2025 (12) TMI 915 - AT - Income Tax

Interest on enhanced land acquisition compensation u/s28 held compensation, exempt u/s 10(37), not taxable u/s 56(2)(viii)

ITAT Rajkot allowed the assessee's appeal, holding that interest received on enhanced compensation for compulsory acquisition of agricultural land, ... Interest on enhanced compensation on account of compulsory acquisition of agricultural land - taxability v/s exemption u/s 10(37) - AO treated it as taxable income of the assessee and made an addition - nature of compensation for compulsory acquisition of agricultural land - HELD THAT:- The issue involved in the present appeal is no longer res integra. The question as to whether the interest is in the nature of compensation for compulsory acquisition of agricultural land, and it is eligible for exemption under section 10(37) of the Act, has been decided, in favour of assessee in the case of Mansukhbhai Kanjibhai Sakariya [2025 (8) TMI 1747 - ITAT RAJKOT] held that the interest awarded as per section 28 of the Act, is part of full value of consideration received on compulsory acquisition of agricultural land, hence, the provisions of section 56(2) (viii) r.w.s. 145B of the Act are not applicable in the case. Thus, hold that interest which is in the nature of compensation for compulsory acquisition of agricultural land, is eligible for exemption under section 10(37) of the Act. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether delay of 84 days in filing the appeal deserved condonation on grounds constituting 'reasonable and sufficient cause'. 1.2 Whether interest received on enhanced compensation under section 28 of the Land Acquisition Act on compulsory acquisition of agricultural land forms part of compensation exempt under section 10(37) of the Income-tax Act, or is taxable as 'income from other sources' under sections 56(2)(viii) and 145B. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Condonation of delay in filing appeal Interpretation and reasoning 2.1 The Tribunal examined the affidavit and delay condonation application explaining the 84-day delay and found the reasons convincing and constituting reasonable and sufficient cause for late filing. 2.2 The Department opposed condonation, but the Tribunal held that, in the interest of justice, the delay ought to be condoned. Conclusion 2.3 The delay of 84 days in filing the appeal was condoned, and the appeal was admitted for adjudication on merits. Issue 2: Taxability of interest on enhanced compensation for compulsory acquisition of agricultural land Legal framework (as discussed) 2.4 The Tribunal considered section 10(37) regarding exemption of compensation on compulsory acquisition of agricultural land, and sections 56(2)(viii) and 145B concerning taxability of 'interest on compensation or enhanced compensation' as income from other sources in the year of receipt. 2.5 Reliance was placed on the binding judgment of the jurisdictional High Court in Movaliya Bhikhubhai Balabhai v. ITO, which, following the Supreme Court decisions in Ghanshyam (HUF) and Govindbhai Mamaiya, held that interest awarded under section 28 of the Land Acquisition Act is an accretion to the value of the land and forms part of enhanced compensation, not 'interest' within the meaning of sections 145A/145B and 56(2)(viii). 2.6 The Tribunal also relied on a co-ordinate bench decision holding that, in view of the jurisdictional High Court's ruling, section 28 interest on enhanced compensation for compulsory acquisition of agricultural land is to be treated as compensation and not taxable as income from other sources. Interpretation and reasoning 2.7 The assessee had received interest on enhanced compensation of a specified sum on account of compulsory acquisition of agricultural land and claimed exemption under section 10(37), contending that such 'interest' was in substance part of compensation. 2.8 The Assessing Officer treated the said amount as taxable interest under the head 'income from other sources', invoking the scheme of sections 56(2)(viii) and 145B. 2.9 The Tribunal noted that the controversy-whether interest under section 28 of the Land Acquisition Act on enhanced compensation is compensation or taxable interest-is no longer res integra in view of the jurisdictional High Court's ruling in Movaliya Bhikhubhai Balabhai, which: (a) distinguished interest under section 28 (as part of enhanced compensation) from interest under section 34 (for delay in payment), (b) held that section 28 'interest' is an accretion to compensation and thus part of the enhanced compensation exigible under section 45(5), and (c) concluded that such amount does not fall within the expression 'interest' contemplated in section 145A/145B and therefore cannot be taxed as income from other sources under section 56(2)(viii). 2.10 Applying the doctrine of binding precedent, the Tribunal held that the decision of the jurisdictional High Court must prevail over contrary views of non-jurisdictional High Courts relied on by the Department, and that tax authorities within the territorial jurisdiction are bound to follow it. 2.11 Consequently, the Tribunal held that interest received by the assessee, being interest under section 28 of the Land Acquisition Act on enhanced compensation for compulsory acquisition of agricultural land, retained the character of compensation and was covered by the exemption under section 10(37). Conclusion 2.12 Interest received on enhanced compensation under section 28 of the Land Acquisition Act, being in the nature of compensation for compulsory acquisition of agricultural land, forms part of the exempt compensation under section 10(37) and is not taxable as 'income from other sources' under sections 56(2)(viii) and 145B. 2.13 The addition made by the Assessing Officer treating such interest as taxable income was deleted, and the appeal of the assessee was allowed.