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Facts
The assessee received interest on enhanced compensation for compulsory acquisition of agricultural land. The Assessing Officer (AO) treated 50% of this interest as taxable income, holding it as revenue receipt and not exempt compensation. The CIT(A) upheld the AO's order.
Held
The Tribunal held that interest on enhanced compensation is taxable as revenue income, following the ratio of Supreme Court and High Court judgments. The Bench affirmed that such interest falls under Section 56(2)(viii) and is taxable in the year of receipt, rejecting the applicability of Section 10(37).
Key Issues
Whether interest on enhanced compensation for compulsory acquisition of land is taxable revenue income or exempt compensation under Section 10(37) of the Income Tax Act, especially after the introduction of Section 56(2)(viii) and Section 145B(1).
Sections Cited
250, 56(2)(viii), 57(iv), 10(37), 145B(1), 45(5), 28, 34
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: This is an appeal filed by the Assessee against the order of the Ld. CIT(A)/NFAC, Delhi dt. 28/02/2025 pertaining to Assessment Year 2018-19. 2. In the present appeal Assessee has raised the following grounds:
1. 1. 1. That on the facts, circumstances and legal position of the case, the Worthy CIT(А), NFAC in Appeal No. NFAC/2017-18/10082399 has erred in passing order dtd. 28/02/2025 in contravention of provisions of S. 250 of the Income Tax Act, 1961 (hereinafter referred to as “Act").
2. That on facts, circumstances and legal position of the case, Worthy CIT(A) has erred in upholding the action of Ld. AO in holding that the interest on enhanced compensation of Rs. 1,08,12,000/- awarded on compulsory acquisition of agricultural land is taxable.
3. That on facts, circumstances and legal position of the case, the order passed by Ld. AO and then by Worthy CIT(A) deserves to be quashed since the same have been passed without affording reasonable opportunity of being heard to the appellant.
4. That the appellant craves leave for any addition, deletion, or amendment in the grounds of appeal on or before the disposal of the same.
3. It has been brought to our notice that, that the present appeal is barred by limitation by 13 days, however no condonation application filed by the assessee. Considering that the issue involved is purely legal in nature, and respectfully following the ratio laid down by the Hon’ble Supreme Court in Collector, Land Acquisition v. Mst. Katiji & Others [(1987) 167 ITR 471 (SC)]*, which emphasizes that 2 substantial justice should prevail over technical considerations, we condone the delay in filing the appeal.
Briefly, the facts of the case are that the assessee filed her return of income for AY 2018-19 on 21.07.2018, declaring an aggregate income of Rs.8,75,330/-. The return disclosed agricultural income of Rs.6,45,930/- and income from other sources of Rs.2,39,397/-, with the total income rounded off at Rs.2,29,400/-. The case was selected for limited scrutiny under CASS, and statutory notices were issued to verify the correctness of the particulars declared. During examination of the return, it was noticed that the assessee had received interest on enhanced compensation on compulsory acquisition of land amounting to Rs.2,16,24,000/- which she claimed as exempt in the return of income. The assessment proceedings pertained specifically to the taxability of such interest received on enhanced compensation.
4.1 During assessment, the AO observed from the return that the assessee had received interest on enhanced compensation within the meaning of Section 56(2)(viii) of the Income-tax Act and had claimed the entire amount as exempt. The AO issued a show-cause notice dated 09.10.2020, proposing to treat 50% of the interest amount i.e., Rs.1,08,12,000/- as taxable income after allowing deduction under Section 57(iv). The assessee placed reliance on several judicial precedents, contending that such interest formed part of compensation and was therefore exempt. However, the AO rejected the assessee’s contentions, referred to the amended statutory provisions concerning taxability of interest on enhanced compensation, and held that the interest received was taxable under the head ‘Income from Other Sources’. Accordingly, the AO made an addition of Rs.1,08,12,000/- and determined the total income at Rs.1,16,87,330/- vide order dated 06.04.2021.
Against the order of the AO the assessee went in appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the assessment order, the grounds of appeal, the assessee’s submissions, and applicable judicial precedents, proceeded to examine whether interest on enhanced compensation is taxable under Section 56(2)(viii). The Ld. CIT(A) embarked on an extensive analysis of Supreme Court jurisprudence beginning with the landmark judgment in Dr. Shamlal Narula (1964), wherein it was conclusively held that interest awarded under Sections 28 and 34 of the Land Acquisition Act is not compensation but a revenue receipt paid for the use 3 of the claimant’s money by the State. The CIT(A) further relied on subsequent larger bench decisions in T.N.K. Govindaraju Chetty, K.S. Krishna Rao, and Bikram Singh, all holding that statutory interest on enhanced compensation is taxable revenue income.
5.1 The CIT(A) observed that although the assessee relied heavily on Ghanshyam (HUF), the ratio in Ghanshyam was delivered by a two-judge bench and dealt primarily with the year of taxability of enhanced compensation under Section 45(5), not with the intrinsic nature of interest. The CIT(A) held that the binding force of the larger bench judgments prevails, and that Ghanshyam did not overrule the settled position that such interest is revenue income. The appellate authority also referred to several rulings of the Hon’ble Punjab & Haryana High Court, including Manjeet Singh (HUF), which consistently affirmed that interest under Section 28 of the Land Acquisition Act is taxable, particularly after the introduction of Section 56(2)(viii) and the corresponding deduction under Section 57(iv) by Finance Act, 2009. 5.2 Accordingly, the CIT(A) held that the AO was correct in treating 50% of the interest as taxable income and that the assessee was not entitled to exemption under Section 10(37) for such interest. The addition made by the AO at Rs.1,08,12,000 was upheld.
The Ld. AR submitted that the interest granted u/s 28 is in the nature of enhanced compensation and is therefore exempt u/s 10(37). Reliance was placed upon Ghanshyam (HUF) and Hari Singh, as well as certain coordinate Bench decisions, contending that interest awarded under section 28 partakes the character of compensation. It was emphasised that the assessee is an agriculturist and the receipt should be viewed as part of the compensation for accretion in value of land.
Per contra, the Ld. DR supported the orders of the authorities below and submitted that the issue is squarely covered against the assessee by the decision of the Chandigarh Bench in Ajay Kumar vs ITO (ITA No. 463/Chd/2023), forming part of the consolidated order in land-acquisition matters.
7.1 It was argued that after insertion of sections 56(2)(viii) and 145B(1), all interest received on compensation or enhanced compensation—whether under section 28 or 34 is taxable in the year of receipt, and the earlier judgments relied upon by the 4 assessee relate to the pre-amendment position. It was further submitted that the assessee cannot claim TDS credit without offering the corresponding income to tax.
We have carefully considered the rival submissions and examined the record. We observe that the Coordinate Chandigarh Bench, in the case of Ajay Kumar (supra), has already adjudicated identical arguments. The Bench ruled that interest on compensation falls within the ambit of Section 56(2)(viii) and is taxable in the year of receipt pursuant to Section 145B(1). The Bench explicitly rejected the applicability of Section 10(37) to the interest component and clarified that claiming TDS credit is contingent upon the income being offered to tax. The facts in the instant case are materially identical. 8.1 In respectful adherence to the binding precedent of the Coordinate Bench in Ajay Kumar, we affirm the Ld. CIT(A)'s decision to sustain the addition. The assessee has failed to adduce any distinguishing features or contrary legal propositions that would justify a departure from the settled view of this Bench.
In the result, the appeal of the assessee is dismissed.