2025 (7) TMI 103 - AT - Income Tax

Interest received on enhanced compensation awarded for acquisition of agricultural land - Addition made within the meaning of provisions of section 145B r/w section 45(5) and amended provisions of sections 56(2)(viii) 57(iv) - HELD THAT - As decided in Inderjit Singh Sodhi 2024 (4) TMI 408 - DELHI HIGH COURT discussion we affirm the concurrent findings of the AO and CIT(A) and find that the view taken by the ITAT is unsustainable as the same is based on an incorrect appreciation of law. The 2010 amendment was a conscious departure by the Legislature from the earlier position and the said departure holds good law as on date. There is no question with respect to the vires of the amendment before us or regarding any ambiguity in the language of the amendment. The only concern is regarding the enunciation of the applicable law and we hold the same to unequivocally mean that interest whether on compensation or on enhanced compensation shall be considered as income from other sources and shall be exigible to income tax. We accordingly answer the substantial question of law which has arisen in the instant appeal in affirmative and in favour of the Revenue. We thus hold that the ITAT has erred in relying upon the decision of Ghanshyam 2009 (7) TMI 12 - SUPREME COURT ignoring the changes brought about by Finance (No.2) Act 2009 which came into effect in the year 2010. Revenue s appeal is allowed.

Summary

The core legal issue considered in this appeal is whether the interest received on enhanced compensation awarded for acquisition of agricultural land is taxable as income under the head "Income from other sources" under the Income Tax Act, specifically under the amended provisions of sections 56(2)(viii), 57(iv), and section 145B.

Additional questions relevant to this issue include:

• The characterisation of interest awarded under Sections 28 and 34 of the Land Acquisition Act, 1894 - whether it forms part of compensation or is a separate income.
• The impact of legislative amendments introduced by the Finance (No.2) Act, 2009, effective from 1.10.2010, on the taxability of such interest.
• The applicability and relevance of judicial precedents prior to and post the 2010 amendment, including the Supreme Court's decisions and the jurisdictional High Court's rulings.
• The correctness of the ITAT's decision in light of the above legal framework and precedents.

Issue-wise Detailed Analysis

1. Taxability of Interest on Enhanced Compensation under Sections 56(2)(viii) and 145B

The legal framework involves the provisions of the Income Tax Act, particularly Section 56(2)(viii) introduced by the Finance (No.2) Act, 2009, which mandates that "income by way of interest received on compensation or on enhanced compensation" shall be chargeable under the head "Income from other sources." Section 145B further clarifies that such interest shall be deemed income in the previous year in which it is received.

Prior to this amendment, judicial precedents such as the Supreme Court's decision in CIT vs. Ghanshyam (HUF) (2009) held that interest under Section 28 of the Land Acquisition Act, 1894, formed part of the compensation and was not taxable separately. The Court distinguished between interest under Section 28 (interest on excess compensation awarded by the Court) and interest under Section 34 (interest for delayed payment), holding that the former was part of compensation while the latter was taxable as income.

However, the amendment introduced in 2010 explicitly reversed this position by making interest on compensation or enhanced compensation taxable as income from other sources. The Court emphasized that the decision in Ghanshyam (supra), being rendered before the amendment, no longer holds good law in this context.

2. Interpretation of Sections 28 and 34 of the Land Acquisition Act, 1894

Sections 28 and 34 deal with interest payable on compensation awarded for land acquisition. Section 28 empowers the Court to direct payment of interest on excess compensation awarded over what the Collector initially awarded. Section 34 mandates payment of interest by the Collector for delayed payment of compensation at specified rates.

The Court noted that interest under Section 28 arises from a judicial determination that a higher compensation was due, whereas Section 34 interest is for delay in payment. Earlier judicial pronouncements, including a three-Judge Bench in Sham Lal Narula v. CIT (1964), had held that interest under both sections is not part of compensation but a revenue receipt taxable under the Income Tax Act.

Subsequent Supreme Court decisions, including Bikram Singh v. Land Acquisition Collector (1997), reaffirmed this view, establishing that such interest is taxable as income. These decisions predate the 2010 amendment but align with the legislative intent to tax interest on compensation.

3. Effect of the 2010 Amendment and Subsequent Judicial Interpretations

The Finance (No.2) Act, 2009, inserted Section 56(2)(viii) and Section 145B, explicitly making interest on compensation taxable. Section 57(iv) further provides a 50% deduction on such income under the head "Income from other sources," with no other deductions allowed.

The Court relied heavily on the recent jurisdictional High Court judgment in PCIT vs. Inderjit Singh Sodhi (HUF) (2024), which interpreted these amendments to mean that interest on enhanced compensation is taxable income from other sources in the year of receipt. The High Court also clarified that earlier decisions like Ghanshyam (HUF) are no longer applicable post-amendment.

The Court rejected the ITAT's reliance on pre-amendment decisions, including Ghanshyam and the Supreme Court's decision in CIT v. Govindbhai Mamaiya (2014), noting that the latter did not consider the 2010 amendment and thus lacks applicability.

4. Application of Law to Facts

The assessee had received enhanced compensation for agricultural land acquisition, with a component of Rs. 1,02,69,536 identified as interest. The Assessing Officer (AO) held this interest taxable under the amended provisions and made an addition accordingly. The CIT(A) deleted this addition relying on ITAT decisions favoring the assessee.

The Revenue challenged this deletion before the Tribunal. The Tribunal heard the Revenue's submissions and examined the relevant judicial pronouncements and statutory provisions. It found the ITAT's approach erroneous for ignoring the 2010 legislative amendment and the binding High Court ruling.

Since the assessee did not appear for hearing, the Tribunal proceeded ex parte and allowed the Revenue's appeal, setting aside the CIT(A)'s order and affirming the AO's addition.

5. Treatment of Competing Arguments

The assessee's argument, based on pre-2010 judicial precedents, was that interest on enhanced compensation under Section 28 of the Land Acquisition Act is part of compensation and thus exempt from tax. The AO and Revenue relied on the 2010 amendment and subsequent High Court ruling to contend that such interest is taxable as income from other sources.

The Tribunal found the Revenue's argument persuasive, holding that the legislative amendment was a conscious departure from earlier law and must be given effect. It noted no challenge was made to the validity of the amendment, and no ambiguity existed in its language. The Tribunal also distinguished the earlier Supreme Court decisions as not addressing the amended provisions.

6. Conclusions

The Tribunal concluded that the interest on enhanced compensation is taxable under Section 56(2)(viii) read with Section 145B of the Income Tax Act. The ITAT's contrary view was set aside, and the addition made by the AO was restored. The Revenue's appeal was allowed accordingly.

Significant Holdings

"The 2010 amendment was a conscious departure by the Legislature from the earlier position and the said departure holds good law, as on date. There is no question with respect to the vires of the amendment before us or regarding any ambiguity in the language of the amendment. The only concern is regarding the enunciation of the applicable law and we hold the same to unequivocally mean that interest, whether on compensation or on enhanced compensation, shall be considered as income from other sources and shall be exigible to income tax."

"The solitary question which arises for our consideration in the present appeal is whether the interest on enhanced compensation received by the respondent-assessee partakes the character of income from other sources under Section 56(2)(viii) of the Act, to be considered as separable from the enhanced compensation."

"Interest under Section 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34."

"The cumulative effect of section 145A(b) and section 56(2)(viii) would be that any interest received on compensation or on enhanced compensation shall be taxable under the head 'Income from other sources' in the year of receipt."

"In a case where title passes to the State, the statutory interest provided thereafter can only be regarded either as representing the profit which the owner of the land might have made if he had the use of the money or the loss he suffered because he had not that use. In no sense of the term can it be described as damages or compensation for the owner's right to retain possession."

"The interest awarded under Section 28 of the Act, just like under Section 34 thereof, cannot be a compensation or damages for the loss of the right to retain possession but only compensation payable by the State for keeping back the amount payable to the owner."

Ultimately, the Tribunal held that the interest component of Rs. 1,02,69,536/- received by the assessee on enhanced compensation is taxable income from other sources under the amended provisions of the Income Tax Act, and the addition made by the AO is affirmed.