COMPENSATION INTEREST UNDER SECTION 28 OF LAND ACQUISITION ACT, 1894 IS NOT TAXABLE UNDER INCOME TAX ACT, 1961.

In ‘Sushila Maruthi Mhatre, Raigad v. Income Tax Officer’- 2026 (2) TMI 1056 - ITAT PUNE, the appellant is a house wife, having no income. The agricultural lands of the father of the appellant were acquired during 1986. The additional compensation to the extent of her share was received during the year under consideration by Appellant. The appellant and his family members contested the award by way of a reference under the Land Acquisition Act, 1894. The Civil Court 13.05.2013 granted Additional Compensation, Solatium as well as Additional Component under section 23(1)(A) as well as Interest under section 28 of the Land Acquisition Act, 1894.

The Assessing Officer issued notice under section 148 of the Income Tax Act, 1961 (‘Act’ for short) for A.Y. 2016-17 on 31.03.2021 based on the information received on Portal of Income Tax Department. Then, Assessing Officer issued notice under section 142 of the Act on various dates. The appellant filed Return of Income in response to notice u/s. 148 on 08.03.2022 declaring total income at Rs. 13,500/-. In the Return of Income, the appellant has claimed interest received on enhanced compensation under section 28 of Land Acquisition Act, of Rs. 87,64,016/- as exempt income.

The Assessing Officer added Rs. 43,82,0008/- by relying on the provisions of Section 56(2)(viii) read with Section 57(iv) read with Section 145A(b) of the Act. The appellant filed appeal before the Commissioner of Income Tax (Appeals) against the order of the Assessing Officer. The Commissioner of Income Tax (Appeals) upheld the order passed by the Assessing Officer on 25.09.2025.

Being aggrieved against the order of Commissioner of Income Tax (Appeals), the appellant filed the present appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short). The Department also filed appeal against the order of Commissioner of Income Tax (Appeals) before the ITAT. The ITAT considered both the appeals together, since the facts of two appeals are same. The ITAT has taken the appeal of the assessee as a lead appeal.

The appellant, in her grounds of appeal, contended that the Commissioner of Income Tax (Appeals) erred in Upholding addition of Rs. 43,82,008/- made by Assessing Officer by relying upon the provisions of Section 56(2)(viii) read with Section 57(iv) read with Section 145A(b) of the Act, not appreciating that the said amount was interest granted under section 28 of the Land Acquisition Act, 1894 and thus bore the character of enhanced compensation on acquisition of agricultural land and was therefore exempt from tax and the addition is required to be deleted.

The appellant submitted the following before the ITAT-

• The agricultural lands were compulsorily acquired by the State Government in the year 1986, under Section 4 of the Land Acquisition Act, 1894 for the New Bombay Project.
• The agricultural land is not a capital asset and therefore no capital gains is chargeable.
• The interest component which is the subject matter of dispute is Rs. 81,79,189/- on which TDS of Rs. 8,17,919/- was deducted.
• Since the Additional Consideration (including interest under section 28 of Land Acquisition Act) was received against compulsory acquisition of agricultural lands, the same was claimed as exempt as per the provisions of section 10(37) of the Act.
• The Authorities below allowed exemption in respect of additional compensation as well as solatium but held the interest received Rs. 81,79,189/- was liable to tax.
• Deduction of 50% as per Section 57(iv) is granted in respect of such interest income.
• The interest is the part of the compensation and therefore, the same is eligible for exemption.

The appellant relied on various judgments to support her contentions. She prayed the ITAT to allow the appeal.

The Department heavily supported the orders of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals). The Department further contented that the land is a capital account. However, the ITAT brought to the notice of the Department that the Assessing Officer did not discuss whether the land is a capital asset or not. Therefore, the assessment order could not be improved at this stage.

The ITAT considered the submissions of the appellant and department and perused the documents/materials on record. The ITAT considered the issue to be decided in this case is as to whether the interest received under section 28 of the Land Acquisition Act on enhanced compensation is taxable under Section 56(2)(viii) of the Act or not! The ITAT observed that it is an admitted fact that the appellant has received interest income of Rs. 87,64,016/- under section 28 of the Land Acquisition Act, on enhanced compensation.

The ITAT relied on Supreme Court judgment in ‘Commissioner of Income Tax v. Ghansyam (HUF)’ – 2009 (7) TMI 12 - Supreme Court, in which the Supreme Court held that the interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. Thus, the Supreme Court held that interest income under section 28 of Land Acquisition Act is part of enhanced compensation.

The ITAT relied on one Gujarat High Court judgment in ‘Movaliya Bhikhubhai Balabhai v. Income-tax Officer-TDS-1-Surat’ - 2016 (5) TMI 488 - GUJARAT HIGH COURTin which the High Court held that the interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression 'interest' as contemplated in Section 145A of the Act. In this case the Department contended that the judgment of Supreme Court in ‘CIT v. Ghansyam’ (supra) is not applicable in the present case due to the amendment undertaken in Section 145A. The High Court held that the judgment of Supreme Court in ‘CIT v. Ghansyam’ is applicable even after the amendment of section 145F of the Act.

The ITAT further relied on the judgment of ITAT, Pune in ‘Sanjay Bhimrao Patil v. Income Tax Officer’ - 2024 (8) TMI 487 - ITAT PUNEin which the ITAT held that the amendment by way of substitution of Section 145A by Finance (No. 2) Act, 2009 w.e.f. 1-04-2010 and amendment by way of insertion of clause (iii) in section 56(2) by Finance Act, 2009 would have no applicability to the facts of the present case and in view of the same the order of Commissioner of Income Tax (Appeals) in confirming the order of Assessing Officer is not justified.

In view of the above relied case laws, the ITAT held that the interest income under section 28 of Land Acquisition Act, is not taxable under Section 56(2)(viii) of the Income Tax Act, 1961. Thus, the ITAT allowed the appeal filed by the appellant.

The ITAT next considered the appeal filed by the Department. The ITAT observed that the Assessing Officer had taxed the interest received under section 28 of the Land Acquisition Act under Section 56(2)(viii) of the Act. Accordingly, Assessing Officer had levied penalty under section 271(1)(c) of the Act, alleging concealment of income. The ITAT held that since interest is not taxable, there is no ground for levying penalty on the appellant. The ITAT directed the Assessing Officer to delete the penalty. The ITAT further observed that the appellant did not conceal any income since the appellant had claimed the impugned interest income as exempt.