Section 28 interest on enhanced compensation for agricultural land treated as exempt capital receipt under income tax law

Interest under section 28 of the Land Acquisition Act received on enhanced compensation for agricultural land was treated as part of the enhanced compensation and, therefore, as a capital receipt within section 45(5). The Tribunal held that exemption under section 10(37) was not denied merely because the amount was described as interest, where the compensation related to agricultural land. Applying the Supreme Court guidance to the facts, it concluded that the receipt was exempt in the assessee's hands and deleted the addition.

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Issues: Whether interest received under section 28 of the Land Acquisition Act on enhanced compensation for agricultural land is taxable in the year of receipt, or whether it is covered by the exemption under section 10(37) of the Income-tax Act, 1961.

Analysis: The receipt in question arose from acquisition of agricultural land and consisted of enhanced compensation together with interest under section 28 of the Land Acquisition Act. The assessment had brought to tax 50% of the interest component by treating it as income under sections 56(2)(viii), 57(iv) and 145A of the Income-tax Act, 1961. The appellate authority had treated the interest as part of enhanced compensation chargeable to tax. The Tribunal held that the Supreme Court decisions relied upon settled that interest under section 28 forms part of enhanced compensation and is a capital receipt falling within section 45(5). It further held that where the compensation relates to agricultural land, the exemption under section 10(37) is not excluded merely because the amount is described as interest under section 28, and that the earlier directions of the Supreme Court required the Assessing Officer to apply the Income-tax Act to the facts of the agricultural land acquisition.

Conclusion: The interest on enhanced compensation was held to be exempt in the facts of the case, and the addition was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded, and the Assessing Officer was directed to refund the TDS deducted on the enhanced compensation.

Ratio Decidendi: Interest under section 28 of the Land Acquisition Act, when received in connection with acquisition of agricultural land, is treated as part of enhanced compensation and the exemption for capital gains on transfer of agricultural land may apply notwithstanding the characterisation of the receipt as interest.

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