2022 (5) TMI 281 - AT - Income Tax

Benefit of exemption claimed by the assessee u/s 10(37) on the compulsory acquisition of agricultural land under the Land Acquisition Act - CIT-A jurisdiction u/s 251 (2) in treating the subject agricultural land as 'capital asset' u/s 45(5) - CIT-A held that land in question is a 'Capital Asset', whose acquisition by state Government is a transfer of capital asset wherein the principal compensation received by the appellant is chargeable to under the head 'Capital Gains' u/s 45 and interest on enhanced compensation is to be treated as 'Income from Other Sources' u/s 56 - whether interest awarded u/s 28 of the Land Acquisition Act is part of compensation is taxable or not? - HELD THAT - There are divergent views on this taxability of interest on the enhanced compensation awarded u/s 28 of the Land Acquisition Act wherein the Hon ble Punjab Haryana High Court has consistently taking a view that it is an income to be treated under the head income from other sources . The Hon ble Gujarat High Court has decided this issue in favour of the assessee following the decision of Hon ble Supreme Court in the case of Ghanshyam 2009 (7) TMI 12 - SUPREME COURT Since the AO of the present case falls under the jurisdiction of Hon ble Delhi High Court, therefore following the dictum that, if one High Court is in favour of the assessee, then in absence of any jurisdictional High Court, that should be followed in favour of the assessee. Thus, ratio of Hon ble Punjab Haryana High Court may not have any binding precedent. Thus, the interest on the enhanced compensation u/s 28 of the Land Acquisition Act is not taxable. Whether the land was an agricultural land or not?- It cannot be inferred even remotely that the land which was acquired by the Government was not an agricultural land. The observation and the finding of the ld. first appellate authority despite noting down these evidences does not have any basis to negate these evidences nor any independent enquiry has been made to counter these evidences. In fact the entire impugned order revolves around on various case laws and the facts discussed herein which has been distinguished by ld. counsel before us. However, we do not find it relevant to discuss here, as none of the case laws are relevant for the present case in the light of these evidences. Once the Land Acquisition Officer as well as court have awarded the compensation treating to be an agricultural land and not only that, all the Revenue departments have certified that it was an agricultural land and substantial proof has been given that agricultural activities were being carried out, then to say that it was a commercial land and not an agricultural land, is unjustifiable. Therefore, we hold that firstly, it was an agricultural land on which the compensation has been awarded by the court; and secondly, the interest received on enhanced compensation u/s 28 of the Land Acquisition Act is part of compensation and hence is not taxable, accordingly assessee is entitled for exemption u/s 10(37) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 10(37) of the Income Tax Act for compulsory acquisition of agricultural land.
2. Classification of the acquired land as a 'Capital Asset' under Section 45(5) of the Income Tax Act.
3. Taxability of interest on enhanced compensation under Section 28 of the Land Acquisition Act.

Detailed Analysis:

Issue 1: Denial of Exemption under Section 10(37)
The primary issue raised was whether the assessee was entitled to exemption under Section 10(37) of the Income Tax Act for the compulsory acquisition of agricultural land. The assessee argued that all conditions for exemption were met, and the land was used for agricultural purposes. The NFAC, however, contended that the land was not agricultural and denied the exemption.

Key Findings:
- The assessee provided substantial evidence, including the award from the Land Acquisition Collector, Form 'D', jamabandi records, and previous income tax returns showing agricultural income.
- The NFAC's conclusion that the land was not agricultural was found to lack basis and was not supported by any independent enquiry or evidence.

Judgment:
The tribunal held that the land was indeed agricultural, and the assessee was entitled to exemption under Section 10(37).

Issue 2: Classification as 'Capital Asset'
The NFAC classified the land as a 'Capital Asset' under Section 45(5) of the Income Tax Act, treating the principal compensation received as chargeable under the head 'Capital Gains'.

Key Findings:
- The tribunal noted that the land was used for agricultural purposes and was classified as such in various official records.
- The classification by the NFAC was based on the commercial value and strategic location of the land, which was not supported by substantial evidence.

Judgment:
The tribunal reversed the NFAC's classification, confirming that the land was agricultural and not a 'Capital Asset' under Section 45(5).

Issue 3: Taxability of Interest on Enhanced Compensation
The assessee argued that the interest on enhanced compensation under Section 28 of the Land Acquisition Act should be treated as part of the compensation and thus exempt from tax. The AO and NFAC held that such interest is taxable as 'Income from Other Sources' under Section 56.

Key Findings:
- The tribunal referred to the Supreme Court's decisions in CIT vs. Ghanshyam (HUF) and UOI vs. Hari Singh, which held that interest under Section 28 partakes the character of compensation.
- The tribunal also considered the conflicting views of various High Courts but followed the principle that if one High Court's decision is in favor of the assessee, it should be followed in the absence of a jurisdictional High Court ruling.

Judgment:
The tribunal held that the interest on enhanced compensation under Section 28 of the Land Acquisition Act is part of the compensation and not taxable. Therefore, the assessee is entitled to exemption under Section 10(37).

Conclusion:
The tribunal allowed the appeal of the assessee, holding that:
1. The land in question was agricultural and eligible for exemption under Section 10(37).
2. The land could not be classified as a 'Capital Asset' under Section 45(5).
3. Interest on enhanced compensation under Section 28 of the Land Acquisition Act is part of the compensation and not taxable.

The judgment was pronounced on May 4, 2022.