2025 (4) TMI 867 - HC - Income Tax

Taxability of amounts received by an assessee as compensation or enhanced compensation for compulsory acquisition of his landed property - Whether the interest received qualifies for exemption u/s 10(37) if the land acquired is agricultural land? - HELD THAT - The developed jurisprudence on property rights therefore unambiguously points to the necessity of treating interest payments for delayed payment of principal compensation amounts for compulsory acquisition of property as an accretion to the compensation amount itself. For a citizen whose property has been compulsorily acquired by the State the right to receive the compensation in full accrues from the date of his dispossession and any statutory interest paid to him for delayed payment of the principal compensation amounts partakes the character of the compensation itself. This is irrespective of whether the interest that is paid is u/s 28 or Section 34 of the LAA because the interest payments under both of the said provisions are premised on the same rationale See The constitution bench decision in Sundar v. Union of India 2001 (9) TMI 1121 - SUPREME COURT . We hold that interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as Capital Gains for the purposes of the I.T. Act. Consequently the interest amounts will also get the benefit of Section 10 (37) of the I.T. Act if the land compulsorily acquired is agricultural land. Since the interest amounts so received are not in the nature of interest as defined under Section 2 (28A) the provisions of Section 56 of the I.T. Act will not be attracted in such cases. While the provisions of Section 56 (2) (viii) deal with interest on compensation or enhanced compensation the said reference to compensation or enhanced compensation need not be seen as made in connection with compulsory acquisition of property. The applicability of Section 56 (2) (viii) will depend upon whether or not in the particular factual situation the interest amount can be treated as different in nature from the principal compensation amount. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal questions considered in this judgment are:

1. Whether the interest amounts received on delayed payment of compensation or enhanced compensation for compulsory acquisition of agricultural land should be classified as 'Capital Gains' or 'Income from other sources' under the Income Tax Act.

2. Whether the interest received qualifies for exemption under Section 10(37) of the Income Tax Act if the land acquired is agricultural land.

3. Whether the Tribunal erred in dismissing the rectification application under Section 154 of the Income Tax Act based on precedents from several High Courts.

ISSUE-WISE DETAILED ANALYSIS

1. Classification of Interest on Delayed Compensation

- Relevant Legal Framework and Precedents: The relevant provisions include Sections 2(28A), 10(37), 45(5), 56(1), 56(2)(viii), and 145B of the Income Tax Act. Precedents considered include judgments from various High Courts and the Supreme Court addressing whether interest on delayed compensation should be treated as part of the compensation itself or as separate interest income.

- Court's Interpretation and Reasoning: The Court examined whether interest paid for delayed compensation under the Land Acquisition Act (LAA) should be considered as part of the compensation or as separate interest income. The Court noted conflicting precedents but leaned towards treating such interest as an accretion to the principal compensation, citing constitutional obligations and recent judicial pronouncements recognizing the right to property as a human right.

- Key Evidence and Findings: The Court noted that compensation for compulsory acquisition is rooted in constitutional obligations under Article 300A, which implies a right to fair compensation, including interest on delayed payments.

- Application of Law to Facts: The Court applied the principle that interest on delayed compensation should be treated as part of the compensation, thereby classifying it under 'Capital Gains' rather than 'Income from other sources'.

- Treatment of Competing Arguments: The Court considered arguments asserting that interest should be treated as separate income under Section 56(2)(viii) but found that the nature of the payment aligns more closely with compensation.

- Conclusions: Interest on delayed compensation is classified as 'Capital Gains' and not as 'Income from other sources'.

2. Exemption under Section 10(37) for Agricultural Land

- Relevant Legal Framework: Section 10(37) provides for the exclusion of income from capital gains arising from the transfer of agricultural land under certain conditions.

- Court's Interpretation and Reasoning: The Court determined that since interest on delayed compensation is treated as part of the compensation, it should also benefit from the exemption under Section 10(37) if the land is agricultural.

- Key Evidence and Findings: The Court emphasized the constitutional and human rights aspects of fair compensation, which include interest as part of the compensation.

- Application of Law to Facts: The Court concluded that interest on compensation for agricultural land is exempt under Section 10(37).

- Treatment of Competing Arguments: The Court acknowledged differing views but held that the nature of the interest aligns with compensation, thus qualifying for exemption.

- Conclusions: Interest on compensation for agricultural land is exempt under Section 10(37).

3. Dismissal of Rectification Application under Section 154

- Relevant Legal Framework: Section 154 allows for rectification of mistakes apparent from the record.

- Court's Interpretation and Reasoning: The Court found that the Tribunal erred in dismissing the rectification application, as several High Courts had taken a view consistent with the appellant's position.

- Key Evidence and Findings: The Court noted precedents supporting the appellant's claim for exemption on interest as part of compensation.

- Application of Law to Facts: The Court concluded that the Tribunal should have considered the rectification application favorably in light of consistent precedents.

- Treatment of Competing Arguments: The Court found the Tribunal's reasoning insufficient to dismiss the application.

- Conclusions: The rectification application should have been allowed.

SIGNIFICANT HOLDINGS

- The Court held that interest on delayed compensation for compulsory acquisition of agricultural land is part of the compensation itself and should be classified as 'Capital Gains'.

- The Court established that such interest qualifies for exemption under Section 10(37) of the Income Tax Act if the land is agricultural.

- The Court concluded that the Tribunal erred in dismissing the rectification application under Section 154, given the consistent view of several High Courts.

- The appeals were allowed, and the questions of law were answered in favor of the assessee and against the revenue.