2021 (11) TMI 136 - AT - Income Tax

Interest on enhanced land compensation not taxable under Income Tax Act

Bhule Ram Sharma Versus ACIT, Circle-1 Noida

The appeal was allowed in a case concerning the taxability of interest received on enhanced compensation for compulsory acquisition of agricultural land. ... Taxability of interest received on enhanced compensation paid by the State of Uttar Pradesh for compulsorily acquiring of the agricultural land of the assessee - interest on the enhanced compensation paid by the NOIDA on which TDS u/s.194A has been duly deducted - AO allowed 50% of the interest received on the enhanced compensation and taxed an amount - whether the interest on enhanced compensation partake the character of compensation or interest? - HELD THAT:- As decided in case of Inderjit Singh Sodhi (HUF) [2020 (6) TMI 697 - ITAT DELHI] interest received by the assessee during the impugned year on the compulsory acquisition of its land u/s 28 of the Land Acquisition Act, is in the nature of compensation and not interest which is taxable under the head income from other sources u/s 56 of the Act as held by the authorities below. The compensation being exempt u/s 10(37) of the Act is not disputed. In view of the same the order passed by the CIT(Appeals) upholding the addition made by the AO on account of interest on enhanced compensation is, not sustainable. Further the issue under consideration regarding the taxability of interest on enhanced compensation is a debatable issue and do not constitute a mistake apparent on record. In view of the limited and restricted powers of rectification u/s 154 or u/s 254 as the case may be, it cannot be said that any mistake apparent on record had occurred in the order of the Tribunal. In view of the above discussion, these appeals of the assessee are hereby allowed. Issues:Taxability of interest received on enhanced compensation for compulsory acquisition of agricultural land.Analysis:The appeal was filed against the order of the ld. CIT(A)-I, Noida, concerning the taxability of interest received by the assessee on enhanced compensation for the compulsory acquisition of agricultural land. The dispute revolved around whether the interest on enhanced compensation should be considered as compensation or interest for tax purposes. The Assessing Officer had taxed 50% of the interest received on the enhanced compensation. The provisions of Section 56(2)(viii) and Section 57(iv) of the Income Tax Act, 1961 were invoked in this case.The key issue was whether the interest on enhanced compensation should be treated as compensation or interest. Various judicial pronouncements by different High Courts and the Supreme Court were examined to determine the nature of the interest received. The decision in the case of Inderjit Singh Sodhi (HUF) Vs. ITO highlighted that interest on enhanced compensation under Section 28 of the Land Acquisition Act is considered an accretion to the value and part of the enhanced compensation or consideration, making it taxable. The year of taxability was determined to be the year in which the interest is received, not spread over on an accrual basis.The judgments in cases like Ghanshyam (HUF), Chet Ram (HUF), and Govindbhai Mamaiya reiterated that interest received under Section 28 is to be treated as compensation and not as interest taxable under the head 'income from other sources'. The legal position established by these judgments was considered binding on lower authorities. Consequently, the interest received by the assessee on compulsory land acquisition under Section 28 of the Land Acquisition Act was deemed to be in the nature of compensation and not taxable as interest under Section 56 of the Act. The order of the CIT(A) upholding the addition made by the AO on interest was deemed unsustainable.In conclusion, considering the settled legal issue and the nature of interest on enhanced compensation, the appeal of the assessee was allowed, and it was held that the interest received was in the nature of compensation and not taxable as interest under the Income Tax Act.