Land acquisition compensation: whether s.28 interest on enhanced award is taxed as capital gains, not other income

The dominant issue was whether interest awarded under s.28 of the Land Acquisition Act, 1894 on enhanced land acquisition compensation is taxable as "income from other sources" by applying s.56(1)(a) r/w s.57(iv) and s.145A(b), or whether it forms part of compensation chargeable as "capital gains". Relying on its recent precedent, the Tribunal held that s.28 interest is inextricably linked to compensation, partakes the character of compensation, and therefore is assessable under the head "capital gains" rather than "income from other sources". Consequently, the assessee's appeal was allowed and the contrary head-of-income treatment was rejected.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether interest received as part of land acquisition compensation under section 28 of the Land Acquisition Act, 1894 could be assessed as "income from other sources" by applying section 57(iv) read with section 56(1)(a) and section 145A(b) of the Income-tax Act, 1961, or whether the contrary view adopted in the impugned assessment was to be accepted.

(ii) Whether the appeal deserved condonation of delay on the facts placed before the Tribunal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (ii): Condonation of delay

Interpretation and reasoning: The Tribunal considered the explanation for delay and applied the principle that procedural delays should be condoned where justice so requires.

Conclusion: Delay of 111 days in filing the appeal was condoned in the larger interest of justice.

Issue (i): Head of income and tax treatment of interest under section 28 of the Land Acquisition Act

Legal framework (as discussed by the Tribunal): The dispute was framed around assessment of the interest component under section 28 of the Land Acquisition Act, 1894, and the Revenue's invocation of section 57(iv) read with section 56(1)(a) and section 145A(b) of the Income-tax Act, 1961, to tax such receipt under the head "income from other sources".

Interpretation and reasoning: The Tribunal identified the controversy as already addressed in a recent Tribunal decision, which had analysed competing authorities cited for taxing such interest as "income from other sources". The Tribunal noted that the said decision had distinguished the case law relied upon by the Revenue and had upheld the position that interest under section 28 is treated differently from interest that is merely compensatory for delayed payment, because it is connected with enhancement/accretion in compensation. The Tribunal further treated the matter as covered by that decision and found no reason to depart from its reasoning.

Conclusion: The Tribunal adopted the reasoning of the cited Tribunal decision mutatis mutandis and accepted the assessee's sole substantive contention, thereby holding that the impugned action of taxing the section 28 interest component as "income from other sources" by applying section 57(iv) read with section 56(1)(a) and section 145A(b) was not to be sustained. The appeal was allowed.

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