2023 (11) TMI 583 - AT - Income Tax

Characterization of income - compensation, enhanced compensation, solatium and interest on such enhanced compensation on account of compulsory acquisition of assessee s rural agricultural land by Government of Gujarat - Income from other sources or exempt income - HELD THAT - Assessee was granted additional compensation and the statutory interest as per Section 28 of Land Acquisition Act, 1894. Hon ble Apex Court in the case of Ghanshyam (HUF) 2009 (7) TMI 12 - SUPREME COURT while considering the taxability of compensation on acquisition of asset held that interest paid on excess amount under section 28 of Land Acquisition Act, 1894 is a part of amount of compensation, however, interest under section 34 is only for delay in making payment after compensation is determined interest under section 28 of Land Acquisition Act, 1894 a part of enhanced value of land. Thus, this statutory interest awarded by Ld. Principal Senior Civil Judge, Gondal is the component of compensation. No interest under section 34 is awarded to assessee as per the judgment of Ld. Principal Senior Civil Judge, Gondal, therefore, the interest component is not taxable income. NFAC/Ld. CIT(A) restricted the allowed only 50% relief to assessee without any basis or reasoning. Coordinate bench of Delhi Tribunal in DCIT Vs Dinesh Sharma 2017 (4) TMI 1503 - ITAT DELHI by following the decision of Hon ble Apex Court in the case of Ghanshyam (supra) also held that where compensation received under compulsory acquisition of land was enhanced by Court on appeal of assessee land owner, interest received on enhanced compensation would be calculated under section 28 of land acquisition act and such interest would be exempted from tax . In view of factual and legal position, the ground raised by assessee is allowed.

Summary

Issues involved:
1. Interpretation of solatium received under Section 28 of Land Acquisition Act in relation to Income Tax Act.
2. Taxability of interest received along with increased compensation under Section 56 of the Income Tax Act.

Issue 1: Solatium received u/s 28 of Land Acquisition Act

The appellant contended that the solatium received under Section 28 of the Land Acquisition Act, along with increased compensation, should not be considered as interest chargeable under Section 56 of the Income Tax Act. It was argued that since the solatium was received on compulsory acquisition of agricultural land in a remote area with a population of less than 10,000, it should not be taxable.

Issue 2: Addition of Rs. 42,07,939 on account of solatium on increased compensation

The question arose whether the solatium/interest received along with increased compensation should be taxed under Section 56(2)(viii) of the Income Tax Act. The appellant argued that such receipts were in the nature of capital and therefore not covered by the said section, making them non-taxable. It was emphasized that interest received on increased compensation partakes the character of a capital receipt, hence should not be taxable under Section 56(2)(viii).

The Assessing Officer noted that the appellant received interest income from various sources, including compensation for the compulsory acquisition of agricultural land. The appellant contended that the interest income did not fall under the head of "income from other sources" and objected to its inclusion in the total income. However, the Assessing Officer treated the entire compensation, including interest, as income from other sources.

The appellant appealed to the Ld. CIT(A), arguing that the compensation received, including enhanced compensation, solatium, and interest, should be exempt from tax. The Ld. CIT(A) allowed 50% relief to the appellant, which the appellant considered to be without a proper basis.

Upon careful consideration of the submissions and relevant laws, it was found that the interest component of the received amount was not taxable income. The interest awarded by the Civil Judge was deemed a part of the compensation and not subject to tax under Section 56. The decision of the Ld. CIT(A) to restrict relief to 50% was deemed unjustified.

In line with the legal position and precedents, the Tribunal allowed the appellant's appeal, concluding that the interest received on enhanced compensation under compulsory acquisition of land was exempt from tax. The appeal of the appellant was allowed, and the judgment was pronounced in open court on 10/11/2023.