Interest on Enhanced Compensation u/s 28 of Land Acquisition is Part of Total Compensation, Not Income: ITAT [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that interest on enhanced compensation awarded under Section 28 of the Land Acquisition Act is not taxable as income from other sources but is an integral part of the total compensation, thereby not attracting Tax Deducted at Source ( TDS ) under Section 194A of the Income Tax Act, 1961.

The Land Acquisition Officer ( LAO ), Gurgaon, the appellant in this case, was responsible for acquiring land under compulsory acquisition for public purposes under the Land Acquisition Act, 1984 on behalf of the Haryana Urban Development Authority ( HUDA ).

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The issue arose when the Deputy Commissioner of Income Tax ( TDS ), Gurgaon treated the LAO as an “assessee in default” for failing to deduct TDS on interest paid to landowners on enhanced compensation, as per the provisions of Section 201(1) and 201(1A) of the Income Tax Act.

The CIT(A) dismissed the LAO’s appeal on procedural grounds, citing a 47-day delay in filing, without considering the merits of the case. The revenue argued that TDS at 20% was mandatory, as landowners had not provided their Permanent Account Numbers ( PANs ), and that such interest fell under “income from other sources” under Section 56 of the Income Tax Act.

On appeal before the ITAT, the LAO’s counsel argued that interest under Section 28 of the Land Acquisition Act forms an integral part of the total compensation and is not a separate income liable for taxation.

The assessee relied on the Punjab & Haryana High Court ruling in Jagmal Singh’s case and the Supreme Court's decision in Ghanshyam ( HUF ) (2009), which clarified that interest under Section 28 is compensation in nature, unlike interest under Section 34, which is taxable as income from other sources.

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The two-member bench comprising Satbeer Singh Godara ( Judicial Member ) and M. Balaganesh ( Accountant Member ) observed that in previous assessment years (2010-11 to 2012-13), it had ruled in favor of the LAO on the same issue and found no material change in facts or law for the year under appeal. The tribunal held that interest awarded under Section 28 of the Land Acquisition Act is compensation and not interest income, making it exempt from TDS under Section 194A of the Income Tax Act.

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