Compensation character determines tax treatment of section 28 land acquisition receipts for eligible agricultural land

Amounts awarded under section 28 of the Land Acquisition Act, 1894 on enhanced compensation for acquisition of eligible agricultural land are treated as part of the compensation itself and retain the character of a capital receipt. The analysis notes that, although section 145A(b) and section 56(2) bring interest on compensation or enhanced compensation to tax on receipt basis under income from other sources, this does not apply where the section 28 amount is integral to compensation within section 10(37) of the Income-tax Act, 1961. The result is that such receipt is exempt and not taxable in the recipient's hands.

---

---

Issues: Whether interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation for acquisition of agricultural land is taxable as income from other sources, or is to be treated as part of compensation and exempt under section 10(37) of the Income-tax Act, 1961.

Analysis: The amendment introducing section 145A(b) of the Income-tax Act, 1961 provides that interest on compensation or enhanced compensation is taxable on receipt basis, and section 56(2) places such income under the head income from other sources with section 57(iv) allowing a standard deduction. However, the decisive question was the character of the amount received under section 28 of the Land Acquisition Act, 1894. The reasoning adopted was that such amount forms part of the compensation itself and, where the acquisition is of agricultural land within the scope of section 10(37), it retains the character of a capital receipt and does not become taxable merely because it is described as interest. The departmental circular was also read as supporting this legislative intent.

Conclusion: The amount received under section 28 of the Land Acquisition Act, 1894 was held not taxable in the assessee's hands and was treated as exempt under section 10(37) of the Income-tax Act, 1961.

Final Conclusion: The addition made by the assessing authority in respect of the enhanced compensation component was deleted and the assessee's appeal was allowed.

Ratio Decidendi: Amounts awarded under section 28 of the Land Acquisition Act, 1894 on enhanced compensation for acquisition of eligible agricultural land are to be treated as part of compensation and not as taxable interest income from other sources.

---