2026 (1) TMI 988 - AT - Income Tax

Interest on enhanced compensation under the Land Acquisition Act is taxable as income from other sources, not exempt under compensation provision.

Issue concerns whether interest under section 28 of the Land Acquisition Act on enhanced compensation is exempt under section 10(37) or taxable as income ... Revision u/s 263 - taxability of interest received on enhanced compensation of compulsory acquisition of agricultural land u/s 28 of the Land Acquisition Act, 1894 - PCIT found that the AO did not conduct proper enquiry in terms of law laid down by Supreme Court and Punjab & Haryana High Court as well law provided in the Act in terms of section 56(2)(viii) r.w. 57(iv) read with section 145A - PCIT further found that the AO did not make any inquiry with regard to the eligibility of the assessee for claiming exemption u/s 10(37). Whether the interest received under section 28 of the Land Acquisition Act on enhanced compensation for acquisition of land, is exempt u/s 10(37) or will be exigible to tax under the 'income from other sources' in view of amendment w.e.f 01.04.2010 in the provisions of section 56(2)(viii) and 57(iv) of the Act? HELD THAT:- The issue is no longer integra. The issue has been decided by the Delhi ITAT Benches in the case of Shri Bhim Singh [2024 (8) TMI 1607 - ITAT DELHI] against the assessee held interest on compensation or interest on enhanced compensation is chargeable to tax under the head “income from other sources‟ from 01.10.2010 onwards. We are of the considered view that the language in section 56(2)(viii) and 145B(1) are plain, simple and unambiguous and that the correct legal position is that the interest received during the year on enhanced compensation under section 28 of the Land Acquisition Act, 1894 is exigible to tax u/s 56(2)(viii) r.w.s 145B(1). The assessee’s claim of the same being exempt u/s 10(37) of the Act is unsustainable as the provisions of section 10(37) deals with ‘compensation’ only and not “interest on compensation or enhanced compensation”. We are of the considered view that the AO had not inquired all the aspect both in terms of law as in the statute book and law laid down by the Supreme Court and High Court, especially the jurisdictional High Court of Punjab & Haryana High Court in the case of Mahender Pal Narang [2020 (3) TMI 1115 - PUNJAB AND HARYANA HIGH COURT] and Puneet Singh [2019 (1) TMI 1068 - PUNJAB AND HARYANA HIGH COURT]. We therefore are of considered view that the PCIT rightly assumed the jurisdiction over the assessee u/s 263 as the reassessment order being erroneous and prejudicial to the interest of the Revenue. Respectfully following the Hon’ble Supreme Court in Sham Lal Narula (Dr.) v[1964 (4) TMI 10 - SUPREME COURT] and the jurisdictional High Court in the case of Mahender Pal Narang and Puneet Singh (supra) and Hon’ble High Court of Delhi in the case of Inderjit Sodhi [2024 (4) TMI 408 - DELHI HIGH COURT] and that of Veena Shah [2024 (7) TMI 501 - ITAT DELHI] (which dealt with identical issue being revised u/s 263 of the Act) as cited above, we hold that the ld. PCIT order dated 14.03.2024 to recompute the interest on enhanced compensation in accordance with section 56(2)(viii) r.w.s. 145B(1) and allowing deduction u/s 57(iv) needs no interference. Grounds raised by the assessee dismissed. Issues: (i) Whether interest received under Section 28 of the Land Acquisition Act on enhanced compensation is taxable as 'income from other sources' under Section 56(2)(viii) read with Section 145B(1) of the Income-tax Act, 1961 or exempt under Section 10(37); (ii) Whether the Principal Commissioner of Income-tax rightly invoked revisional jurisdiction under Explanation 2 to Section 263(1) to set aside the assessing officer's order.Issue (i): Taxability of interest on enhanced compensation under Section 28 of the Land Acquisition Act.Analysis: The statutory amendments introduced by Finance (No.2) Act, 2009 (effective 01.04.2010) inserted Clause (viii) in Section 56(2) and Section 145B(1), expressly making interest on compensation or enhanced compensation chargeable under the head 'Income from other sources' and deeming such interest to be income of the year of receipt; Section 57(iv) allows a 50% deduction for income of the nature referred to in Section 56(2)(viii). Prior Supreme Court decisions treating interest under Section 28 as not part of compensation were considered in light of the 2010 legislative change; subsequent High Court and Tribunal decisions have held that the 2010 amendment altered the tax treatment so that interest on compensation/enhanced compensation is taxable as income from other sources on receipt.Conclusion: The interest of Rs. 82,88,672 received under Section 28 on enhanced compensation is taxable as income from other sources under Section 56(2)(viii) read with Section 145B(1) and not exempt under Section 10(37); deduction under Section 57(iv) is available as applicable.Issue (ii): Validity of exercise of revisional powers under Explanation 2 to Section 263(1).Analysis: The assessing officer accepted the exemption claim without addressing the implications of the post-2010 amendments and without making requisite inquiries under the applicable authorities and jurisdictional High Court rulings; such lack of proper enquiry rendered the assessment order erroneous and prejudicial to revenue within the meaning of Explanation 2 to Section 263(1).Conclusion: The revisional order under Explanation 2 to Section 263(1) setting aside the assessment for recomputation in accordance with Section 56(2)(viii) read with Section 145B(1) and Section 57(iv) is justified.Final Conclusion: The appeal is dismissed and the revisional direction to recompute taxability of the interest on enhanced compensation in accordance with Sections 56(2)(viii), 145B(1) and 57(iv) of the Income-tax Act, 1961 is upheld.Ratio Decidendi: Post-2010 amendments to Section 56(2)(viii) and Section 145B(1) of the Income-tax Act, 1961 make interest on compensation or enhanced compensation taxable as 'income from other sources' in the year of receipt, permitting recomputation under revisional powers where the assessing officer failed to apply these provisions.