2019 (10) TMI 143 - AT - Income Tax

Taxability of interest received on enhanced compensation on compulsory acquisition of land u/s 28 of the Land Acquisition Act, 1894 - interest taxable u/s 56 or in the nature of compensation which was exempt from capital gain tax u/s 10(37) - HELD THAT - Undisputedly the interest amount had been received u/s 28 of the Land Acquisition Act, 1894. We find that the nature of the said interest and its taxability had been settled by the Hon'ble Apex Court in its decision in the case of Ghanshyam, HUF 2009 (7) TMI 12 - SUPREME COURT which has been reiterated by the apex court in the case of Gobind Bhai Mamaiya 2014 (9) TMI 587 - SUPREME COURT and Hari Singh Others 2017 (11) TMI 923 - SUPREME COURT holding the same to be in the nature of compensation taxable as such. We hold that the interest received by the assessee during the impugned year on the compulsory acquisition of its land u/s 28 of the Land Acquisition Act, is in the nature of compensation and not interest which is taxable under the head income from other sources u/s 56 of the Act as held by the authorities below. The compensation being exempt u/s 10(37) of the Act is not disputed. In view of the same the order passed by the CIT(Appeals) upholding the addition made by the AO on account of interest on enhanced compensation is not sustainable. - Decided in favour of assessee

Issues Involved:
1. Taxability of interest received on enhanced compensation under Section 28 of the Land Acquisition Act, 1894.
2. Applicability of Sections 56(2)(viii), 57(iv), and 145A of the Income Tax Act, 1961.
3. Consideration of previous judicial decisions, including those by the Hon'ble Supreme Court and High Courts, on the nature of interest received under Section 28.

Issue-Wise Detailed Analysis:

1. Taxability of Interest Received on Enhanced Compensation:
The primary issue revolves around whether the interest received by the assessee under Section 28 of the Land Acquisition Act, 1894, on the compulsory acquisition of agricultural land, is in the nature of compensation and thus exempt under Section 10(37) of the Income Tax Act, 1961, or if it should be taxed under 'Income from Other Sources' under Section 56.

The assessee argued that the interest received under Section 28 is in the nature of compensation and should be exempt under Section 10(37). This position was supported by the Supreme Court's decision in CIT Vs. Ghanshyam (HUF), where it was held that interest under Section 28 is part of the enhanced value of the land and thus constitutes compensation.

The Assessing Officer (AO) disagreed, stating that the amended provisions of Sections 56(2)(viii), 57(iv), and 145A of the Income Tax Act, which became applicable from the assessment year 2010-11, mandated that 50% of the interest received should be taxable. The AO relied on the decision of the Punjab & Haryana High Court to support this view.

However, the CIT(A) found merit in the assessee's claim, noting that the Supreme Court in Ghanshyam (HUF) had clearly held that interest under Section 28 is part of the enhanced compensation. The CIT(A) also pointed out that the amendments to Sections 56, 57, and 145A were intended to mitigate hardships from the Supreme Court's earlier decision in Ramabai Vs. CIT, which required arrears of interest to be taxed on an accrual basis. Therefore, these amendments did not apply to interest under Section 28, which should be treated as compensation.

2. Applicability of Sections 56(2)(viii), 57(iv), and 145A:
The AO's position was that the interest on enhanced compensation should be taxed under Sections 56(2)(viii), 57(iv), and 145A, which were introduced to tax interest on compensation or enhanced compensation in the year of receipt.

The CIT(A) countered this by stating that these sections were meant to address the issue of taxing interest on an accrual basis, as per the Ramabai decision, and did not apply to interest received under Section 28, which is considered compensation. The CIT(A) supported this interpretation with the Supreme Court's ruling in Union of India Vs. Hari Singh & Others, which reiterated that interest under Section 28 is compensation.

3. Consideration of Previous Judicial Decisions:
The CIT(A) and the ITAT both relied heavily on the Supreme Court's decision in Ghanshyam (HUF) and subsequent decisions, including Union of India Vs. Hari Singh & Others and CIT Vs. Chet Ram (HUF), which consistently held that interest under Section 28 is part of the enhanced compensation and not taxable as interest income.

The ITAT noted that the issue had already been adjudicated in favor of the assessee for the impugned year in separate proceedings under Section 154. The ITAT found no new facts or arguments from the Revenue that would warrant a different conclusion. Thus, the ITAT upheld the CIT(A)'s decision to delete the addition made by the AO.

Conclusion:
The appeal filed by the Revenue was dismissed, affirming that interest received under Section 28 of the Land Acquisition Act, 1894, is in the nature of compensation and exempt under Section 10(37) of the Income Tax Act, 1961. The ITAT's decision was based on consistent judicial precedents, including multiple Supreme Court rulings, which clarified that such interest should not be taxed under 'Income from Other Sources'.

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