2025 (8) TMI 739 - AT - Income Tax

Interest on land acquisition compensation exempt from income tax under Section 10(37) of Income Tax Act

The ITAT Delhi held that the interest component of land acquisition compensation received under section 28 of the Land Acquisition Act is exempt from ... Income from other sources - Assessing interest component of land acquisition compensation u/s 28 of the Land Acquisition Act, 1894, while invoking section 57(iv) r.w.s. 56(1) (a) r.w.s. 145A(b) - HELD THAT:- It emerges that this tribunal's recent decision in Pawan Kumar [2024 (1) TMI 1077 - ITAT DELHI] has held interest under section 28 of Land Acquisition Act received by the assessee is exempt under section 10(37) - Assessee's appeal is allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the interest component received under section 28 of the Land Acquisition Act, 1894, forming part of enhanced compensation for compulsory acquisition of agricultural land, is taxable as income from 'other sources' under the Income Tax Act, 1961 or exempt as capital gains under section 10(37) of the Act. 2. Whether the Assessing Officer (AO) erred in not treating the interest component as taxable income from other sources, thereby rendering the assessment order erroneous and prejudicial to the Revenue's interest, justifying revision under section 263 of the Act. 3. Whether the AO conducted necessary and proper enquiries regarding the taxability of the interest component during the assessment proceedings. 4. The legal effect of the amendments introduced by the Finance (No. 2) Act, 2009 (notably sections 56(2)(viii), 57(iv), 145A, and 145B) on the character and taxability of interest received under section 28 of the Land Acquisition Act. 5. The binding nature and applicability of the Punjab & Haryana High Court decision in Mahender Pal Narang vs. CBDT and its subsequent dismissal of Special Leave Petition (SLP) by the Supreme Court, in light of the Supreme Court's decision in CIT vs. Ghanshyam HUF and other relevant Supreme Court precedents. 6. Whether an audit objection alone suffices to hold an assessment order erroneous or prejudicial to Revenue's interest for invoking revisionary jurisdiction under section 263 of the Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Interest under Section 28 of the Land Acquisition Act as Income from Other Sources or Exempt Capital Gains - Legal Framework and Precedents: The Supreme Court in CIT vs. Ghanshyam HUF (2009) held that interest awarded under section 28 of the Land Acquisition Act is an accretion to the value of land and forms part of enhanced compensation, thus qualifying as capital receipt and exempt under section 10(37) of the Income Tax Act. Interest under section 34, by contrast, is for delay in payment and treated differently. - Amendments: The Finance (No. 2) Act, 2009 introduced sections 56(2)(viii), 57(iv), 145A, and 145B to clarify the tax treatment of interest on compensation or enhanced compensation, aiming to tax such interest as income from other sources on receipt basis. - Conflicting Judicial Opinions: The Punjab & Haryana High Court in Mahender Pal Narang held the interest under section 28 to be taxable as income from other sources post-amendment, rejecting the Ghanshyam HUF view. However, the Supreme Court dismissed the SLP against this decision in limine, which does not constitute affirmation of the High Court's view. - Court's Interpretation and Reasoning: The Tribunal distinguished Mahender Pal Narang, emphasizing the binding nature of the Supreme Court's decision in Ghanshyam HUF and subsequent affirmations in Hari Singh and other cases. The amendments were intended to override the Supreme Court's ruling in Rama Bai (on accrual basis taxation of interest) and not the Ghanshyam HUF ruling on the character of interest under section 28. - Conclusion: Interest under section 28 remains part of enhanced compensation, exempt under section 10(37), and not taxable as income from other sources. The AO's treatment of the interest as exempt capital receipt is legally sustainable. Issue 2: Validity of Revision under Section 263 Based on Alleged Erroneous Assessment - Legal Framework: Section 263 allows revision only if the assessment order is erroneous and prejudicial to Revenue's interest. Mere audit objections or differences in opinion do not suffice. - Facts and Findings: The AO issued notices and made enquiries under sections 143(2) and 142(1), received detailed submissions including documentary evidence supporting exemption claim under section 10(37), and accepted the explanation without making additions. - Precedents: The Delhi High Court in CIT vs. Sunbeam Auto Ltd. and Rajasthan High Court in Ganpat Ram Bisnoi held that lack of elaborate discussion does not render an order erroneous if proper enquiry was conducted. The Supreme Court in Malabar Industrial Co. Ltd. held that erroneous order requires incorrect assumption of facts or law, which is absent here. - Court's Reasoning: The PCIT's revision was based solely on audit objection and the Mahender Pal Narang decision, ignoring the binding Supreme Court precedent and the facts of the case. The AO's order was a debatable view, which cannot be disturbed under section 263. - Conclusion: The revision order under section 263 is unsustainable and quashed. Issue 3: Adequacy of Enquiry by Assessing Officer - Evidence and Findings: The AO issued specific notices seeking evidence on the nature of the interest received. The assessee furnished detailed explanations and documentary proof, which the AO accepted. The assessment order was completed without additions. - Legal Reasoning: Absence of elaborate discussion in the assessment order does not imply lack of enquiry. The AO's satisfaction with the explanation after due process is sufficient. - Conclusion: The AO conducted necessary and proper enquiry; the claim of lack of enquiry is unfounded. Issue 4: Effect of Amendments by Finance (No. 2) Act, 2009 on Taxability of Interest under Section 28 - Legal Framework: Sections 56(2)(viii), 57(iv), 145A, and 145B were inserted to tax interest on compensation on receipt basis to mitigate hardship caused by the Supreme Court's decision in Rama Bai regarding accrual basis taxation of interest income. - Interpretation: These amendments do not alter the character of the interest under section 28 of the Land Acquisition Act from capital receipt to revenue receipt. The legislative intent was to clarify timing of taxation, not to recharacterize the nature of the amount. - Supporting Precedents: The Supreme Court in Hari Singh affirmed the Ghanshyam HUF principle. The Finance Bill proposing amendments was introduced before the Ghanshyam HUF decision, indicating no legislative intent to overrule it. - Conclusion: Amendments do not affect exemption of interest under section 10(37); interest under section 28 remains capital receipt. Issue 5: Binding Nature of Punjab & Haryana High Court Decision in Mahender Pal Narang and Its SLP Dismissal - Legal Principle: Dismissal of SLP in limine does not constitute binding precedent or affirmation of the High Court's decision. - Analysis: The Tribunal held that the Mahender Pal Narang decision was rendered without considering the Supreme Court's later decision in Hari Singh, which affirmed Ghanshyam HUF. Therefore, reliance on Mahender Pal Narang by the PCIT and Revenue is misplaced. - Conclusion: Mahender Pal Narang is not binding in this context; the Supreme Court's ruling in Ghanshyam HUF and Hari Singh governs. Issue 6: Sufficiency of Audit Objection to Invoke Revisionary Jurisdiction under Section 263 - Legal Framework: Audit objections alone cannot render an assessment order erroneous or prejudicial to Revenue's interest. Independent application of mind by the revisional authority is mandatory. - Precedent: The Punjab & Haryana High Court in CIT vs. Sohana Woollen Mills held that audit objections do not justify revision under section 263 without independent examination. - Findings: The PCIT's revision was triggered solely by audit objections without independent scrutiny or consideration of binding Supreme Court precedents. - Conclusion: Revision on audit objection alone is invalid; the PCIT's order is unsustainable.