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Facts
The assessee received Rs. 32.46 lakhs as interest on enhanced compensation for compulsory acquisition of rural agricultural land. The assessee claimed this income as exempt under Section 10(37) of the Income Tax Act, 1961, treating it as capital gains. The Assessing Officer (AO) subsequently assessed it as 'income from other sources' under Section 143(1).
Held
The Tribunal upheld the decision of the first appellate authority, ruling that the interest received on enhanced compensation is taxable under the head 'income from other sources' as per Section 56(2)(viii) and not as capital gains. It also affirmed the allowance of a 50% deduction under Section 57(iv) of the Act, relying on a jurisdictional High Court decision.
Key Issues
Whether interest received on enhanced compensation for compulsory acquisition of agricultural land is taxable as 'income from other sources' or as 'capital gains' and eligible for exemption under Section 10(37).
Sections Cited
Section 250, Section 143(1), Section 10(37), Section 56(2)(viii), Section 57(iv)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR
Before: DR. M. L. MEENA & SH. UDAYAN DASGUPTA
ORDER Per Udayan Dasgupta, J.M.:
This appeal is filed by the assessee against the order of the ld. Addl./JCIT(A)-7, Mumbai dated 26.02.2024 passed u/s 250 of the Income Tax Act, 1961 which has emanated from the order of the AO, CPC passed u/s 143(1) of the Act, 1961 dated 26.09.2018. of interest received on enhanced compensation arising on compulsory acquisition of agricultural lands.
The brief facts arising from record are that the assesee has received interest of an amount of Rs.32.46 lakhs from Land Acquisition officer which has arisen on compulsory acquisition of rural agricultural lands by the Government, as enhanced compensation as part of compulsory acquisition, which has been claimed by the assessee as exempted income u/s 10 (37) of the Act 61.
The return filed by the assessee declaring taxable income at NIL, has been assessed u/s 143(1), on a total income of Rs.32.46 lakhs by CPC, Bangalore, treating the interest received as “income from other source”.
The matter carried in first appeal by the assessee claiming exemption u/s 10(37) of the Act 61, on the ground that the interest received is a part of the compensation which is exempt u/s 10(37) of the Act, has been dismissed by the Ld. first appellate authority, relying on the law laid down by the Hon’ble jurisdictional High Court in the case of Mahender Pal Narang v CBDT , New Delhi [2020] (423 ITR 13)/316 CTR 906 where the Hon’ble court has observed that interest received on compensation or enhanced compensation was to be treated as income from other sources , and not under the head ‘Capital gains.
Rs.32.46 lakhs received by the assessee as interest on compensation / or enhanced compensation, has considered the same to be taxable under the head “income from other sources” u/s 56(2)(viii) and has judiciously allowed the deduction of a sum equal to fifty percentage of such income , allowable u/s 57(iv) of the Act 61 and the addition was restricted to Rs. 16.44 lakhs.
Now, the assessee is in appeal before the Tribunal with the claim that the interest portion received on compensation is to be treated as income from capital gains and not income from other sources, and he relied on the decision of the Hon’ble Kerala High Court in the case of Sh. Anvar Ali Poolakkodan v. ITO, Ward-1, Tirur in of 2024 dated 11th April, 2025 where the Hon’ble Court while analyzing the provisions relating to interest amounts received by assessee in respect of delay payment of compensation under the Land Acquisition Act has held that the same will be treated as accruals to the principal compensation amount and be classified as capital gains for the purpose of Income Tax Act.
The Court has further held that the consequential interest amount will also get the benefit of section 10(37) of the Act if the land compulsorily acquired is agricultural land. The ld. AR of the assessee prayed that the interest amount received may be treated as accruals to the principal compensation and be classified as capital gains which will be qualified for deduction u/s 10(37). has relied on the judgment of the Hon’ble jurisdictional High Court in the case of Mahender Pal Narang v. Central Board of Direct Taxes dated 19th February, 2020 (supra) where it has been held that the interest received on compensation or enhanced compensation is to be treated as income from other sources and not under the head capital gains.
The ld. D.R. further pointed out that the department preferred an SLP to appeal against the judgement of Hon’ble Punjab & Haryana High Court in the aforesaid case where the Court held that section 10 deals with deductions and clause (37) thereof deals with capital gains arising from transfer of agricultural land and it nowhere provides as to what is to be included under the head ‘Capital gains.’ The SLP has been dismissed by the Hon’ble Apex Court. Thus, interest received on compensation or enhanced compensation was to be treated as income from other sources and not under the head capital gains.
Respectfully, following the decision of the Hon’ble jurisdictional High Court, we are of the opinion that interest on enhanced compensation on compulsory acquisition of agricultural land will be treated as income from other sources and not under the head capital gains. received on compensation by the assessee on compulsory acquisition of land will form part of the taxable income under the head income from other sources and shall be entitled to deduction u/s 57 (iv) of the Act, 1961.
In the result, the appeal filed by the assessee is dismissed being devoid of merits.
Order pronounced in the open court as on 26.09.2025