2025 (12) TMI 1107 - AT - Income Tax

Interest on enhanced compensation for compulsory acquisition of rural farmland held taxable u/s56(2)(viii), not exempt u/s10(37)

Whether interest received on enhanced compensation for compulsory acquisition of rural agricultural land is exempt as part of compensation under s.10(37), ... Taxability of interest received on compensation for compulsory acquisition of land - interest as taxable under “Income from Other Sources” or exempt? - assessee contended that interest received u/s 28 of the Land Acquisition Act forms part of compensation for rural agricultural land and is exempt u/s 10(37) - HELD THAT:- We observe that in the case of Ajay Kumar [2025 (11) TMI 1310 - ITAT CHANDIGARH] has already adjudicated identical arguments. The Bench ruled that interest on compensation falls within the ambit of Section 56(2)(viii) and is taxable in the year of receipt pursuant to Section 145B(1). The Bench explicitly rejected the applicability of Section 10(37) to the interest component and clarified that claiming TDS credit is contingent upon the income being offered to tax. The facts in the instant case are materially identical. Thus, we affirm the CIT(A)'s decision to sustain the addition. The assessee has failed to adduce any distinguishing features or contrary legal propositions that would justify a departure from the settled view of this Bench. Appeal of the assessee is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether interest received on compensation/enhanced compensation for compulsory acquisition of land is taxable as 'Income from Other Sources' under section 56(2)(viii), read with section 145B(1), or is exempt as part of compensation for rural agricultural land under section 10(37). 1.2 Whether credit for tax deducted at source on such interest can be allowed when the corresponding interest income is not offered to tax. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of interest on compensation/enhanced compensation and claim of exemption under section 10(37) Interpretation and reasoning 2.1 The Tribunal recorded that the assessee had received interest on enhanced compensation from the Land Acquisition Officer, which the Assessing Officer had brought to tax as 'Income from Other Sources' under section 56(2)(viii), allowing a 50% deduction under section 57(iv) and applying section 145B(1) for year-of-receipt taxation. 2.2 The Tribunal noted that the assessee's contention before the first appellate authority was that interest received under section 28 of the Land Acquisition Act formed part of the compensation for rural agricultural land and was therefore exempt under section 10(37). The Tribunal further noted that the Commissioner (Appeals) rejected this argument on the basis that, post Finance Act, 2009, section 56(2)(viii) specifically taxes interest on compensation or enhanced compensation as 'Income from Other Sources' with a 50% deduction under section 57(iv), and that recent High Court decisions had treated such interest, whether under section 28 or otherwise, as taxable revenue receipt. 2.3 In examining the rival submissions, the Tribunal placed reliance on the decision of its Coordinate Bench in Ajay Kumar, which had considered identical arguments concerning the taxability of interest on compensation or enhanced compensation in land acquisition matters. In that decision, as noted and adopted by the Tribunal, it was held that interest on compensation falls within the ambit of section 56(2)(viii) and, by virtue of section 145B(1), is taxable in the year of receipt. The Coordinate Bench had expressly rejected the applicability of section 10(37) to the interest component, distinguishing between the exempt compensation and the taxable interest. 2.4 The Tribunal found that the facts of the present case were 'materially identical' to those in Ajay Kumar. It observed that the assessee had not produced any distinguishing features in facts or law nor any contrary legal proposition that could warrant a departure from the view already settled by the Coordinate Bench. Conclusions 2.5 The Tribunal held that interest on compensation or enhanced compensation received by the assessee is chargeable to tax as 'Income from Other Sources' under section 56(2)(viii), to be taxed in the year of receipt as mandated by section 145B(1), with the statutory 50% deduction under section 57(iv). 2.6 The Tribunal further held that section 10(37) does not apply to the interest component of the compensation, and therefore the assessee's claim that such interest formed part of exempt compensation for rural agricultural land was rejected. 2.7 On this basis, the Tribunal affirmed the order of the Commissioner (Appeals) sustaining the addition of the net 50% of the interest amount to the assessee's income. Issue 2 - Availability of TDS credit without offering corresponding income to tax Interpretation and reasoning 2.8 The Tribunal noted and adopted the Coordinate Bench's reasoning in Ajay Kumar that the right to claim credit of tax deducted at source is contingent upon the underlying income being offered to tax. 2.9 It recorded that the revenue had argued that the assessee could not claim TDS credit on interest on compensation without including such interest as taxable income and that this position had been affirmed in the Coordinate Bench decision relied upon. Conclusions 2.10 By following the Coordinate Bench in Ajay Kumar, the Tribunal held that the assessee is not entitled to claim TDS credit in respect of interest on compensation unless and until that interest is offered to tax in accordance with sections 56(2)(viii) and 145B(1). 2.11 As the assessee failed to show any legal basis for a contrary treatment, the Tribunal upheld the denial of any TDS-related relief inconsistent with the inclusion of the interest in taxable income, and consequently dismissed the appeal in entirety.