Taxability of interest on enhanced compensation and limited scrutiny scope clarified, while cash-borrowing issue was remanded for verification

In a limited scrutiny assessment, enquiry into interest income from enhanced compensation was treated as within the permitted scope because the return was selected for low other-income concerns and the receipt was already examined. Interest under section 28 of the Land Acquisition Act on enhanced compensation for agricultural land was treated as part of enhanced compensation and assessable under the capital gains framework on receipt, so the addition was deleted. The cash-borrowing addition required further verification because the bank evidence needed to test genuineness and repayment had not been fully examined, and the matter was remanded to the Assessing Officer.

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Issues: (i) Whether, in a limited scrutiny assessment, enquiry into the assessee's interest income from enhanced compensation was beyond the permissible scope; (ii) whether interest received under section 28 of the Land Acquisition Act on enhanced compensation for agricultural land was taxable; (iii) whether the addition of Rs. 85 lakhs towards cash borrowings required confirmation or fresh verification.

Issue (i): Whether, in a limited scrutiny assessment, enquiry into the assessee's interest income from enhanced compensation was beyond the permissible scope.

Analysis: The scrutiny selection reason referred to low income from other sources vis-a -vis substantial fixed deposits and cash deposits, and the assessment record showed examination of income from other sources, including the receipt of compensation-related interest. On that footing, the enquiry into the impugned receipt was found to fall within the stated scope of limited scrutiny.

Conclusion: The enquiry was held to be within jurisdiction and not beyond the scope of limited scrutiny.

Issue (ii): Whether interest received under section 28 of the Land Acquisition Act on enhanced compensation for agricultural land was taxable.

Analysis: The governing principle applied was that additional amount, solatium, and interest under section 28 of the Land Acquisition Act form part of enhanced compensation and are assessable under the capital gains regime in the year of receipt. The exemption for agricultural land under section 10(37) was treated as operating on the character of the capital gain, but not as displacing the settled treatment of interest on enhanced compensation where the statutory scheme and precedent made the receipt part of enhanced compensation.

Conclusion: The addition on account of interest on enhanced compensation was deleted.

Issue (iii): Whether the addition of Rs. 85 lakhs towards cash borrowings required confirmation or fresh verification.

Analysis: The assessee relied on creditor bank statements and pleaded repayment through banking channels, but the assessee's own bank statements showing repayment were not before the authorities below. As the material necessary to test genuineness and repayment had not been examined, the matter was considered fit for fresh verification by the Assessing Officer.

Conclusion: The issue was remanded to the Assessing Officer for fresh consideration.

Final Conclusion: The assessee obtained relief on the taxability of interest on enhanced compensation, while the cash-borrowing addition was sent back for verification, resulting in partial success in the appeal.

Ratio Decidendi: Interest received under section 28 of the Land Acquisition Act forms part of enhanced compensation and is to be assessed under the capital gains provisions, while an issue may be remanded where essential evidence for testing the genuineness of a cash loan transaction has not been examined.

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