Compensatory interest on land acquisition payment treated as part of compensation, taxed as capital gains and exempt for agricultural land.

Statutory interest paid for delayed compensation in compulsory acquisition retains the character of compensation rather than ordinary interest under the Income-tax Act. The Kerala High Court held that such amount is an accretion to the principal compensation because it compensates the landowner for deprivation of the use of money when due, and therefore is assessed as capital gains instead of income from other sources. Where the acquired land is agricultural land, the amount also falls within the exemption for such compensation. Section 56(2)(viii) does not apply to this compensatory statutory interest.

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Issues: Whether interest received on delayed payment of compensation or enhanced compensation for compulsory acquisition of agricultural land is to be treated as part of the compensation and assessed under the head "Capital Gains", with the benefit of section 10(37), or as "Income from other sources" under section 56(2)(viii) of the Income-tax Act, 1961.

Analysis: The statutory scheme treats compensation and enhanced compensation for compulsory acquisition as capital gains, and section 10(37) exempts such income arising from agricultural land. The question was whether interest paid under sections 28 or 34 of the Land Acquisition Act, 1894, for delayed payment of compensation has a different character. The Court held that such interest is not ordinary interest within section 2(28A) of the Income-tax Act, 1961, but an accretion to the principal compensation because it compensates the assessee for the deprivation of the use of the compensation amount when due. The reasoning was reinforced by the constitutional obligation under Article 300A of the Constitution of India and the established property-rights jurisprudence that recognizes fair compensation as an integral part of lawful acquisition. On that basis, the reference in section 56(2)(viii) to interest on compensation or enhanced compensation was held not to govern such statutory interest in compulsory acquisition cases where the amount retains the character of compensation.

Conclusion: Interest received for delayed payment of compensation under the Land Acquisition Act, 1894, is to be treated as part of the compensation and classified as capital gains, and where the acquired land is agricultural land, the amount also qualifies for exemption under section 10(37); section 56(2)(viii) does not apply.

Ratio Decidendi: Statutory interest paid for delayed payment of compulsory acquisition compensation partakes the character of the compensation itself and is assessed as capital gains, not as income from other sources, where the nature of the payment is compensatory rather than independent interest income.

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