2025 (1) TMI 643 - AT - Income Tax

Income from Other Sources - Addition of interest u/s. 28 of the Land Acquisition Act, 1894 on enhanced compensation received by the assessee on compulsory acquisition of land - assessee claimed interest as part of the compensation and exempt from tax u/s. 10(37) - AO treated the interest awarded to the assessee on enhanced compensation, as Income from Other Sources - HELD THAT - Hon'ble Apex Court in the case of CIT vs Ghanshyam HUF 2009 (7) TMI 12 - SUPREME COURT has held that interest received on compensation/enhanced compensation is part of compensation, hence, exigible to tax u/s. 45(5) of the Act. In the case of Mahender Pal Narang vs CBDT 2020 (3) TMI 1115 - PUNJAB AND HARYANA HIGH COURT after considering amended provisions of section 56(2) of the Act distinguished the decision rendered in the case of Ghanshyam HUF (supra) and held that interest received on compensation or enhanced compensation is to be treated as Income from Other Sources and not under the head Capital Gains . Recently, in the case of PCIT vs. Inderjit Singh Sodhi HUF 2024 (4) TMI 408 - DELHI HIGH COURT held that interest whether on compensation or enhanced compensation received on acquisition of land u/s. 28 or u/s. 34 of the Land Acquisition Act, 1894 shall be exigible to income tax as Income from Other Sources u/s. 56(2)(viii) of the Act. Decided against assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal question in this judgment is whether the interest received on enhanced compensation for land acquired under the Land Acquisition Act, 1894, should be classified as "Income from Other Sources" or as part of "Capital Gains" under the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The primary legal framework involves the interpretation of Section 56(2)(viii) of the Income Tax Act, 1961, which was amended by the Finance (No.2) Act 2009, effective from April 1, 2010. This section specifies that income by way of interest received on compensation or enhanced compensation is to be treated as "Income from Other Sources." The case also references Section 28 of the Land Acquisition Act, 1894, concerning the award of interest on compensation for compulsory land acquisition.

Precedents considered include the Supreme Court's decision in CIT vs. Ghanshyam HUF, which initially held that interest on compensation was part of the compensation itself and thus taxable under "Capital Gains." However, subsequent rulings, such as those by the Punjab and Haryana High Court in Mahender Pal Narang vs. CBDT and the Delhi High Court in PCIT vs. Inderjit Singh Sodhi HUF, distinguished this position, treating such interest as "Income from Other Sources" following the amendment.

Court's Interpretation and Reasoning

The court interpreted that the amendment to Section 56(2) clarified the legislative intent to tax interest on compensation or enhanced compensation under "Income from Other Sources." The court reasoned that the amendment was a deliberate legislative action to address the taxability of such interest, diverging from the earlier interpretation that grouped it with the principal compensation amount under "Capital Gains."

Key Evidence and Findings

The court examined the orders of the lower authorities and the legal precedents cited by both parties. It found that the amendment to Section 56(2) and the subsequent judicial interpretations provided a clear framework for treating interest on enhanced compensation as "Income from Other Sources."

Application of Law to Facts

Applying the amended Section 56(2)(viii) to the facts, the court concluded that the interest amount of Rs. 5,10,17,090/- received by the assessee on enhanced compensation should be taxed as "Income from Other Sources." The court noted that the assessee's reliance on the Ghanshyam HUF decision was misplaced due to the subsequent legislative and judicial developments.

Treatment of Competing Arguments

The assessee argued that the interest should be considered part of the compensation and thus exempt under Section 10(37) of the Income Tax Act, citing the Ghanshyam HUF case. However, the court dismissed this argument, emphasizing the distinction made by the amendment and upheld by recent judicial decisions. The court found the respondent's reliance on the amended Section 56(2) and the Mahender Pal Narang and Inderjit Singh Sodhi cases more persuasive and aligned with current legal standards.

Conclusions

The court concluded that there was no infirmity in the CIT(A)'s order, which treated the interest on enhanced compensation as "Income from Other Sources." Consequently, the appeal by the assessee was dismissed.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

"In light of recent decisions rendered in the case of Mahender Pal Narang (supra) and Inderjit Singh Sodhi (supra), we find no infirmity in the order of CIT(A), hence, the same is upheld."

Core Principles Established

The judgment establishes the principle that interest received on compensation or enhanced compensation for land acquisition is to be treated as "Income from Other Sources" under Section 56(2)(viii) of the Income Tax Act, following the 2009 amendment.

Final Determinations on Each Issue

The court upheld the CIT(A)'s decision, confirming that the interest amount received by the assessee on enhanced compensation is taxable as "Income from Other Sources," dismissing the appeal.

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