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May 14, 2022

Interest on enhanced compensation is not taxable under the Land Acquisition Act: Delhi ITAT

by CA Shivam Jaiswal in Income Tax

Interest on enhanced compensation is not taxable under the Land Acquisition Act: Delhi ITAT

Facts and Issue of the case

The assessee has filed his original return of income at Rs.3,34,10,040/- on 03.08.2016. Later on, return was revised at  Rs.1,70,83,650/-  which was filed on  23.03.2018.   The case of the assessee was selected for limited scrutiny under CASS on the following grounds :-
“Sale consideration of property reported by  the  assessee  in schedule CG of ITR is less than the compensation on acquisition of immovable property reported by transferee of property in TDS return (for TDS u/s 194L and 194LA).”

The assessee has declared interest received on enhanced compensation u/s 28 under the Land Acquisition Act, 1894, of Rs.3,31,93,013/-. Later on, in the revised return, the assessee has claimed 50% deduction u/s 57 of the Act on the said interest. The AO accepted the interest income at Rs.1,70,83,650/- as shown in revised return. However, during the course of assessment proceedings, the assessee had raised a claim by way of letter that even the balance amount of 50%, i.e., Rs.1,70,83,650/- itself was not taxable as enhanced interest was awarded u/s 28 of the Land Acquisition Act and, therefore, such interest income partakes the nature of compensation as held by Hon’ble Supreme Court in the case  of  UOI & Ors. Vs. Hari Singh  reported in 302 CTR 458 (SC) and CIT vs. Ghanshyam (HUF) (2009)  315  ITR  1.  According  to  the  assessee, since the land was agricultural land being used for agricultural operations in for last many years of acquisition and, therefore, such agricultural land which was acquired by the Government and thus compensation received from the Government is exempt u/s 10(37) of the Act. The AO however did not accept this claim.

The assessee then raised this issue before the NFAC. Ld. NFAC however, instead of dealing with the controversy raised in the grounds of appeal and was subject matter of appellate proceedings that amount of interest received on the acquisition of land u/s 28 of the Land Acquisition Act is exempt, has held that the land itself  is  not agricultural and, therefore, there is no question of any exemption u/s 10(37) of the Act. Accordingly, there was an enhancement All the evidences filed before the first appellate authority to substantiate that it was agricultural land have  been rejected and finally, it was held that the land was not agricultural land albeit it had commercial value having a strategic location  and, therefore, exemption u/s 10(37) cannot be allowed.

Before this court, ld. counsel for the assessee, Dr.  Rakesh  Gupta submitted that insofar as the interest on enhanced compensation u/s 28 of the Land Acquisition Act in respect of agricultural land also partakes the character of a compensation and, therefore, he is entitled for compensation u/s 10(37) of the Act. In support, he relied upon various judgments. Thus, insofar as the assessee’s claim for exemption u/s 10(37) is concerned, the same cannot be denied insofar as interest on enhanced compensation received u/s 28 of the Land Acquisition Act. He also referred to copy of award, as appearing in pages 140 to 146 of  the paper book, passed by Land Acquisition Collector where it has been categorically mentioned that the award classified the land as “Chahi” which means irrigated land.  

Ld. NFAC issued notice u/s 251(2) that land does not fall under the parameter of agricultural land. In response, the assessee had submitted the entire evidences showing that land acquired was agricultural land and for which copy of jamabandi, Form-D, copy of award, etc. was enclosed. The assessee had  also  submitted  the girdwari which gives the description of the crops produced in various years. Hence, Ld. Counsel submitted that  ld. NFAC erred on law and facts in holding that compensation which was awarded on the acquisition of the land by the Government was  not  an  agricultural land. In the light of these evidences and  record,  he  submitted  that such a finding should be reversed.

On the other hand, ld. DR for the Revenue submitted that first of all, interest received u/s 28 of the Land Acquisition Act is not part of compensation and is taxable and in support decisions of Hon’ble Punjab & Haryana High Court in case of Manjit Singh (2016) 65 taxman.com, Mahender Pal  Narang  vs.  CBDT  423  ITR  13  and Punit Singh vs. CIT (A) 110 taxman 16. Thus, AO has rightly denied the exemption u/s 10(37) of the Act holding that interest received on enhanced compensation u/s 28 of the Land Acquisition Act is taxable. Insofar as observation and the finding of the ld. NFAC that it was not agricultural land, he strongly relied upon the finding and reasoning of the ld. first appellate authority.

Observation of the court

Court has heard rival submissions and  also  perused  the relevant findings given in the impugned order as well as the material referred to before us. Here in this case, the assessee is having agricultural land in Haryana. The assessee’s land was acquired by the Government of Haryana and Land Acquisition Collector had announced award on 16.07.2007 fixing the market value of the land at Rs.20,00,000/- per acre. Later on, it was awarded enhanced compensation of Rs.95,00,000/- per acre by Hon’ble Supreme Court. The assessee was awarded interest u/s 28 of the  Land Acquisition Act of Rs.3,31,93,013/- and had claimed deduction of 50% in the revised return and accordingly, in the return of income, the  assessee  has shown income on this amount  of interest  at  Rs.1,70,83,650/-.  Later on, during the course of assessment proceedings, the assessee claimed that this interest is not taxable at all,  because  such  interest  is enhanced income u/s 28 of the Land Acquisition Act and, therefore, it partakes the character of compensation which is held to be not taxable by Hon’ble Supreme Court  in  the  case  of  CIT  vs.  Ghanshyam  HUF and in the case  of  UOI  vs. Hari  Singh (supra)

First of all, court will deal with the contention raised by the ld. DR for the Revenue that whether interest awarded u/s 28 of the Land Acquisition Act is part of compensation is taxable or not. According to the provisions of Land Acquisition Act, when the land is acquired the Collector may be directed to pay interest on excess  compensation  to the landowner u/s 28 of the Land Acquisition Act  which  is  by  the order of the Court and for the period the till excess compensation is deposited in the court.

The claim before the Hon’ble  court by the  assessee is that payment of interest is only a payment in consideration of loss of enjoyment of the possession of the land by the owner and not by way of any charge on compensation and therefore it was not exigible to income tax. It was also the claim that definition of interest u/s 2 (28A) is confined only to money lending business between a debtor and the creditor. The  Hon’ble  High Court of Punjab and Haryana in that case has held that the interest is not part of compensation but it is awarded for depriving assessee of user of such compensation due to delay in payment and such is income.

Then in July 2019 the Hon’ble Supreme Court had another occasion to determine the interest on compensation received by the assessee in case of [2009] 182 Taxman 368 (SC)/[2009] 315 ITR 1 (SC)/[2009] 224  CIT  versus  Ghanshyam  (HUF).  The Hon’ble Supreme Court was once again seized of the issue in case of Union of India versus Hari Singh and others where the  order was passed on September 15, 2017 wherein it has  been  held  that when the compensation is paid the assessing officer should keep into mind the provisions of Section 28 of the  land acquisition  act and the law laid down by the Hon’ble Supreme Court in case of can sham HUF in order to ascertain whether the interest given Under the said provision amounts to compensation or not.

By the Finance Act (Number 2) Act 2009 with effect  from I  April 2010 there is an amendment Under the provisions of Section 56 (2) (viii) which provided that income by way of interest received on compensation or on enhanced compensation referred to in clause (B) of Section 145A is an income. A corresponding provision was also introduced u/s 57 (iv) providing for deduction of a sum equal to the 50% of the income chargeable to tax under the above provision. The provisions of Section 145A (B) was also introduced providing that interest received by the assessee shall be deemed to be the income of the year in which it is received. Subsequently with retrospective effect from 1.4.2017 The Finance Act 2018 provided that income by way of interest received on compensation or enhanced compensation is chargeable to tax as income from other sources Under the provisions of Section 56 (2) (viii) of the act.

Hon’ble High Court of Punjab and Haryana  has  taken  a consistent view that interest received on delayed payment of compensation under either Section 28 or u/s 34 is taxable as income from other sources in the year of the receipt under the act. Such view was after considering the order of the Hon’ble Supreme Court in Dr Shyam Lal Narula, Bikram Singh,  (supra).  Thus, there  are  divergent views on this taxability of interest on the enhanced compensation  awarded u/s 28 of the Land Acquisition Act wherein the Hon’ble Punjab &  Haryana  High  Court  has consistently taking a view that it is an income to be treated under the head ‘income from other  sources’.  The  Hon’ble  Gujarat  High  Court has decided this issue in favour of the assessee  following the  decision of Hon’ble Supreme Court in the case of Ghanshyam (supra). Since the AO of the present case falls under the jurisdiction  of  Hon’ble  Delhi High Court, therefore following the dictum that, if one High Court is in favour of the assessee, then in absence  of  any  jurisdictional  High Court, that should be followed in favour of the assessee. Thus, ratio of Hon’ble Punjab & Haryana High Court may not have any binding precedent. Thus, the interest on the enhanced compensation u/s 28 of the Land Acquisition Act is not taxable.

Coming to the issue of whether the land was an  agricultural land or not, from the bare perusal of various evidences which were filed before the ld. first appellate authority viz. –

  • Award showing the land as irrigated land;
  • Existence of tubewells, tress and kharif crops;
  • Form No.D issued by Land Acquisition Officer which was signed by him and also by Patwari & Kanungo clearly mentioned that the amount paid to the assessee is against agricultural land;
  • Jamabandi showing the nature of crops produced; and
  • Income-tax returns showing agricultural income;

it cannot be inferred even  remotely that the land which was acquired by the Government was not an agricultural land. The observation and the finding of the ld. first appellate authority  despite  noting  down these evidences does not have any basis to negate these evidences nor any independent enquiry has been made  to  counter these  evidences. In fact the entire impugned order revolves around on various case laws and the facts discussed herein which has been distinguished by ld. counsel before us.  However, we do not find it relevant to discuss here, as none of the case laws are relevant for the present case in the light of these evidences. Once the Land Acquisition Officer as well  as  court have awarded the compensation treating to be  an  agricultural  land and not only that, all the Revenue  departments have certified that it was an agricultural land and substantial proof has been given that agricultural activities were being carried out, then to say that it was a commercial land and not an agricultural land, is unjustifiable.

Conclusion

Court held that it was an agricultural land on which the compensation has been awarded by the court; and secondly, the interest received on enhanced compensation u/s 28 of the Land Acquisition Act is part of compensation and hence is not taxable, accordingly assessee is entitled for exemption u/s 10(37) of the Act.

Pranav-Saran-Vs-ACIT-ITAT-Delhi

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