2025 (10) TMI 298 - AT - Income Tax

Interest on enhanced compulsory acquisition compensation not taxable under s.56(2)(viii) read with s.145B(1); appeal allowed, taxpayer wins

ITAT CHENNAI - AT allowed the appeal, holding that interest received on enhanced compensation consequent to compulsory acquisition is not chargeable as ... Interest received on enhanced compensation - 'Income from Other Sources' in terms of Section 56(2)(viii) r.w.s 145B(i) - treatment of interest paid u/s. 28 of the Land Acquisition Act - HELD THAT:- Admittedly the assessee had received the disputed interest in consequence to the compulsory acquisition and hence the only issue to be adjudicated in the present appeal is whether the AO was correct in bringing to tax the sum (50 % of the of interest on enhanced compensation as income of the appellant by invoking the Section 56(2)(viii) r.w.s 145B(i). As perused the judgments in Puneet Singh [2019 (1) TMI 1068 - PUNJAB AND HARYANA HIGH COURT] and Anvar Ali Poolakkodan [2025 (4) TMI 867 - KERALA HIGH COURT] wherein the identical issues were considered by the Hon'ble Courts. We note that on this issue there are divergent views expressed by the Hon'ble High Courts. The Hon'ble Punjab & Haryana High Court had decided the issue in favour of the Revenue and the Hon'ble Kerala had held the issue in favour of the Assessee. In such a scenario, as held by the Hon'ble Supreme Court in the case of Vegetable Products [1973 (1) TMI 1 - SUPREME COURT] we are inclined to follow the decisions in favour of the assessee on the issue in hand. ISSUES PRESENTED AND CONSIDERED 1. Whether interest received under Section 28 (and/or Section 34) of the Land Acquisition Act, paid on account of enhanced or delayed compensation for compulsory acquisition, is taxable as 'income from other sources' under Section 56(2)(viii) read with Section 145B(1) of the Income-tax Act. 2. Whether such interest amounts form part of the principal compensation (capital receipt) and therefore qualify for treatment under the head 'Capital Gains' and, when relating to agricultural land, for exemption under Section 10(37) of the Income-tax Act. 3. Which judicial precedent governs where High Courts have taken divergent views on whether interest under the Land Acquisition Act is to be treated as compensation or as taxable interest (i.e., choice between decisions favourable to Revenue and those favourable to assessee). 4. (Raised but not finally adjudicated on merits) Whether procedural defects alleged (non-adherence to faceless regime and denial of opportunity / breach of principles of natural justice) vitiate the assessment order. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability under Section 56(2)(viii) read with Section 145B(1) Legal framework: Section 56(2)(viii) brings within 'income from other sources' interest on compensation or enhanced compensation; Section 145B(1) (as amended) deals with computation/receipt. The Land Acquisition Act (Sections 28 and 34) provides for interest on enhanced compensation (court-awarded) and interest for delayed payment. Precedent treatment: High Courts have expressed divergent views. Some decisions (e.g., Punjab & Haryana High Court line) treat such interest as taxable as income (distinguishing it from compensation), whereas other decisions (notably Kerala High Court in Anvar Ali Poolakkodan) hold that interest under Sections 28/34 partakes the character of compensation and is not interest in the commercial sense attracting Section 56. Interpretation and reasoning: The Court examined the nature and object of interest under Sections 28 and 34 of the Land Acquisition Act and the legislative intent behind the 2009 amendment introducing Section 56(2)(viii) and Section 145B. The Court emphasized that interest under the Land Acquisition Act compensates for the loss suffered by the dispossessed owner for non-availability of the compensation when due and is therefore integrally linked to the principal compensation. It relied on the reasoning that constitutional and statutory protection of property rights and the compensatory character of such payments support treating interest as an accretion to compensation rather than a distinct revenue-style interest receipt. Ratio vs. Obiter: Ratio - Where interest is paid under Section 28 or Section 34 of the Land Acquisition Act as compensation for delayed payment or as part of enhanced compensation, such interest partakes the character of the principal compensation and is not taxable as 'interest' under Section 56(2)(viii) read with Section 145B(1). Obiter - Observations on the scheme of Article 300A and broader jurisprudence on property rights were used to reinforce the compensatory character but are ancillary to the central ratio. Conclusion: The Court held that the Assessing Officer erred in invoking Section 56(2)(viii) r.w.s. 145B(1) to tax 50% of the interest on enhanced compensation. The interest in question was held to be an accretion to compensation and not taxable as income from other sources under Section 56. Issue 2 - Classification as Capital Receipt and Applicability of Section 10(37) Legal framework: Capital gains provisions (including Section 45(5) where relevant) treat compensation for compulsory acquisition as consideration for transfer of capital asset; Section 10(37) exempts compensation for compulsory acquisition of agricultural land when conditions are met (e.g., distance from municipal limits). Precedent treatment: Decisions have recognized a distinction between compensation and post-determination interest; however, some jurisprudence (including the Kerala decision followed) treats interest under Sections 28/34 as forming part of compensation and consequently as capital in nature, thereby bringing such amounts within the scope of Section 10(37) where the land qualifies as agricultural. Interpretation and reasoning: Given the Court's conclusion (Issue 1) that the interest is an accretion to compensation, the interest must be classified with the principal compensation for characterisation as capital receipt. The Court accepted that when the underlying asset is agricultural land satisfying statutory tests, the combined amount (principal compensation plus integral interest) is eligible for exemption under Section 10(37). Ratio vs. Obiter: Ratio - Interest inherently connected to enhanced compensation under Sections 28/34 is to be characterised along with the compensation for purposes of capital gains and exemption under Section 10(37) where applicable. Obiter - Detailed discussion of municipal-limit tests and distance facts were treated as case-specific but flow logically from the ratio. Conclusion: The interest component linked to enhanced compensation is to be treated as part of capital compensation and is, consequently, eligible for the same exemptions (e.g., Section 10(37)) applicable to the principal compensation when statutory conditions are met. Issue 3 - Choice of Precedent where High Courts Diverge Legal framework: Where High Courts are in conflict, tribunal should follow the view favourable to the assessee in appropriate circumstances, consistent with higher-court direction on selection of precedents. Precedent treatment: The Court identified conflicting High Court decisions - one line favouring Revenue (Punjab & Haryana) and another favouring assessee (Kerala). The Court cited controlling principles that allow following decisions favourable to the assessee in cases of divergent High Court precedents, as indicated by Supreme Court guidance. Interpretation and reasoning: The Court explicitly followed the Kerala High Court decision (Anvar Ali Poolakkodan) as the applicable authority on the issue because of the divergence in High Court rulings and the jurisprudential basis recognising the compensatory character of interest under the Land Acquisition Act. Ratio vs. Obiter: Ratio - In the present factual matrix and doctrinal conflict, the tribunal followed the Kerala High Court ratio that interest under Sections 28/34 is part of compensation and not taxable under Section 56(2)(viii). Obiter - Reference to the broad line of authorities and constitutional property-right jurisprudence supports but does not alter the chosen precedent. Conclusion: The tribunal adopted the Kerala High Court precedent and applied it to allow the appeal; divergent High Court authority was not followed. Issue 4 - Procedural Complaints (Faceless Regime and Natural Justice) Legal framework: Allegations that the faceless assessment regime was not adhered to and that principles of natural justice were breached can, if substantiated, vitiate an assessment order. Precedent treatment: The record shows these grounds were raised in the appeal but the tribunal confined adjudication to the substantive taxability issue. Interpretation and reasoning: The Court's order addresses the substantive taxability issue as the decisive point and directs deletion of the addition; it does not undertake a detailed adjudication on procedural non-compliance or natural-justice grounds in the reasons delivered. Ratio vs. Obiter: Obiter - The procedural grounds were noted among the grounds of appeal but were not the basis of the decision; no definitive ratio on procedural non-compliance is laid down. Conclusion: Procedural complaints were raised but not necessary to the decision; the appeal was allowed on substantive grounds without adjudicating those procedural issues. Final Disposition The addition of Rs. 22,46,610 (50% of the interest on enhanced compensation) brought to tax under Section 56(2)(viii) read with Section 145B(1) was deleted. The tribunal followed the view that interest under Sections 28/34 of the Land Acquisition Act is an accretion to compensation (capital receipt) and is not taxable as income from other sources under Section 56; consequential relief was granted to the assessee.