2021 (4) TMI 494 - AT - Income Tax

Characterisation of income - interest awarded u/s 28 of the Land Acquisition Act - computation of capital gain u/s 45 - assessee had received enhanced compensation of land acquisition, which included compensation and interest thereon - Assessing Office had made addition being 50% of interest u/s 56(2)(viii) r.w. Section 57(iv) - Whether interest awarded u/s 28 of Land Acquisition Act, 1894 is nothing but an accretion to the value compensation and hence it is part and parcel of compensation? - HELD THAT - The capital receipt unless specifically taxable u/s 45 under the head capital gain, in principle, is outside the scope of income chargeable to tax and cannot be taxed as income unless it is in the nature of Revenue receipt or specifically brought within the ambit of income by way of specific provision of the Income Tax Act. Thus, the interest received on compensation to the assessee is nothing but a capital receipt and the addition is against the law. From the perusal of the order of the CIT(A), it can be seen that the CIT(A) has not given a separate finding as to why the Assessing Officer is justified in making the addition. This issue has been decided in case of Union of India Vs. Hari Singh 2017 (11) TMI 923 - SUPREME COURT wherein it is held that on agricultural Land no tax is payable when the compensation/enhanced compensation is received by the assessee as their land were agricultural land. The compensation was received in respect of agricultural land belonging to the assessee which had been acquired by the state government. The CIT(A) has not taken cognizance of the decision of the Apex Court in case of Hari Singh (supra). The ratio of the said decision is applicable in the present case. Thus, the appeal of the assessee is allowed.

Issues Involved:
1. Taxability of interest awarded under section 28 of the Land Acquisition Act as a capital receipt.
2. Validity of reopening assessment under section 147.
3. Legality of the notice issued.
4. Applicability of Supreme Court judgments on taxability of interest under section 28 of the Land Acquisition Act.
5. Assessment of income based on compensation and interest received under section 28 of the Land Acquisition Act.

Issue 1: Taxability of Interest as a Capital Receipt:
The appeal raised the question of whether interest awarded under section 28 of the Land Acquisition Act should be considered a capital receipt. The appellant argued that such interest is an accretion to the value of compensation and should be treated as part of the compensation, thus falling under the capital nature and not as income chargeable to tax unless specifically taxable under section 45 of the Income Tax Act. The appellant cited relevant Supreme Court judgments to support this argument, emphasizing that the interest received on compensation is a capital receipt and should not be taxed as income. The Tribunal agreed with the appellant's contention, highlighting that unless specifically taxable under section 45 as capital gain, a capital receipt is outside the scope of income chargeable to tax. The Tribunal noted that the CIT(A) did not provide a valid reason for the Assessing Officer's addition, and referenced the Union of India Vs. Hari Singh case where it was held that no tax is payable on compensation received for agricultural land.

Issue 2: Validity of Reopening Assessment under Section 147:
The appellant challenged the reopening of the assessment under section 147 as being against the law. The Tribunal did not delve deeply into this issue as the primary focus was on the taxability of interest as a capital receipt. However, the Tribunal implicitly rejected the reopening of the assessment by allowing the appeal based on the taxability of the interest received on compensation.

Issue 3: Legality of Notice Issued:
The appellant contended that the notice issued was against the law and facts of the case, requesting it to be quashed. The Tribunal did not provide a detailed analysis of this issue in the judgment, as the main consideration was the taxability of interest as a capital receipt.

Issue 4: Applicability of Supreme Court Judgments:
Both parties referenced various Supreme Court judgments to support their arguments regarding the taxability of interest under section 28 of the Land Acquisition Act. The Tribunal analyzed these judgments, particularly the case of Union of India Vs. Hari Singh, to determine the tax treatment of interest received on compensation. The Tribunal found the arguments based on relevant Supreme Court judgments to be persuasive in supporting the appellant's position that the interest should be treated as a capital receipt.

Issue 5: Assessment of Income Based on Compensation and Interest Received:
The Assessing Officer had assessed the income based on the compensation and interest received under section 28 of the Land Acquisition Act, adding a portion of the interest to the income under section 56(2)(viii) and section 57(iv) of the Income Tax Act. The Tribunal disagreed with this assessment, ruling that the interest received on compensation should be treated as a capital receipt and not taxed as income unless specifically taxable under section 45 as capital gain. The Tribunal allowed the appeal, overturning the assessment made by the Assessing Officer and the decision of the CIT(A).

In conclusion, the Tribunal allowed the appeal, holding that the interest received on compensation under section 28 of the Land Acquisition Act should be treated as a capital receipt and not taxed as income unless specifically taxable under section 45 as capital gain. The Tribunal emphasized the importance of following relevant Supreme Court judgments in determining the taxability of such interest and highlighted the need for a valid justification for any additions made by the Assessing Officer.

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