Land acquired by the government? ITAT says interest on enhanced compensation may be exempt from tax

The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has ruled in favour of a taxpayer in a dispute over the tax treatment of interest received on enhanced compensation for compulsory acquisition of agricultural land. The tribunal held that interest awarded under Section 28 of the Land Acquisition Act forms part of the compensation and is eligible for exemption under Section 10(37) of the Income Tax Act.

The ruling came in the case of Kishorbhai Nathabhai Makani for assessment year 2016-17. The assessee had challenged an order of the National Faceless Appeal Centre (NFAC), which had upheld the tax treatment of the interest component as taxable income.

ITAT relies on Gujarat High Court precedent

The dispute centred on whether the interest received on enhanced compensation should be treated as separate income under Section 56(2)(viii), or whether it should be regarded as part of the compensation itself.

The tribunal relied on its earlier decision in the case of Mansukhbhai Kanjibhai Sakariya, as well as the Gujarat High Court’s ruling in Movaliya Bhikhubhai Balabhai vs ITO. In that case, the Gujarat High Court held that interest awarded under Section 28 of the Land Acquisition Act has the character of compensation and does not fall within the meaning of “interest” covered by the relevant provisions of the Income Tax Act.

The distinction between Section 28 and Section 34 interest was central to the tribunal’s reasoning. The judicial precedents cited in the order establish that Section 28 interest is linked to the enhanced amount of compensation determined by the court. The Supreme Court’s decision in Ghanshyam (HUF) had held that such interest is an accretion to the value of the land and forms part of enhanced compensation.

The Gujarat High Court subsequently held that Section 28 interest should not be treated as taxable “interest” under Section 145A and Section 56(2)(viii). The Rajkot tribunal noted that this was the jurisdictional High Court’s decision and therefore had binding force on authorities within Gujarat.

Taxpayer had received ₹2.69 crore in enhanced compensation

In the case before the tribunal, the assessee had received a 25% share of enhanced compensation amounting to ₹2.69 crore for the compulsory acquisition of ancestral agricultural land. This amount included ₹1.89 crore as interest awarded under Section 28 of the Land Acquisition Act.

The assessing officer had examined the transaction and concluded that the Section 28 interest was part of the full value of consideration received for compulsory acquisition of the agricultural land. As a result, the officer held that the provisions taxing interest on compensation as income from other sources did not apply.

The matter was subsequently taken up under Section 263 by the Principal Commissioner of Income Tax. The tribunal, however, found that the assessing officer had made the necessary inquiries and had adopted a legally plausible view based on binding judicial precedents.

The tribunal also noted that the original compensation, enhanced compensation and related interest had already been subjected to taxation in the hands of one of the co-owners. Taxing the same amounts again in the hands of another co-owner would therefore amount to double taxation, according to the order.

ITAT quashes revision proceedings and allows appeal

The tribunal rejected the Revenue’s reliance on a contrary ruling of the Punjab and Haryana High Court in Manjeet Singh (HUF). It observed that the ruling was not from the jurisdictional High Court and therefore did not have binding force on authorities operating under the Gujarat High Court’s jurisdiction.

The tribunal also referred to the doctrine of stare decisis and the principle that lower courts and quasi-judicial authorities are bound by decisions of the High Court exercising jurisdiction over them. It held that where the assessing officer has adopted a legally plausible view supported by judicial precedent, the Commissioner cannot use Section 263 merely to substitute another possible view.

Ultimately, the Rajkot Bench held that interest in the nature of compensation for compulsory acquisition of agricultural land is eligible for exemption under Section 10(37). It deleted the addition made by the assessing officer and allowed the assessee’s appeal.