2025 (4) TMI 389 - AT - Income Tax

Addition of 50% of interest received u/s. 28 of the Land Acquisition Act 1894 - Income from Other Sources or as part of compensation exempt from tax - HELD THAT - The provisions of section 56(2) of the Act were amended by the Finance (No.2) Act 2009 w.e.f 01.04.2010 by way of insertion of clause (viii) to sub-section (2) to section 56 which says Income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A. Prior to insertion of aforesaid clause the 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 solatium paid for compulsory acquisition of land hence exigible to tax u/s. 45(5) of the Act. The Hon ble Punjab and Haryana High Court 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) (viii) 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 interest received 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. Appeal of the assessee is dismissed

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

The validity of the notice issued under section 148 of the Income Tax Act, 1961, and whether it was time-barred.
The taxability of interest received on enhanced compensation under the Land Acquisition Act, specifically whether such interest is to be treated as 'Income from Other Sources' or as part of compensation exempt from tax.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Notice under Section 148

Relevant legal framework and precedents: The notice under section 148 of the Income Tax Act is a procedural requirement for reassessment. Section 149(1) specifies the time limits for issuing such notices.
Court's interpretation and reasoning: The assessee contended that the notice issued on 13.04.2023 was time-barred as per section 149(1), which allowed issuance only until 04.04.2023.
Key evidence and findings: The notice was issued after the permissible period, leading to the argument that the proceedings were vitiated.
Application of law to facts: The Tribunal considered the timing of the notice issuance and the statutory deadline.
Treatment of competing arguments: The department did not provide a counter-argument specifically addressing the timing issue.
Conclusions: The Tribunal did not explicitly rule on this procedural issue, focusing instead on the substantive taxability of the interest.

Taxability of Interest on Enhanced Compensation

Relevant legal framework and precedents: The amendment to section 56(2)(viii) of the Income Tax Act by the Finance (No.2) Act 2009, effective from 01.04.2010, was central. This amendment specified that interest on enhanced compensation is taxable as 'Income from Other Sources'. The Supreme Court's decision in CIT vs. Ghanshyam HUF and the High Court's decision in Mahender Pal Narang vs. CBDT were considered.
Court's interpretation and reasoning: The Tribunal noted that the amendment to section 56(2)(viii) postdated the decisions relied upon by the assessee. The Tribunal emphasized the legislative intent to tax such interest as 'Income from Other Sources'.
Key evidence and findings: The Tribunal referenced recent High Court decisions, including PCIT vs. Inderjit Singh Sodhi (HUF), which supported the view that such interest is taxable under the amended provisions.
Application of law to facts: The Tribunal applied the amended section 56(2)(viii) to the facts, determining that the interest received by the assessee fell within the scope of taxable income.
Treatment of competing arguments: The assessee's reliance on pre-amendment case law was addressed by distinguishing those cases based on the amendment's effective date.
Conclusions: The Tribunal upheld the CIT(A)'s decision, affirming that the interest on enhanced compensation is taxable as 'Income from Other Sources'.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The provisions of section 56(2) of the Act were amended by the Finance (No.2) Act 2009 w.e.f 01.04.2010 by way of insertion of clause (viii) to sub-section (2) to section 56."
Core principles established: The amendment to section 56(2)(viii) clearly delineates the taxability of interest on enhanced compensation as 'Income from Other Sources', overriding previous interpretations that treated it as part of compensation.
Final determinations on each issue: The Tribunal dismissed the appeal, affirming the CIT(A)'s order. It held that the interest on enhanced compensation is taxable under section 56(2)(viii) and did not explicitly address the procedural issue regarding the notice's timing.

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