Tax treatment of interest on enhanced land acquisition compensation turns on whether it forms part of compensation or income from other sources.

Interest received on enhanced compensation for compulsory acquisition of agricultural land may be treated as part of the compensation itself, rather than as income from other sources, where it is closely linked to delayed payment of the acquisition award. The Tribunal noted conflicting High Court views on interest under section 28 of the Land Acquisition Act, 1894, and followed the interpretation favourable to the assessee. On that approach, section 56(2)(viii) read with section 145B(1) of the Income-tax Act, 1961 does not apply to tax such receipt separately, and the exemption attached to agricultural land compensation remains available.

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Issues: Whether interest received on enhanced compensation for compulsory acquisition of agricultural land is taxable as income from other sources under section 56(2)(viii) read with section 145B(1) of the Income-tax Act, 1961, or whether it forms part of the compensation and is not so taxable.

Analysis: The dispute concerned interest paid on enhanced compensation arising from compulsory acquisition. The Tribunal noted conflicting High Court views on whether such interest under section 28 of the Land Acquisition Act, 1894 is distinct income or an accretion to the compensation itself. Following the view favourable to the assessee, the Tribunal accepted that interest paid for delayed receipt of compensation partakes the character of the principal compensation, especially where the underlying land is agricultural land and the receipt is integrally connected with compulsory acquisition. On that approach, section 56(2)(viii) does not apply to treat the amount as income from other sources, and the exemption linked to agricultural land compensation remains available.

Conclusion: The addition made by treating the interest on enhanced compensation as taxable income was deleted and the issue was decided in favour of the assessee.

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