2018 (7) TMI 2120 - AT - Income Tax

Addition on enhanced land compensation received by the assessee - not allowing deduction under section 10(37) - Interest received on enhanced compensation - AO noted that the agricultural land of the assessee was acquired by HUDA and the assessee has received compensation as well as interest thereon but same was not shown as income - HELD THAT - The Hon'ble Supreme Court in CIT Vs. Ghanshyam Dass (HUF) 2009 (7) TMI 12 - SUPREME COURT has held that interest received by the assessee u/s 28 of the Land Acquisition Act is a part of enhanced value of land and therefore, is part of land compensation only. Therfore it emerges that Interest received by the assessee u/s 28 of the Land Acquisition Act is part of the compensation and is not in the nature of the interest. Therefore it is chargeable to tax under the head capital gain u/s 45 (4) of the act. Further interest received u/s 34 of the land Acquisition Act is in the nature of the interest and is chargeable to tax as interest Income under the head Income from Other sources in accordance with the method of accounting regularly followed by the assessee. AO in the impugned case has categorically held that compensation received by the assessee is u/s 28 of the Land Acquisition Act. Such fact is also reiterated and communicated to the assessee vide letter dated 26.07.2011 of the ld AO. This fact has also been further proved by the assessee by the letter dated 22.03.2018 of the Land Acquisition Officer, Faridabad obtained under Right to Information Act, 2005. Therefore, there is no dispute that interest received by the assessee is u/s 28 of the land Acquisition Act. The ld CIT(A) has proceeded on the basis that interest received by the assessee is u/s 34 of the Land Acquisition Act. Such finding is devoid of any evidence. Therefore, the order of the ld CIT(A) cannot be upheld. As the assessee has received the compensation u/s 28 of the Land Acquisition Act same is part of the compensation received by the assessee which is chargeable to tax under the head capital gain u/s 45(5) of the Act. Section 10(37) of the Act provides that if any sum is chargeable to tax under the head capital gain arising from the transfer of agricultural land in case of assessee in pursuance of compulsory acquisition, then same is exempt subject to certain conditions. In the case of the assessee the ld AO himself has stated that the assessee is entitled to deduction u/s 10(37) of the Act and sum of the compensation received by it as the land acquired is an agricultural land on production of copy of Girdawari of the land -there is no dispute by the ld AO himself about the nature of the land. In view of this we are of the opinion that the assessee is eligible for deduction u/s 10(37) of the Act. Further, the certificate of Patwari dated 19.12.2011 also shows that the land of the assessee is an agricultural land and the assessee has produced wheat, jwar etc on that land. In view of this the ground No. 2 of the appeal of the assessee is allowed and the ld AO is directed to treat the interest of compensation received by the assessee as compensation of land as sum was awarded u/s 28 of the Land Acquisition Act and further to grant exemption u/s 10(37) - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Taxability of land compensation and interest received by the assessee.
2. Allowability of deduction under section 10(37) of the Income Tax Act, 1961.

Analysis:

Issue 1: Taxability of land compensation and interest received by the assessee
The appellant, an individual, received compensation and interest on acquired agricultural land but did not show it as income. The Assessing Officer (AO) held the compensation taxable under section 28 of the Land Acquisition Act due to the cash system of accounting. The AO also exempted a portion under section 10(37) of the Act. The CIT(A) further differentiated between interest on enhanced compensation and interest under section 34 of the Land Acquisition Act, holding the latter taxable. The appellant contended that the interest received was part of the compensation under section 28, making it eligible for exemption under section 10(37). The Tribunal referred to the Supreme Court decision in CIT Vs. Ghanshyam Dass (HUF) and clarified that interest under section 28 is part of compensation and taxable as capital gain, while interest under section 34 is taxable as income from other sources. The Tribunal found the CIT(A)'s decision erroneous as the interest received was under section 28, not section 34, and reversed the lower authorities' orders.

Issue 2: Allowability of deduction under section 10(37)
Section 10(37) provides exemption for capital gains from the transfer of agricultural land due to compulsory acquisition, subject to conditions. The AO acknowledged the appellant's eligibility for deduction under section 10(37) upon verifying the nature of the land. The Tribunal noted that the land was agricultural based on the Girdawari and Patwari certificates. Consequently, the Tribunal allowed the appellant's appeal, directing the AO to treat the interest received as compensation for land under section 28 and grant exemption under section 10(37) of the Act. The Tribunal reversed the lower authorities' decisions, thereby allowing the appeal of the assessee.

In conclusion, the Tribunal ruled in favor of the assessee, holding that the interest received was part of the compensation under section 28 of the Land Acquisition Act, making it taxable as capital gain and eligible for exemption under section 10(37) of the Income Tax Act, 1961.