the Hon’ble Supreme Court held that “interest paid under section 28 of the Land Acquisition Act forms part of 9 -: compensation and is a part of enhanced value of the land”. The Hon’ble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO 388 ITR 343 held that interest forms part of compensation and the same is not taxable. Therefore, we are of the view that these two judgements are rendered in consonance with the provisions of section 3(i) of new RFCTARR Act, 2013, which defines the term compensation, which includes interest, if any, payable under the said Act. Hence, the Assessing Officer as well as the ld. CIT(A) are not justified in making addition under section 56(2)(viii) of the Act on the receipt of enhanced interest received by way of enhanced compensation for compulsory acquisition of land. Thus, the order of the ld. CIT(A) is set aside and delete the addition made by the Assessing Officer. Thus, the grounds raised by the assessee are allowed.”
Similarly, another Bench of the Chennai Tribunal in the case of Devaraya Pillai Subramanian vs. ITO, supra by following the Hon’ble Kerala High Court judgment had held as follows:- 19. We have heard rival submissions and perused the material on record along with paper book filed and gone through the orders of the authorities. Admittedly the assessee had received the disputed interest in consequence to the compulsory acquisition and hence the only issue to be adjudicated in the present appeal is whether the AO was correct in bringing to tax the sum of Rs.22,46,610/- (50 % of the of interest on enhanced compensation amounting to Rs. 44,93,229/- as income of the appellant by invoking the Section 56(2)(viii) r.w.s 145B(i).
We have perused the judgments of the Punjab & Haryana High Court and Kerala High Court referred supra wherein the identical issues were considered by the Hon'ble Courts. We note that on this issue there are divergent views expressed by the Hon'ble High Courts. The Hon'ble Punjab & Haryana High Court had decided the issue in favour of the Revenue and the Hon'ble Kerala had held the issue in favour of the Assessee. In such a scenario, as held by the Hon'ble Supreme Court in the case of Vegetable Products (supra), we are inclined to follow the decisions in favour of the assessee on the issue in hand.
“8. On a conjoint reading of the above statutory provisions, it is clear that amounts received by an assessee as compensation or enhanced compensation for compulsory acquisition of his landed property would be treated as income under the head of 'Capital Gains' for the purposes of the I.T. Act. If the said compensation amounts are received in relation to agricultural property, then by virtue of the provisions of Section 10 (37) of the I.T. Act, the amounts would stand excluded from the total income of the assessee for the purposes of the I.T. Act. As for the interest amounts received by an assessee in terms of Section 28 or Section 34 of the LAA, it is debatable as to whether the said interest would qualify as interest for the purposes of the I.T. Act as well going by the definition of the term under Section 2 (28A) of the I.T. Act. This is because there are conflicting precedents on the issue as to whether the interest paid to an assessee for delayed payment of compensation for compulsory acquisition of his land partakes the character of the compensation itself or merely that of an interest payment [Dr. Sham Lal Narula v. Commissioner of Income-Tax [1964] 53 ITR 151 (SC)]; Puneet Singh v. CIT, Karnal [2019] 110 taxmann.com 116/415 ITR 215 (Punjab & Haryana); Mahender Pal Narang v. CBDT, New Delhi [2020] 120 taxmann.com 400/275 Taxman 222/423 ITR 13 (Punjab & Haryana); Mahender Pal Narang v. CBDT, Ministry of Finance [2021] 126 taxmann.com 105/279 Taxman 74/462 ITR 498 (SC); T.N.K. Govindaraju Chetty v. Commissioner of Income-tax [1967] 66 ITR 465 (SC); Bikram Singh v. Land Acquisition Collector [(1997) 10 SCC 243/[1996] 89 Taxman 119/224 ITR 551 (SC)]; Commissioner of Income-tax, Faridabad v. Ghanshyam (HUF) [(2009) 8 SCC 412/[2009] 182 Taxman 368/315 ITR 1 (SC)]; Commissioner of Income-tax. Faridabad v. Chet Ram (HUF) [(2018) 15 SCC 270/[2017] 86 taxmann.com 103/251 Taxman 4/400 ITR 23 (SC)]; Commissioner of Income Таx, Rajkot v. Govindbhai Mamaiya - [(2014) 16 SCC 449/[2014] 52 taxmann.com 270/229 Taxman 138/367 ITR 498 (SC)]; Principal Commissioner of Income-tax 10 v. Inderjit Singh 11 -: Sodhi (HUF) [MANU/DE/2633/2024/[2024] 161 taxmann.com 301 (Delhi)]; Manjet Singh (HUF) v. Union of India [MANU/PH/3409/2014]/2016] 65 taxmann.com 160/237 Taxman 116 (Punjab & Haryana) & Manjet Singh (HUF) Karta Manjeet Singh v. Union of India [MANU/SCOR/ 55128/2014]
Going by the nature of the payment of interest under the LAA, we are inclined to hold that the payment of interest on delayed payment of compensation to an assessee, be it under Section 28 or Section 34 of the LAA, would partake the character of the principal compensation itself since it is essentially paid to compensate the assessee for the loss he sulflered on account of not having the use of the principal compensation amount at the time when it fell due. We cannot lose sight of the fact that compensation amounts paid to a person towards compulsory acquisition of his property traces its roots to the constitutional obligation to pay such compensation under Article 300A of the Constitution. Recent judicial pronouncements have also recognised the right to property as a human right. In Dharnidhar Mishra (D) v. State of Bilhar [(2024) 10 SCC 605] the court pointed out that although the right property ceased to be a fundamental right by the Constitution (44th Amendment) Act, 1978, continues to be a human right in a welfare state, and a constitutional right under Article 300A of the Constitution. Accordingly, the State cannot dispossess a citizen of his property except in accordance with the procedure established by law. The court went on to observe that the obligation to pay compensation, though not expressly included in Article 300A, can be inferred from that Article since the court has recognized the right to property as a basic human right. That apart, recently in Kolkata Municipal Corporation v. Bimal Kumar Shah [(2024) 10 SCC 533] the court, while rejecting the contention of the Corporation that it had effectively acquired the property of a citizen, drew a distinction between a statutory provision that confers a power of acquisition to the Corporation and other provisions that dealt with the procedure to be followed in the exercise of that power. The court found that Article 300A of the Constitution, that prohibited the deprivation of property of a citizen save as authorized by law, conferred on a citizen seven sub-rights viz. (i) the right to a 12 -: notice of the proposed acquisition, (ii) the right to be heard on the objections if any to such proposal (iii) the right to a reasoned decision thereon (iv) the right to insist that the acquisition could only be for a public purpose (v) the right to restitution or fair compensation (vi) the right to an efficient and expeditious process and (vii) the right to a conclusion of the proceedings. In essence, the court saw the concepts of substantive and procedural due process as integral aspects of the phrase 'authority of law' in Article 300A of the Constitution. The developed jurisprudence on property rights therefore unambiguously points to the necessity of treating interest payments for delayed payment of principal compensation amounts for compulsory acquisition of property, as an accretion to the compensation amount itself. For a citizen whose property has been compulsorily acquired by the State, the right to receive the compensation in full accrues from the date of his dispossession and any statutory interest paid to him for delayed payment of the principal compensation amounts partakes the character of the compensation itself. This is irrespective of whether the interest that is paid is under Section 28 or Section 34 of the LAA because the interest payments under both of the said provisions are premised on the same rationale [See: The constitution bench decision in Sundar v. Union of India (2001) 7 SCC 211 ].
10. In the light of the discussion above, we hold that interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as "Capital Gains' for the purposes of the I.T. Act. Consequently, the interest amounts will also get the benefit of Section 10 (37) of the I.T. Act if the land compulsorily acquired is agricultural land. Further, since the interest amounts so received are not the nature of interest as defined under Section 2 (28A), the provisions of Section 56 of the I.T. Act will not be attracted in such cases. While the provisions of Section 56 (2)(viii) deal with interest on compensation or enhanced compensation, the said reference to compensation or enhanced compensation need not be seen as made in connection with compulsory acquisition of property. The applicability of Section 56 (2)(viii) will depend 13 -: upon whether or not, in the particular factual situation, the interest amount can be treated as different in nature from the principal compensation amount.” In the present facts and circumstances of the case by respectfully following the above ratio laid down by the Hon'ble Kerala High Court, we are inclined to allow the grounds raised by the Assessee and direct the AO to delete the addition made.
In light of the aforesaid judicial pronouncements, I hold that interest received on enhanced compensation partakes the character of compensation which is entitled for exemption u/s.10(37) of the Act / RFCTLARR Act. It is ordered accordingly.
9. Since, I have decided the issue raised on merits in favour of assessee, the legal contention is not adjudicated and is left open.
In the result, the appeal filed by the assessee is allowed.