Enhanced compensation treatment for section 28 interest on acquired agricultural land excludes tax as interest income.

Interest awarded under section 28 of the Land Acquisition Act, 1894 on compulsory acquisition of agricultural land is treated as part of enhanced compensation, not as ordinary interest income. On that basis, the receipt is not taxable under section 56(2)(viii) read with section 145A(b) of the Income-tax Act, 1961. The amount also falls within the exemption available for compensation arising from compulsory acquisition of agricultural land under section 10(37) of the Income-tax Act, 1961. Accordingly, the addition was unsustainable.

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Issues: Whether interest received under section 28 of the Land Acquisition Act, 1894 on compulsory acquisition of agricultural land is taxable as interest income under the Income-tax Act, 1961 or forms part of enhanced compensation eligible for exemption.

Analysis: The issue was decided by applying the principle that interest awarded under section 28 of the Land Acquisition Act, 1894 partakes the character of compensation and is an accretion to the compensation amount rather than ordinary interest. Since the acquired land was agricultural land and the compensation related to compulsory acquisition of such land, the amount received under section 28 could not be taxed as interest income under section 56(2)(viii) read with section 145A(b) of the Income-tax Act, 1961. The decision also followed the view that such receipt falls within the exemption available for compulsory acquisition of agricultural land under section 10(37) of the Income-tax Act, 1961.

Conclusion: The receipt under section 28 of the Land Acquisition Act, 1894 was held to be part of enhanced compensation and not taxable as interest income; the addition was not sustainable.

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