Interest on enhanced land acquisition compensation follows the character of compensation and may qualify for agricultural land exemption.

Interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation was treated as inseparable from the compensation itself and, if taxable at all, as compensation for income-tax purposes. Where the acquired asset was agricultural land, the exemption under section 10(37) of the Income-tax Act, 1961 was considered applicable to the receipt, subject to verification of the factual character of the land. The factual nature of the land was therefore material, and on those facts the assessees were granted relief and the amount was held not taxable.

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Issues: Whether interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation is to be treated as part of compensation and, where the acquired land is agricultural land, whether such receipt is exempt from tax under section 10(37) of the Income-tax Act, 1961.

Analysis: The receipt of interest under section 28 was held to be inseparable from enhanced compensation. The Tribunal followed the settled position that such amount assumes the character of compensation and is taxable, if at all, in the same manner as the compensation itself. It further noted that where the acquisition relates to agricultural land, the exemption under section 10(37) applies to the receipt, and the later Supreme Court directions were understood as requiring the Assessing Officer to examine the factual nature of the land and apply the law accordingly.

Conclusion: The receipt of interest under section 28 of the Land Acquisition Act, 1894 was treated as part of compensation and the assessees were held entitled to relief on the footing that the amount was not taxable in the facts of the case.

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