The Income Tax Appellate Tribunal (ITAT) Delhi Bench has carefully examined the complex issue of taxability of interest received under Section 28 of the Land Acquisition Act, 1894, and held that interest on compensation on acquisition of agricultural land will be treated as Income from other sources.
The core dispute centers on whether the interest received on enhanced compensation during land acquisition is a capital receipt exempt under Section 10(37) or a revenue receipt taxable under “Income from Other Sources”. The assessee, Vachaspati Sharma, received Rs. 4,78,95,440 as enhanced compensation including interest, and claimed complete exemption.
Moreover, the Supreme Court in the Ghanshyam (HUF) case (2009) had held that interest under Section 28 is part of enhanced compensation and should be treated as a capital receipt. However, subsequent legislative amendments and judicial interpretations have significantly altered this perspective.
The Finance Act (No. 2) of 2009 introduced critical amendments to the Income Tax Act, specifically Sections 56(2)(viii) and 57(iv), which explicitly categorize interest on compensation as taxable under “Income from Other Sources”.
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These amendments were designed to provide clarity and resolve existing ambiguities in tax treatment.
The Punjab and Haryana High Court, in the landmark Mahender Pal Narang case(2021), provided a definitive interpretation. The court held that the language of the amended sections is unambiguous – interest received on compensation or enhanced compensation must be treated as income from other sources, not capital gains.
The ITAT noted that the Supreme Court’s earlier view in Ghanshyam’s case(2009), being a Division Bench judgment, cannot override the principle of stare decisis established by larger bench decisions like Dr. Shamlal Narula’s case. The legislative amendments effectively obliterated the distinction drawn in Ghanshyam’s case.
Importantly, the amendments also introduced a 50% deduction under Section 57(iv) for such interest income, providing some relief to taxpayers. The legislative intent was clear – to treat such interest as a revenue receipt and tax it accordingly.
The tribunal extensively reviewed multiple judicial precedents, including decisions from various High Courts and ITAT benches. While some earlier judgments supported the assessee’s position, the more recent interpretations, especially post-2010 amendments, consistently held that such interest is taxable.
The order highlighted a crucial distinction between interest under Sections 28 and 34 of the Land Acquisition Act. While Section 34 interest is clearly for delayed payment, Section 28 interest, though discretionary, is now considered a revenue receipt based on legislative amendments.
Notably, in the newer Land Acquisition Act (the Successor Act), Section 96 provides a blanket exemption from income tax for compensation and interest. However, this applies only to acquisitions after January 1, 2014, and does not retroactively impact earlier cases.
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The Two member Bench comprised of Sudhir Kumar(Judicial Member) and Sifa Ur Rahman(Accountant Member) ultimately concluded that the interest received under Section 28 of the Land Acquisition Act is taxable as income from other sources. The decision was reinforced by the Supreme Court’s dismissal of the Special Leave Petition in the Mahender Pal Narang(2021) case, effectively settling the legal position.
The interest of Rs. 2,39,47,720 (50% of the total interest received) would be taxable under “Income from Other Sources”, with a 50% deduction allowed.
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