2023 (8) TMI 140 - AT - Income Tax

Addition made for interest received on enhanced compensation on account of compulsorily acquisition of Agriculture land - As argued it is only an accretion to the value of land and not in the nature of interest and the same is liable to be treated as per the provision of section 45(5) r.w.s. 10(37) and if the Original compensation is Taxable then the same will also be taxable and if original compensation is exempt u/s 10(37) on account of compulsorily acquisition of agriculture Land then the same will also be exempt because this interest has been awarded by the Apex court under the provision of section 28 of the Compulsorily Land acquisition act - AO allowed 50% of deduction on total interest received, u/s 28 of enhanced compensation by following the provisions of section 57(iv) of the Act and treated the remaining 50% as Income from other sources. as confirmed by CIT(A) HELD THAT - As the land of the assessee was acquired under the old Land Acquisition Act, but, the intention of the legislature is also clear as per the said Circular wherein the compensation received by the assessee u/s 96 of the RFCTLAAR Act has to be held as exempt from levy of income-tax. CIT(A) was not correct in upholding the assessment order wherein the AO has granted part relief to the assessee u/s 57(iv) of the Act and not applying the provisions of section 10(37) of the Act on the interest received by the assessee on enhanced compensation. Therefore, the orders of the authorities below are set aside being not sustainable and not in accordance with the provisions of the Act. Therefore, the grounds of appeal of the assessee are allowed and the AO is directed to allow deduction u/s 10(37) of the Act to the assessee on the entire amount of interest received on enhanced compensation u/s 28 of the Act. Decided in favour of assessee.

Summary

Issues Involved:

1. Legality and validity of the order passed by the CIT(A), NFAC.
2. Taxability of interest received on enhanced compensation for compulsory acquisition of agricultural land.
3. Application of Section 10(37) and Section 45(5) of the Income Tax Act, 1961.
4. Interpretation of judicial precedents and legislative intent.

Summary:

Issue 1: Legality and Validity of the Order by CIT(A), NFAC:

The assessee contended that the order passed by the CIT(A), NFAC, upholding the assessment order was illegal, bad in law, and contrary to the facts and circumstances of the case. The assessee argued that the order was passed without proper application of mind and should be set aside.

Issue 2: Taxability of Interest on Enhanced Compensation:

The primary issue was whether the interest received on enhanced compensation for the compulsory acquisition of agricultural land should be treated as 'Income from other sources' or as part of 'Capital gains.' The assessee argued that such interest, awarded under Section 28 of the Land Acquisition Act, 1894, is an accretion to the value of land and not in the nature of interest, thus should be treated under Section 45(5) read with Section 10(37) of the Income Tax Act, 1961.

Issue 3: Application of Section 10(37) and Section 45(5) of the Income Tax Act, 1961:

The assessee cited several judicial precedents, including the Supreme Court's decision in CIT vs. Ghanshyam (HUF), which held that interest awarded under Section 28 of the Land Acquisition Act is part of the compensation and should be treated as a capital receipt, exempt under Section 10(37) if the original compensation is exempt. The Revenue, however, relied on the Punjab & Haryana High Court's judgment in Mahender Pal Narang vs. CBDT, which treated such interest as 'Income from other sources.'

Issue 4: Interpretation of Judicial Precedents and Legislative Intent:

The Tribunal referred to the ITAT Delhi Bench's decision in Ram Kishan vs. ITO, which held that interest on enhanced compensation under Section 28 of the Land Acquisition Act is part of the compensation and should be treated as tax-free under Section 10(37) if the transfer is of agricultural land. The Tribunal emphasized that statute must be interpreted according to the legislature's intent, which, as clarified by CBDT Circular No. 5/2010, aims to mitigate undue hardship to taxpayers by treating such interest as part of the compensation.

Conclusion:

The Tribunal concluded that the CIT(A) erred in upholding the assessment order, which treated 50% of the interest on enhanced compensation as 'Income from other sources.' The Tribunal set aside the orders of the authorities below and directed the AO to allow deduction under Section 10(37) on the entire amount of interest received on enhanced compensation under Section 28 of the Land Acquisition Act. The appeal filed by the assessee was allowed.