2017 (1) TMI 326 - AT - Income Tax

Enhanced compensation received by assessee would be taxable as income from other sources - Held that - Interest received u/s. 28 of the Land Acquisition Act, 1894 is nothing but enhanced compensation on the lands acquired. Since the lands are agricultural lands originally, the compensation is exempt u/s. 10(37). In view of that, we uphold the claims of assessee and the grounds are considered allowed. AO is directed to grant exemption as claimed. See Movaliya Bhikhubhai Balabhai Versus Income Tax Officer - TDS - 1 - Surat & 1 2016 (5) TMI 488 - GUJARAT HIGH COURT

Issues Involved:
1. Taxability of enhanced compensation received by the assessee.
2. Classification of interest received on compensation under the Land Acquisition Act.
3. Applicability of Section 10(37) for exemption of compensation.
4. Interpretation of Sections 56(2)(viii), 57(iv), and 145A(b) regarding interest on compensation.
5. Application of Finance Act amendments on the interest component.
6. Determination of whether interest should be taxed on an accrual or receipt basis.

Issue-wise Detailed Analysis:

1. Taxability of Enhanced Compensation:
The primary issue was whether the enhanced compensation received by the assessee for the compulsory acquisition of agricultural land would be taxable as 'income from other sources.' The assessee argued that the compensation, including interest, should be exempt under Section 10(37) of the Income Tax Act as the land was agricultural.

2. Classification of Interest Received:
The assessee received interest under Section 28 of the Land Acquisition Act, 1894. The AO treated the interest amount as taxable under 'income from other sources' per Sections 56(2)(viii) and 145A(b). The assessee contended that interest under Section 28 should be considered part of the compensation, not as separate interest income, citing the Supreme Court's judgment in CIT Vs. Ghanshyam HUF [315 ITR 1].

3. Applicability of Section 10(37):
The compensation for agricultural land acquisition is exempt under Section 10(37). The assessee maintained that since the interest under Section 28 is part of the compensation, it should also be exempt. The AO disagreed, treating the interest as taxable income.

4. Interpretation of Sections 56(2)(viii), 57(iv), and 145A(b):
The AO relied on the amended provisions of Sections 56(2)(viii) and 145A(b), which state that interest received on compensation or enhanced compensation is taxable in the year of receipt. The assessee argued that these provisions should not apply to interest under Section 28 as it is part of the compensation, not separate interest.

5. Application of Finance Act Amendments:
The AO referenced the Finance Act amendments, effective from 01-04-2010, to tax the interest in the year of receipt. The assessee contended that the amendments were intended to mitigate hardship and should not apply retrospectively to interest accrued before the amendment.

6. Accrual vs. Receipt Basis of Taxation:
The assessee argued that the interest amount should be taxed on an accrual basis, following the Supreme Court's decision in Ramabai Vs. CIT [181 ITR 400], which stated that interest on delayed compensation should be taxed as it accrues. The AO rejected this, citing the amended provisions that mandate taxation in the year of receipt.

Judgment Analysis:

The Tribunal considered the arguments and the relevant legal provisions. It noted that the Supreme Court in CIT Vs. Ghanshyam HUF [315 ITR 1] distinguished between interest under Sections 28 and 34 of the Land Acquisition Act. Interest under Section 28 is part of the enhanced compensation, while interest under Section 34 is for delay in payment. The Tribunal also referenced the Gujarat High Court's decision in Movaliya Bhikhubhai Balabhai Vs. ITO, which held that interest under Section 28 is part of the compensation and not taxable as interest income.

The Tribunal concluded that the interest received under Section 28 of the Land Acquisition Act is part of the enhanced compensation and, since the land was agricultural, the compensation is exempt under Section 10(37). The amendments to Sections 56(2)(viii) and 145A(b) apply to interest under Section 34, not Section 28. Therefore, the interest received by the assessee is not taxable as 'income from other sources.'

Conclusion:
The Tribunal allowed the appeal, holding that the interest received under Section 28 of the Land Acquisition Act is part of the enhanced compensation for agricultural land and is exempt under Section 10(37). The AO was directed to grant the exemption as claimed by the assessee.

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