2016 (5) TMI 488 - HC - Income Tax

Interest u/s 28 LAA is compensation, not taxable interest u/ss 145A, 194A, 197 IT Act

HC held that interest awarded under section 28 of the Land Acquisition Act, 1894, forms part of compensation and does not constitute 'interest' within the ... Refund of TDS wrongly deducted - Deduction for TDS on Compensation u/s 28 of Land acquisition Act - TDS u/s 194A on interest awarded on enhanced compensation - Held that:- 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 I.T. Act. The first respondent - Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the I.T. Act to the petitioner for non-deduction of tax at source, inasmuch as, the petitioner is not liable to pay any tax under the head “income from other sources” on the interest paid to it under section 28 of the Act of 1894. The petitioner had earlier challenged the communication dated 9th February, 2015 whereby its application for a certificate under section 197 of the I.T. Act had been rejected, and subsequently, tax on the interest payable under section 28 of the Act of 1894 has already been deducted at source. Consequently, the challenge to the above communication has become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 forms part of the compensation and not interest, the second respondent was not justified in deducting tax at source under section 194A of the I.T. Act in respect of such amount. The petitioner is, therefore, entitled to refund of the amount wrongly deducted under section 194A of the I.T. Act. For the foregoing reasons, the petition succeeds and is accordingly allowed. The second respondent having wrongly deducted an amount of ₹ 2,07,416/- by way of tax deducted at source out of the amount of ₹ 20,74,157/- payable to the petitioner under section 28 of the Act of 1894 and having deposited the same with the income-tax authorities, taking a cue from the decision of the Punjab and Haryana High Court in Jagmal Singh v. State of Haryana [2013 (7) TMI 774 - PUNJAB & HARYANA HIGH COURT], the first respondent is directed to forthwith deposit such amount with the Reference Court, which shall thereafter disburse such amount to the petitioner herein. Rule is made absolute accordingly with costs. - Decided in favour of assessee Issues Involved:1. Legality of the communication dated 9th February 2015 issued by the Income Tax Officer, TDS-1, Surat.2. Legality of the deduction and deposit of Rs. 2,07,416/- towards 10% TDS by the second respondent.3. Determination of whether the interest under section 28 of the Land Acquisition Act, 1894 is taxable as income from other sources or as part of compensation under section 45(5) of the Income Tax Act.4. Entitlement of the petitioner to a refund of the TDS amount deducted.Detailed Analysis:1. Legality of the Communication Dated 9th February 2015:The petitioner challenged the communication dated 9th February 2015 issued by the Income Tax Officer, TDS-1, Surat, which rejected the petitioner’s application for a certificate of NIL tax liability under section 197(1) of the Income Tax Act. The rejection was based on the premise that interest on delayed payment of compensation and enhanced value of compensation is taxable under sections 57(iv), 56(2)(viii), and 145A(b) of the Income Tax Act. The petitioner contended that interest under section 28 of the Land Acquisition Act, 1894 should be treated as part of compensation and not as income from other sources, relying on the Supreme Court's decision in Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF), which held that interest under section 28 is part of the enhanced value of the land and thus part of the compensation.2. Legality of the Deduction and Deposit of Rs. 2,07,416/- Towards 10% TDS:The second respondent deducted Rs. 2,07,416/- as TDS from the interest amount of Rs. 20,74,157/- payable under section 28 of the Land Acquisition Act, 1894. The petitioner argued that such deduction was not in consonance with statutory provisions, as interest under section 28 should be treated as part of compensation and not as income from other sources. The court examined the provisions of sections 23, 28, and 34 of the Land Acquisition Act, 1894, and section 45(5) of the Income Tax Act, concluding that interest under section 28 is part of the enhanced compensation and thus not subject to TDS under section 194A of the Income Tax Act.3. Determination of Whether the Interest Under Section 28 of the Land Acquisition Act, 1894 is Taxable as Income from Other Sources or as Part of Compensation Under Section 45(5) of the Income Tax Act:The court referred to the Supreme Court's ruling in Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF), which clarified that interest under section 28 of the Land Acquisition Act, 1894 is an accretion to the value of the land and forms part of the compensation. Therefore, it should be taxed as part of capital gains under section 45(5) of the Income Tax Act, not as income from other sources under section 56(2)(viii). The court rejected the contention that the amendment to section 145A by the Finance (No.2) Act, 2009, which deemed interest received on compensation or enhanced compensation as income of the year in which it is received, altered this interpretation.4. Entitlement of the Petitioner to a Refund of the TDS Amount Deducted:The court held that since the interest under section 28 of the Land Acquisition Act, 1894 forms part of the compensation, the second respondent was not justified in deducting TDS under section 194A of the Income Tax Act. Consequently, the petitioner was entitled to a refund of the wrongly deducted amount of Rs. 2,07,416/-. The court directed the first respondent to deposit the amount with the Reference Court, which would then disburse it to the petitioner.Conclusion:The court allowed the petition, quashing the communication dated 9th February 2015 and declaring the deduction of Rs. 2,07,416/- as TDS to be illegal. The court directed the refund of the deducted amount to the petitioner, affirming that interest under section 28 of the Land Acquisition Act, 1894 is part of the compensation and not taxable as income from other sources.