2021 (4) TMI 862 - AT - Income Tax

Accrual of income - interest received on enhanced Compensation - assessee is agriculturist his land was acquired by the Government and he received total compensation from land acquisition officer Panchkula which includes interest on enhanced compensation - assessee claimed exemption under Section 10(37) - HELD THAT - 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 an addition. 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/enhanced compensation to the assessee is nothing but a capital receipt and the addition is against the law. This issue has been decided by the Hon'ble Apex Court 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 the land was agricultural land. The compensation was received in respect of agricultural land belonging to the assessee which had been acquired by the government. - Decided in favour of assessee.

Summary

Issues:
Appeal against order dated 06/01/2017 passed by CIT(A)-Karnal for assessment year 2011-12.

Analysis:
The appeal was filed by the assessee against the CIT(A)'s order, challenging the treatment of interest received on enhanced compensation as income. The assessee, an agriculturist, received compensation including interest on enhanced compensation. The assessing officer disallowed 50% of the interest received on enhanced compensation, adding it to the assessee's income. The CIT(A) upheld the assessing officer's decision. The assessee contended that interest awarded under the Land Acquisition Act is a capital receipt and not taxable. The assessing officer's addition was deemed invalid and unsustainable by the assessee. The ITAT noted that the interest received on compensation/enhanced compensation was a capital receipt and not taxable income unless specifically brought within the ambit of income by the Income Tax Act. Citing a Supreme Court decision, the ITAT ruled that no tax is payable on compensation received for agricultural land. The CIT(A) failed to consider this decision, leading to the allowance of the assessee's appeal.

In conclusion, the ITAT allowed the appeal of the assessee, emphasizing that the interest received on compensation/enhanced compensation was a capital receipt and not subject to taxation. The decision was based on the principle that unless specifically taxable under the Income Tax Act, capital receipts are not considered taxable income. The ITAT referenced a Supreme Court ruling to support the decision that no tax is payable on compensation received for agricultural land. The CIT(A)'s failure to consider this precedent led to the allowance of the assessee's appeal.