2022 (6) TMI 1371 - AT - Income Tax

Income from other sources - compensation received by the appellant against compulsory acquisition of agricultural land along with interest - AO treated the interest u/s 56(2)(viii) r.w.s. 145A(b) and allowed deduction u/s 57(iv) - HELD THAT - CIT(A) grossly ignored the judgment of Hon ble Supreme Court in the case of CIT Vs. Ghanshyam ( 2009 (7) TMI 12 - SUPREME COURT and difference between interest received u/s 28 and Section 34 and interest received u/s 37 of the Income Tax Act, 1961. The interest u/s 28 is a part of the amount of compensation whereas interest u/s 34 is only for delay in making payment after the compensation is determined. Interest u/s 28 is a part of enhanced value of the land. The certificate from the DRO has been given to the AO during the assessment proceedings and could not have been treated as additional evidence. In any case, if a request has not been made under Rule 46A, the ld. CIT(A) being the senior functionary of the Department is expected to guide the assessee instead of summarily dismissing the appeal. In case the veracity of the certificate is suspected, the same could have been enquired from the DRO and in case of any falsification, prosecution provision could be invoked against the assessee/AR who has filed the certificate. Decided in favour of assessee. Unexplained addition to the capital account - As we find that the amount of Rs.3.91 Cr. and Rs.3.80 Cr. has been reconciled and the capital account as on 31.03.2013 stands at Rs.6.31 Cr. which includes the compensation received. Hence, the addition is liable to be deleted. Appeal of the assessee is allowed.

Summary

Issues:
1. Tax treatment of compensation received for compulsory acquisition of agricultural land.
2. Addition of unexplained amount to capital account.

Analysis:

Issue 1: Tax Treatment of Compensation Received for Compulsory Acquisition of Agricultural Land
The Assessee appealed against the order of the ld. CIT(A) regarding the tax treatment of compensation received for the compulsory acquisition of agricultural land. The Assessee contended that the compensation received, including interest, should be exempt from income tax as it pertains to agricultural land. The AO treated the interest under section 56(2)(viii) read with section 145A(b) and allowed deduction under section 57(iv). The ld. CIT(A) upheld the AO's decision, stating that the interest received on enhanced compensation should be treated as income from other sources and granted deduction under section 57(iv). The Assessee produced a certificate from the District Revenue Officer confirming the interest received under section 28 of the Land Acquisition Act, 1894. However, the ld. CIT(A) did not consider this certificate as it was not filed before the AO and dismissed the appeal. The ITAT found that the ld. CIT(A) erred in ignoring the Supreme Court judgment distinguishing interest under sections 28, 34, and 37 of the Income Tax Act, 1961. The ITAT held that the interest under section 28 forms part of the compensation and should not be taxed. The ITAT also criticized the ld. CIT(A) for not considering the certificate from the District Revenue Officer and allowed the appeal on this ground.

Issue 2: Addition of Unexplained Amount to Capital Account
The Assessee challenged the addition of Rs. 11.26 lakhs as an unexplained addition to the capital account. The Assessee provided a reconciliation statement with corrected balance sheets and ledger accounts to explain the discrepancy in the capital account balances. The ITAT noted that the capital account balances were reconciled, including the compensation received, and therefore, the addition was unjustified. Consequently, the ITAT allowed the appeal on this ground as well.

In conclusion, the ITAT ruled in favor of the Assessee on both issues, holding that the compensation received for compulsory acquisition of agricultural land, including interest, should be exempt from income tax and that the addition to the capital account was unwarranted based on the reconciled balances.