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August 28, 2020

Interest on Enhanced Compensation u/s 28 of Land Acquisition Act, 1894 is Exempt u/s 10(37)

Interest on Enhanced Compensation u/s 28 of Land Acquisition Act, 1894 is Exempt u/s 10(37)

Compulsory acquisition is the power of government to acquire private rights in land without the willing consent of its owner or occupant in order to benefit society. Compensation against such acquisition is provided to the assessee by the government. 

One of the most common question is with regard to the taxability of interest received on compensation or enhanced compensation. Enhanced interest is offered u/s. 28 of the Land Acquisition Act, 1894 on compulsory acquisition of agricultural land. Exemption under section 10(37) is available only on account of compulsory acquisition of urban agricultural land.

As per section 145A(b) of the Income Tax Act, any interest received by an assessee on compensation or enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

Further, as per section 56(2)(viii) of the Income Tax Act, income by way of interest received on compensation or on enhanced compensation referred to in section 145A(b) above shall be taxable under the head income from other sources in the previous year in which such interest is received.

In the case of above interest which is taxable under the head income from other sources, a deduction of a sum equal to 50% of such income shall be allowed to the assessee and no deduction shall be allowed under any other clause of section 57.

Let us refer to the case of ITO Vs Sh. Dhanender Kumar HUF (ITAT Chandigarh) where an appeal was preferred by the Revenue challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)].

The issue under consideration is whether interest received u/s. 28 of the Land Acquisition Act, 1894 on compulsory acquisition of agricultural land in the nature of compensation is exempt u/s. 10(37) or chargeable to tax under head ‘Income from Other Sources’?

Facts of the Case

  • The issue involved in the present appeal related to the issue of taxability of interest received on enhanced compensation on compulsory acquisition of land u/s 28 of the Land Acquisition Act, 1894.
  • It was contended that the AO had held the same to be taxable u/s 56(2)(viii) read with sections 57(iv) and 145A.
  • The assessee had received enhanced compensation during the year along with interest on the compensation.
  • The assessee had treated the entire amount as being in the nature of compensation and exempt u/s 10(37) of the Act.
  • The assessee submitted that the interest component having been received u/s 28 of the Land Acquisition Act, was in the nature of compensation and thus eligible for exemption u/s 10(37) of the Act.
  • The assessee relied upon the decision of the Apex Court in the case of CIT Vs. Ghanshyam (HUF), in support of its above contention.
  • The AO dismissed the contention of the assessee stating that the issue of taxability of interest on enhanced compensation was now covered by the amended provisions of sections 56(2)(viii), 57(iv) and 145A of the Act, which was applicable w.e.f. AY 2010-11 and according to the same 50% of the interest received was taxable.
  • Accordingly, the AO subjected 50% of the interest received on enhanced compensation to tax.

Proceedings of CIT(A)

  • The matter was carried in appeal before the CIT(A) who found merit in the claim of the assessee.
  • The CIT(A) referred to the decision of the Apex Court in the case of Ghanshyam(HUF) and relying on the same held that as per the said decision, interest received u/s 28 of the Land Acquisition Act was part of the enhanced valued of land and in the nature of enhanced compensation only.
  • Further the CIT(A) stated that the amendment made to the Act by introducing sections 56(2)(viii), 57(iv) and 145A(b) of the Act was for the purpose of mitigating the hardships of the assessee on account of the decision of the Apex Court in the case of Ramabai Vs. CIT(1990) whereby it was held that the arrears of interest computed on the enhanced compensation was to be taxed on accrual basis.
  • Taxing the said interest in the year of receipt, was to be read in the context of interest received on compensation or enhanced compensation used u/s 145A(b) only and, therefore, it clearly did not refer to the interest received u/s 28 of the Land Acquisition Act, which had been held by the Apex Court to be in the nature of enhanced compensation in the case of Ghanshyam (HUF) (supra).
  • The CIT(A) allowed the assessee’s appeal deleting the addition made by the AO of 50% of the interest received on enhanced compensation.

Proceedings of ITAT

  • Aggrieved with the order of CIT(A), Revenue preferred an appeal before Income Tax Appellate Tribunal (ITAT)
  • Departmental Representative relied upon the order of the AO, though he fairly conceded that the issue stood decided in favour of the assessee by the ITAT in appeal for the disputed year, though in different proceedings i.e u/s 154 of the Act.
  • Since the issue involved in the present already stood adjudicated by the ITAT for the disputed year in favour of the assessee, though in appeal in separate proceedings, and the Revenue had not brought to the notice of the ITAT any new facts which were not there before the ITAT while deciding the earlier appeal, ITAT found that for all purposes the issue already stood examined by the ITAT.
  • Considering the fact that the CIT(A) has already taken note of the decision of the ITAT and applying the same, deleted the addition.

Therefore, interest u/s 28 of the Land Acquisition Act received by the appellant is in the nature of compensation and is exempt under the provision of Section 10(37) of the Income Tax Act.

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