Land acquisition interest wrongly taxed as other income; section 54F deduction allowed for property construction reinvestment

The ITAT Delhi allowed the assessee's appeal on two grounds. First, interest received under section 28 of the Land Acquisition Act, 1984 was wrongly assessed as income from other sources under section 57(iv) read with section 145A(b), following the precedent in Pawan Kumar. Second, the lower authorities erred in rejecting section 54F deduction for capital gains reinvestment in residential property construction. The tribunal clarified that construction need not commence after asset transfer, citing Bharti Mishra, and found the assessee provided sufficient evidence of reinvestment qualifying for the deduction.

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The core legal questions considered in this appeal relate primarily to the validity and correctness of the reassessment proceedings under sections 147 and 144B of the Income-tax Act, 1961 (the Act), the tax treatment of interest received under section 28 of the Land Acquisition Act, 1894, and the eligibility for deduction under section 54F of the Income-tax Act in respect of long-term capital gains arising from the transfer of agricultural land.

Firstly, the Tribunal examined whether the reassessment initiated under section 147/144B was validly and lawfully undertaken, including scrutiny of the reasons recorded by the Assessing Officer (AO) and the sanction under section 151. Secondly, the Tribunal analyzed the taxability of interest received under section 28 of the Land Acquisition Act, specifically whether such interest constitutes income from other sources under section 56(2)(viii) read with section 57(iv) and section 145A(b) of the Act or forms part of capital gains exempt under section 10(37). Thirdly, the Tribunal considered the correctness of the addition of Rs. 1,30,00,000 on account of long-term capital gains and the denial of deduction under section 54F by the lower authorities due to alleged non-compliance and insufficient evidence of reinvestment.

Regarding the validity of reassessment proceedings, the assessee initially challenged the reopening on grounds including lack of jurisdiction, absence of tangible material, failure to record reasons based on independent application of mind, and invalid sanction under section 151. However, the assessee did not press these legal grounds during the hearing, and accordingly, these challenges were rejected.

The principal substantive issue revolved around the tax treatment of the interest received under section 28 of the Land Acquisition Act. The Revenue contended that such interest should be assessed as income from other sources under section 56(2)(viii) read with section 57(iv) and section 145A(b), relying on decisions such as Mahender Narang v. CBDT and PCIT v. Inderjit Singh Sodhi HUF, which held that interest on compensation or enhanced compensation is taxable as income from other sources. The AO and the Commissioner of Income Tax (Appeals) upheld this view, making an addition of Rs. 36,72,385 (50% of Rs. 73,44,770) on this account.

However, the Tribunal carefully scrutinized the factual and legal matrix, relying heavily on a recent coordinate bench decision in Pawan Kumar v. PCIT, which distinguished the Revenue's cited precedents. The Tribunal noted that the assessee had received interest amounting to Rs. 3,97,56,460 under section 28 of the Land Acquisition Act as part of enhanced compensation for compulsory acquisition of agricultural land. The assessee claimed exemption under section 10(37) of the Act, supported by the Supreme Court's decision in CIT v. Ghanshyam HUF, which held that interest under section 28 forms part of enhanced compensation and thus is capital receipt exempt under section 10(37).

The Tribunal observed that the AO had conducted proper enquiries during assessment proceedings, including issuing notices under section 142(1) and considering the assessee's explanations and documentary evidence. The AO accepted the assessee's claim of exemption, and the assessment order was not erroneous or prejudicial to Revenue's interest. The Tribunal also noted that the Principal Commissioner of Income Tax (PCIT) had assumed jurisdiction under section 263 based solely on an audit objection without applying independent mind, which is impermissible. The Tribunal further emphasized that the insertion of sections 145A, 145B, 56(2)(viii), and 57(iv) by the Finance Act, 2009, was intended to mitigate hardship related to the timing of taxation of interest income and did not alter the fundamental character of interest under section 28 from capital receipt to revenue receipt.

In addressing the competing decisions, the Tribunal highlighted that the dismissal of Special Leave Petition (SLP) by the Supreme Court in limine against the Punjab & Haryana High Court's decision in Mahender Pal Narang's case does not amount to affirming the High Court's view as binding precedent. The Tribunal also cited authoritative Supreme Court rulings affirming the character of interest under section 28 as part of capital receipt and exempt under section 10(37), including CIT v. Govindbhai Mamaiya, UOI v. Hari Singh, and ITO, TDS v. Muktanangiri Maheshgiri. The Tribunal concluded that the AO's order was based on a tenable view of law and that the PCIT's revisionary order was unsustainable.

Consequently, the Tribunal held that the addition made on account of interest received under section 28 of the Land Acquisition Act was not justified and allowed the assessee's appeal on this ground.

The second major issue concerned the addition of Rs. 1,30,00,000 on account of long-term capital gains arising from the sale of agricultural land and the denial of deduction under section 54F. The AO made the addition because the assessee failed to furnish relevant details and documentary evidence during assessment proceedings to substantiate reinvestment in a residential house property within the prescribed time. The AO noted discrepancies such as absence of credit entries in the bank statements for the sale consideration and payments for construction made prior to the sale date. Despite repeated opportunities and notices, the assessee did not submit the required bills, vouchers, or bank evidence during assessment or appellate proceedings.

The AO's remand report detailed that the sale was effected on 23.11.2016 for Rs. 1,30,00,000, with payments made by cheque on 18.11.2016 and TDS paid on 23.11.2016. However, the bank statements filed did not reflect receipt of sale proceeds, and construction payments were made before the sale, undermining the claim of reinvestment. The AO thus disallowed the deduction under section 54F and confirmed the addition.

The assessee contended that the sale consideration was received on 14.12.2016 and reinvestment was made on the same day by executing a buyer's agreement dated 16.12.2016, with the conveyance deed executed on 01.01.2020. The assessee relied on a decision holding that it is not necessary for construction to commence only after the transfer of the capital asset, but it suffices if the amount equal to capital gain is invested in the residential house property.

The Tribunal, after examining the case file and evidence, noted that the bank account did show credits from the purchaser in three installments totaling approximately Rs. 1,35,84,000 on 14.12.2016, supporting the assessee's claim of receipt of sale proceeds. The Tribunal accepted the assessee's evidence, including the conveyance deed and other documents evidencing construction and investment in the residential property.

In light of this, the Tribunal held that the lower authorities erred in rejecting the section 54F deduction on the basis of absence or insufficiency of evidence. The Tribunal emphasized that the assessee had met the conditions for claiming deduction under section 54F by reinvesting the capital gains in the construction of a residential house property within the prescribed period, and the timing of construction payments relative to the sale date was not determinative.

Accordingly, the Tribunal allowed the deduction under section 54F, set aside the addition of Rs. 1,30,00,000 on account of long-term capital gains, and dismissed the corresponding ground raised by the assessee.

In summary, the Tribunal's significant holdings include:

"The order of the AO is based on the decision of the Hon'ble Supreme Court in Ghanshyam HUF on the issue of taxability of interest received by the assessee under section 28 of Land Acquisition Act, it can at best be said to be a debatable issue on which two views are possible and the AO accepts one of the views. In this view of the matter too, the PCIT cannot assume revisional jurisdiction."

"The insertion of section 145A, section 145B, section 56(2)(viii) and section 57(iv) by the Finance (No.2) Act, 2009 w.e.f. 01.04.2010 does not change the character of interest under section 28 of the Land Acquisition Act granted by the court from 'capital receipt' forming part of enhanced compensation as envisaged in section 45(5) of the Act to 'revenue receipt' chargeable to tax as income from other sources."

"The lower authorities have erred in law and on facts in rejecting the claim of deduction under section 54F of the Act. The assessee has filed all his detailed evidence in support of the construction of his residential house forming subject matter of reinvestment of his capital gain; and, therefore, the learned lower authorities have erred in law and on facts in rejecting section 54F deduction in very terms."

"The AO's order is not erroneous and not liable to be revised under section 263 of the Act merely on the basis of an audit objection without independent application of mind."

These holdings affirm that reassessment must be based on tangible material and reasoned application of mind, that interest under section 28 of the Land Acquisition Act retains its character as capital receipt exempt under section 10(37), and that deductions under section 54F require consideration of substantive evidence of reinvestment rather than mere formalities or timing of payments.

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