2018 (7) TMI 2120 - AT - Income Tax

Tribunal deems interest taxable as capital gain, eligible for exemption under Income Tax Act

The Tribunal ruled in favor of the assessee, determining that the interest received was part of the compensation under section 28 of the Land Acquisition ... Interest under section 28 of the Land Acquisition Act treated as part of land compensation - interest under section 34 of the Land Acquisition Act as interest taxable under Income from Other Sources - chargeability as capital gains under section 45(5) - exemption for compulsory acquisition of agricultural land under section 10(37)Interest under section 28 of the Land Acquisition Act treated as part of land compensation - chargeability as capital gains under section 45(5) - Whether the amount received as interest on enhanced compensation is to be treated as part of land compensation under section 28 of the Land Acquisition Act and accordingly chargeable as capital gains under section 45(5). - HELD THAT: - The Tribunal applied the principle in CIT v. Ghanshyam Dass (HUF) that amounts received under section 28 of the Land Acquisition Act represent part of the enhanced value of the land and are therefore part of land compensation rather than being in the nature of interest. The assessee produced the AO's communication and a Right to Information return from the Land Acquisition Officer confirming that the sums were awarded under section 28. The CIT(A)'s contrary conclusion that the receipts were under section 34 lacked evidentiary basis. Having accepted that the receipts fall under section 28, the Tribunal held they form part of compensation for land and are chargeable to tax under the head capital gains in accordance with section 45(5). [Paras 7, 8]The receipts characterised as interest are part of compensation under section 28 of the Land Acquisition Act and are chargeable as capital gains under section 45(5).Exemption for compulsory acquisition of agricultural land under section 10(37) - Whether the assessee is entitled to exemption under section 10(37) in respect of the capital gain arising from compulsory acquisition of agricultural land. - HELD THAT: - Section 10(37) exempts capital gains arising from compulsory acquisition of agricultural land subject to specified conditions. The AO had himself recorded that the land was agricultural and that the assessee could claim deduction on production of Girdawari; the assessee also produced a Patwari certificate showing agricultural cultivation. On these facts the Tribunal found the conditions for exemption under section 10(37) satisfied and directed the AO to allow the exemption in respect of the compensation (including the amounts held to be under section 28). [Paras 9]The assessee is eligible for deduction/exemption under section 10(37) in respect of the compensation received on compulsory acquisition of agricultural land; the AO is directed to grant the exemption.Final Conclusion: The Tribunal reversed the CIT(A)'s findings: the sums received as interest were properly awarded under section 28 of the Land Acquisition Act and form part of land compensation chargeable as capital gains under section 45(5), and the assessee is entitled to exemption under section 10(37); the AO is directed to treat and grant relief accordingly for Assessment Year 2009-10. Issues Involved:1. Taxability of land compensation and interest received by the assessee.2. Allowability of deduction under section 10(37) of the Income Tax Act, 1961.Analysis:Issue 1: Taxability of land compensation and interest received by the assesseeThe appellant, an individual, received compensation and interest on acquired agricultural land but did not show it as income. The Assessing Officer (AO) held the compensation taxable under section 28 of the Land Acquisition Act due to the cash system of accounting. The AO also exempted a portion under section 10(37) of the Act. The CIT(A) further differentiated between interest on enhanced compensation and interest under section 34 of the Land Acquisition Act, holding the latter taxable. The appellant contended that the interest received was part of the compensation under section 28, making it eligible for exemption under section 10(37). The Tribunal referred to the Supreme Court decision in CIT Vs. Ghanshyam Dass (HUF) and clarified that interest under section 28 is part of compensation and taxable as capital gain, while interest under section 34 is taxable as income from other sources. The Tribunal found the CIT(A)'s decision erroneous as the interest received was under section 28, not section 34, and reversed the lower authorities' orders.Issue 2: Allowability of deduction under section 10(37)Section 10(37) provides exemption for capital gains from the transfer of agricultural land due to compulsory acquisition, subject to conditions. The AO acknowledged the appellant's eligibility for deduction under section 10(37) upon verifying the nature of the land. The Tribunal noted that the land was agricultural based on the Girdawari and Patwari certificates. Consequently, the Tribunal allowed the appellant's appeal, directing the AO to treat the interest received as compensation for land under section 28 and grant exemption under section 10(37) of the Act. The Tribunal reversed the lower authorities' decisions, thereby allowing the appeal of the assessee.In conclusion, the Tribunal ruled in favor of the assessee, holding that the interest received was part of the compensation under section 28 of the Land Acquisition Act, making it taxable as capital gain and eligible for exemption under section 10(37) of the Income Tax Act, 1961.