2024 (11) TMI 1157 - AT - Income Tax

Characterization of receipt - interest u/s 28 of the Land Acquisition Act 1894 received by the appellant during the year, which was part of enhanced compensation for compulsory acquisition of his agricultural land exempt u/s 10(37) - whether interest u/s. 28 of the Land Acquisition Act 1894 awarded by the Court is a revenue receipt chargeable to tax as Income from Other Sources or is an integral part of enhanced compensation, and thus, is a capital receipt, which is exempt u/s. 10 (37) - HELD THAT - We find that Hon ble Punjab Haryana High Court in Mahender Pal Narang 2020 (3) TMI 1115 - PUNJAB AND HARYANA HIGH COURT held that interest issued on the compensation for enhanced compensation is to be treated as income from other sources and did not follow the principles laid down by Hon ble Gujrat High Court and Special Leave Petition against the aforesaid judgment has also been dismissed. In the case of PCIT vs Inderjit Singh Sodhi (HUF) 2024 (4) TMI 408 - DELHI HIGH COURT observed that the enhanced compensation as income from other sources. The Hon ble Supreme Court has not dealt with Finance (No-2) act of 2010 in the case of Hari Singh while the Hon ble Delhi High Court has discussed the finance Act (No-2)/2010 and the judgement of Ghanshyam das (HUF) both. The interest on compensation or on enhanced compensation cannot be considered as compensation and shall be chargeable to tax under the head income from other sources. The Ld CIT(A) has rightly decided that interest received on compensation or enhanced compensation is to be treated as the income from other sources u/s 56(2)(viii) - Appeal of the assessee is dismissed.

Issues Involved:

1. Taxability of interest under Section 28 of the Land Acquisition Act, 1894.
2. Applicability of Section 10(37) of the Income Tax Act, 1961 for exemption.
3. Interpretation of interest as "Income from Other Sources" under Section 56(2)(viii) of the Income Tax Act.
4. Impact of legislative amendments and judicial precedents on the tax treatment of interest on compensation.

Detailed Analysis:

1. Taxability of Interest under Section 28 of the Land Acquisition Act, 1894:

The primary issue revolves around whether the interest awarded under Section 28 of the Land Acquisition Act, 1894, is a revenue receipt chargeable to tax as "Income from Other Sources" or forms part of the enhanced compensation, thereby qualifying as a capital receipt. The appellant contends that the interest awarded is part of the enhanced compensation and should be treated as a capital receipt exempt under Section 10(37) of the Income Tax Act, 1961. The Supreme Court in CIT vs. Ghanshyam (HUF) held that interest under Section 28 is part of the enhanced compensation, thus a capital receipt. However, this position is challenged by subsequent legislative amendments and judicial interpretations.

2. Applicability of Section 10(37) for Exemption:

Section 10(37) provides an exemption for capital gains arising from the compulsory acquisition of agricultural land. The appellant argues that since the interest under Section 28 is part of the enhanced compensation, it should be exempt under this provision. However, the Revenue argues that the interest does not qualify for this exemption as it is distinct from the compensation itself and should be taxed as income from other sources.

3. Interpretation of Interest as "Income from Other Sources":

The legislative amendments introduced by the Finance Act, 2009, particularly Section 56(2)(viii), classify interest received on compensation or enhanced compensation as income from other sources. This amendment effectively overrides earlier judicial interpretations that treated such interest as part of the compensation. The Punjab & Haryana High Court in Mahender Pal Narang vs. CBDT upheld this view, stating that interest on enhanced compensation is taxable as income from other sources, irrespective of its characterization as part of the compensation in earlier judgments.

4. Impact of Legislative Amendments and Judicial Precedents:

The judgment highlights the shift in legal interpretation following the legislative amendments. The Delhi High Court in PCIT vs. Inderjit Singh Sodhi (HUF) emphasized that the 2010 amendment altered the taxability of interest on compensation, making it taxable as income from other sources. The court noted that the amendment was a conscious departure from the earlier position, reinforcing the view that such interest should not be treated as part of the compensation for tax purposes.

Conclusion:

The tribunal dismissed the appeal, affirming the CIT(A)'s decision that interest under Section 28 of the Land Acquisition Act is taxable as income from other sources under Section 56(2)(viii) of the Income Tax Act. The tribunal relied on the legislative amendments and judicial precedents, particularly the decisions of the Punjab & Haryana High Court and the Delhi High Court, which clarified the tax treatment of such interest post-amendment. The decision underscores the importance of legislative intent and subsequent amendments in determining the taxability of interest on compensation.

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