2025 (7) TMI 752 - AT - Income Tax

Revision u/s 263 - issue of taxability of interest u/s 28 of the Land Acquisition Act granted as part of enhanced compensation - lack of enquiry or lack of investigation - HELD THAT - After discussing the compensations received by the assessee we observe that the compensation and solatium received by the assessee falls within section 23 of the Land Acquisition Act and the additional cost received by the assessee which forms part of interest compensation award to the assessee. Therefore he came to the conclusion that the additional cost @12% received by the assessee of Rs. 21, 36, 951/- is subject to tax. AO has not verified the compensation properly and not applied the jurisdictional High Court order in the present case. After considering the findings of the ld. PCIT in detail we observe that ld. PCIT at para 15 of the order discussed the provisions of section 23(1A) of the Land Acquisition Act and he observed that compensation awarded by the Court is a determination and conclusion on the said rate also includes the payment as per section 23(1A) and solatium u/s 23(2) of the Land Acquisition Act 1894. The additional rate does not include interest and it is not mandatory. It is left to the discretion of the Court. The provisions of section 28 and 34 are very clearly classified as interest. The provisions of section 23(1A) and section 23(2) do not refer to said amount as interest. After discussing section 23(1A) in detail ld. PCIT while concluding at para 66 of the order treated the additional cost @ 12% as interest which is chargeable to tax. Compensation of additional cost is at the discretion of the Court the Court may award the additional cost @ 12% to the assessee and it is relevant to note that section 23(1A) falls under compensation and it cannot be treated as part of interest awarded to the assessee. PCIT while concluding the above additional cost as additional interest award to the assessee is not proper and it is apparent on record. Since the additional compensation solatium and additional cost are part and parcel of the compensation awarded to the assessee which cannot be termed as additional interest awarded to the assessee therefore the direction of the ld. PCIT is bad in law and we are inclined to set aside the order passed u/s 263 of the order. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this appeal revolve around the taxability and classification of amounts received by the assessee under the Land Acquisition Act, 1894, specifically:

(i) Whether the interest received on enhanced compensation under the Land Acquisition Act is exempt under any specific provisions of the Income-tax Act, 1961;

(ii) Whether judicial precedents from the jurisdictional High Court and the Supreme Court exempt such interest from taxation;

(iii) The applicability of provisions of sections 56(2)(viii), 57(iv) read with section 145A of the Income-tax Act to the interest received;

(iv) Whether the Assessing Officer (AO) was bound by jurisdictional High Court judgments and whether the AO conducted proper enquiry;

(v) Whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of revenue, justifying revision under section 263 of the Income-tax Act;

(vi) The legal correctness of the Principal Commissioner of Income-tax's (PCIT) direction to enhance the addition by Rs. 10,81,975/- on account of additional interest amount without supporting evidence;

(vii) Whether the order under section 263 violates principles of natural justice by setting aside the assessment order to make further enquiries.

Regarding the taxability of interest on enhanced compensation under the Land Acquisition Act, the legal framework includes sections 23, 28, and 34 of the Land Acquisition Act, 1894, and relevant provisions of the Income-tax Act, 1961, notably sections 10(37), 2(28A), 56(2)(viii), 57(iv), and 145A(B). Section 10(37) exempts compensation received on compulsory acquisition of agricultural land, but the question arises whether this exemption extends to interest components.

The PCIT scrutinized the assessment order passed under section 143(3) and found that the AO had accepted the assessee's claim of exemption on interest without conducting proper enquiry, and had assessed only Rs. 1,92,59,621/- of interest against the total interest of Rs. 2,91,34,541/- shown in Form 26AS. The PCIT observed that the AO failed to consider an additional amount of Rs. 21,36,951/- awarded as interest (additional cost @ 12%) by the Court and treated this amount as exempt without verification.

The PCIT referred to judicial precedents of the jurisdictional High Court and the Supreme Court, holding that interest received on enhanced compensation is taxable under the head "Income from Other Sources" and is not exempt under section 10(37). The PCIT relied on the provisions of section 2(28A) read with sections 56(2)(viii), 57(iv), and 145A(B) of the Income-tax Act to conclude that the interest component must be taxed in the year of receipt. The PCIT thus held the assessment order erroneous and prejudicial to the interest of revenue and set it aside under section 263, directing the AO to make an addition of Rs. 10,81,975/- (50% of Rs. 21,63,951/-) representing the tax on the additional interest amount.

The assessee contended that the entire amount received, including the enhanced compensation, solatium, and interest, was exempt under section 10(37). The assessee submitted that the additional cost awarded @ 12% under section 23(1A) of the Land Acquisition Act is part of compensation and not interest. The assessee relied on the statutory language of section 23(1A) and judicial decisions to support this position. It was argued that the AO had correctly completed the assessment by taxing only the actual interest received and that the PCIT's order to enhance the addition was erroneous and contrary to law.

The Tribunal analyzed the relevant provisions of the Land Acquisition Act, especially section 23(1A), which mandates the Court to award an amount calculated at 12% per annum on the market value of land from the date of notification to the date of award or possession. The Tribunal noted that this amount is awarded at the discretion of the Court and is classified under compensation, not interest. Sections 28 and 34 of the Land Acquisition Act, on the other hand, explicitly deal with interest.

The Tribunal observed that the PCIT erred in treating the additional cost @ 12% as interest for taxation purposes. The Tribunal emphasized that the additional cost is a component of compensation and solatium and cannot be equated with interest income. Consequently, the Tribunal found the PCIT's direction to enhance the addition by Rs. 10,81,975/- on this basis to be legally unsustainable.

On the issue of whether the AO conducted proper enquiry, the Tribunal noted that the AO had made an addition of 50% of the interest amount actually received and had considered the relevant facts. The Tribunal held that the assessment order was not erroneous or prejudicial to revenue merely because the PCIT held a different view. The Tribunal further held that section 263 cannot be invoked to set aside an order simply to enable further enquiries where the AO has already conducted scrutiny.

The Tribunal also addressed the question of the applicability of judicial precedents and statutory provisions. It held that the AO is bound to apply the law as laid down by the jurisdictional High Court and Supreme Court. However, in this case, the PCIT's reliance on certain precedents was found to be distinguishable and not applicable to the facts of the case.

Regarding natural justice, the Tribunal found no violation as the assessee was given ample opportunity to present submissions and evidence before the PCIT and during the appeal proceedings.

In conclusion, the Tribunal held that:

- The additional cost awarded @ 12% under section 23(1A) of the Land Acquisition Act is a part of compensation and solatium and not interest;

- The AO's assessment order was neither erroneous nor prejudicial to the interest of revenue in respect of the interest on enhanced compensation;

- The PCIT's order under section 263 to enhance the addition by treating the additional cost as interest is legally unsustainable;

- The section 263 order is set aside, and the appeal of the assessee is allowed.

Significant holdings include the Tribunal's interpretation of section 23(1A) of the Land Acquisition Act as awarding additional compensation and not interest, and the principle that section 263 cannot be used to overturn an assessment order merely because the PCIT holds a different opinion without establishing that the AO's view was impossible or unsustainable. The Tribunal emphasized the mandatory cumulative conditions under section 263 requiring the assessment order to be both erroneous and prejudicial to revenue, which were not satisfied in this case.

Verbatim, the Tribunal stated: "From the above, compensation of additional cost is at the discretion of the Court, the Court may award the additional cost @ 12% to the assessee and it is relevant to note that section 23(1A) falls under compensation and it cannot be treated as part of interest awarded to the assessee. The above facts were discussed in detail by the ld. PCIT at para 15 of the order. Therefore, ld. PCIT while concluding the above additional cost as additional interest award to the assessee is not proper and it is apparent on record."

Further, the Tribunal remarked: "Since the additional compensation, solatium and additional cost are part and parcel of the compensation awarded to the assessee, which cannot be termed as additional interest awarded to the assessee, therefore, the direction of the ld. PCIT is bad in law and we are inclined to set aside the order passed u/s 263 of the order."

This judgment clarifies the classification of amounts awarded under the Land Acquisition Act for income tax purposes and limits the scope of revision under section 263, reinforcing the principle that mere difference of opinion does not justify setting aside an assessment order.