2023 (1) TMI 1218 - AT - Income Tax

Interest on enhanced land compensation deemed exempt under IT Act

Manjeet Singh Versus ITO, Ward-2, Karnal And Puneet Singh Versus ACIT, Karnal

The ITAT concluded that interest received on enhanced compensation under Section 28 of the Land Acquisition Act is considered compensation, not interest, ... Characterisation of income - interest on the compensation received by the assessee -compensation exempt from tax u/s 10(37) or taxable u/s 56(2)(viii) - interest received on enhanced compensation treated as Income of the appellant - assessee was owner of agricultural land and the same was taken under compulsory acquisition by Government of Haryana - assessee claimed the entire enhanced compensation inclusive of interest as residual part of compulsory acquisition of agricultural land and claimed it as exempted u/s 10(37) - AO did not accept the contention of the assessee and held that the interest income as taxable income under the head “income from other sources u/s 56(2)(viii) - HELD THAT:- As decided in SHRI SATBIR, SHRI VED PAL, SHRI SHEO CHAND, SHRI KARAMBIR, SHRI DHARAM PAL AND SHRI CHANDGI RAM [2018 (7) TMI 1163 - ITAT CHANDIGARH] as per proposition laid down in Ghanshyam, HUF [2009 (7) TMI 12 - SUPREME COURT] remains and which having been laid down by the Hon'ble Apex Court is the law of the land and has to be followed by all lower authorities. The 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. Appeals of the assessees are allowed. Issues Involved:1. Taxability of interest received on enhanced compensation.2. Applicability of Section 10(37) and Section 56(2)(viii) of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Interest Received on Enhanced Compensation:The primary issue in this case is whether the interest received by the assessee on enhanced compensation for compulsory acquisition of agricultural land is taxable as 'income from other sources' under Section 56(2)(viii) or exempt under Section 10(37) of the Income Tax Act, 1961.The assessee argued that the interest received should be considered part of the compensation and hence exempt under Section 10(37). The Assessing Officer (AO), however, treated the interest income as taxable under the head 'income from other sources' as per Section 56(2)(viii), introduced by the Finance Act, 2009, effective from 01.04.2010. The AO relied on the Supreme Court's decision in Bikram Singh & others Vs Land Acquisition Collector, which held that interest received on compensation/enhanced compensation is a revenue receipt and hence taxable.2. Applicability of Section 10(37) and Section 56(2)(viii) of the Income Tax Act, 1961:The assessee contended that the issue is covered by several higher court rulings, including CIT vs. Ghanshyam (HUF), CIT vs. Govindbhai Mamaiya, and CIT vs. Chet Ram (HUF), which support the view that interest received under Section 28 of the Land Acquisition Act, 1894, is part of the compensation and thus exempt under Section 10(37).The ITAT reviewed various judicial precedents, including the Supreme Court's decisions in Ghanshyam (HUF) and Govindbhai Mamaiya, which clarified that interest awarded under Section 28 of the Land Acquisition Act is an accretion to the value of the land and forms part of the compensation. Therefore, it should be treated as part of the enhanced compensation and not as interest income under Section 56(2)(viii).The ITAT also considered the decision in Manjeet Singh (HUF) by the Punjab & Haryana High Court, which held that interest received under Section 28 and Section 34 of the Land Acquisition Act is taxable under Section 56(2)(viii). However, the ITAT noted that subsequent Supreme Court rulings in Ghanshyam (HUF) and Govindbhai Mamaiya, which are binding, support the view that such interest is part of the compensation.Conclusion:The ITAT concluded that the interest received by the assessee on enhanced compensation under Section 28 of the Land Acquisition Act is in the nature of compensation and not interest, and therefore, it is exempt under Section 10(37). The appeals of the assessees were allowed, and the additions made by the AO were not sustained.Order Pronounced:The appeals were allowed, and the order was pronounced in the open court on 25/01/2023.