Interest on enhanced compensation forms part of compensation, keeping it outside income from other sources and TDS under section 194A.

Interest on enhanced compensation under section 28 of the Land Acquisition Act is treated as part of the compensation itself, not as income from other sources under section 56 of the Income-tax Act, 1961. On that characterisation, the obligation to deduct tax at source under section 194A does not arise. The discussion also notes that capital gains arising from compulsory acquisition of agricultural land may be exempt under section 10(37) of the Income-tax Act, 1961. Accordingly, the TDS demand under section 194A was held unsustainable and relief was granted to the assessee.

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Issues: Whether interest paid on enhanced compensation under section 28 of the Land Acquisition Act is taxable as income from other sources and whether tax deduction at source under section 194A of the Income-tax Act, 1961 was attracted.

Analysis: The dispute turned on the character of interest awarded on enhanced compensation. The reasoning adopted from the earlier decision held that interest under section 28 of the Land Acquisition Act is not a separate item of income from other sources, but forms part of the compensation itself. On that basis, such receipt was held outside section 56 of the Income-tax Act, 1961. Once the receipt was treated as an integral part of compensation, the obligation to deduct tax at source under section 194A did not arise. The reasoning further recognised that capital gains arising from compulsory acquisition of agricultural land may be exempt under section 10(37) of the Income-tax Act, 1961.

Conclusion: The TDS demand under section 194A was not sustainable, and the assessee was entitled to relief.

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