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Issues: (i) Whether interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation was taxable separately as income from other sources or formed part of the exempt compensation. (ii) Whether such interest was to be taxed on receipt basis or on accrual/apportionment basis.
Issue (i): Whether interest received under section 28 of the Land Acquisition Act, 1894 on enhanced compensation was taxable separately as income from other sources or formed part of the exempt compensation.
Analysis: The issue was examined in the light of the distinction between interest under section 28 and interest under section 34 of the Land Acquisition Act, 1894. Interest under section 28 was treated as an accretion to the value of the acquired land and as part of the enhanced compensation, whereas interest under section 34 was regarded as compensation for delay. Since the compensation for acquisition of agricultural land was exempt under section 10(37) of the Income-tax Act, 1961, the amount received under section 28 did not retain the character of taxable interest under section 56(2)(viii) of the Income-tax Act, 1961.
Conclusion: The interest received under section 28 was part of the enhanced compensation and was not taxable separately as income from other sources.
Issue (ii): Whether such interest was to be taxed on receipt basis or on accrual/apportionment basis.
Analysis: The governing principle applied was that interest under section 28, when treated as part of enhanced compensation, is taxable only when received and not by spreading it over the years of accrual. The receipt basis rule was reaffirmed as the applicable method where the amount is characterised as part of compensation rather than as ordinary interest income.
Conclusion: The amount, if taxable at all, was to be considered on receipt basis and not on accrual/apportionment basis.
Final Conclusion: The additions made by the tax authorities could not be sustained, and the assessees were entitled to relief.
Ratio Decidendi: Interest awarded under section 28 of the Land Acquisition Act, 1894 is an accretion to the value of the acquired land and forms part of enhanced compensation, so it takes the tax character of compensation and is taxable, if at all, on receipt basis.
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