The New Delhi bench of Income Tax Appellate Tribunal( ITAT ) has held that interest received on enhanced compensation not comes under ‘income from other sources’ u/s 56 and not attracts Tax Deduction at Source u/s 194A.
The assessee is Land Acquisition Office (LAO) and is governed by the provisions of Land Acquisition Act, 1984. The LAO acquired land from the land owners under compulsory acquisition for public purposes as per the directions of Haryana Urban Development Authority (HUDA). The land owners got enhanced compensation which was awarded by the court on which they received interest.
The issue for consideration is whether the impugned interest received by the land owners on enhanced compensation is ‘income from other sources’ under section 56 of the Act attracting the TDS provision enshrined under section 194A of the Act.
In the assessment proceedings for the assessment year 2012-13 the assessee submitted before the AO that no TDS is required to be deducted on the interest payments which fall under section 28 of the LA Act relying on the decision of the Honorable Jurisdictional High Court in the case of Jagmal Singh (supra) and during appellate proceedings filed an affidavit that interest on enhanced compensation was paid to the recipient land owners under section 28 of the LA Act and submitted that the provision of section 194A do not apply for the reason that interest under section 28 is a part of the amount of compensation itself. It was pointed out that there is vital difference between interest awarded under section 28 and interest paid under section 34 of the LA Act. Interest under section 28, unlike under section 34 is an accretion in value and regarded as part of the compensation itself which is not the case of interest under section 34 of the LA Act. Interest under section 34 is for delay in making payment after the amount is determined.
The ITAT has observed that interest on enhanced compensation under section 28 of LA Act, being an integral part of consideration is exempt from capital gains tax under section 10(37) of the Act. Agricultural land situate in any area referred to in item (a) or item (b) of section 2(14)(iii) of the Act do not fall withinthe ambit of agricultural land and thus constitute ‘capital asset’ under section 2(14) of the Act. Compulsory acquisition of capital asset under any law is ‘transfer’ under section 2(47)(iii) of the Act. Accordingly, any profit or gain arising from transfer of such a capital asset is exigible to capital gains tax under section 45 of the Act in the previous year in which the transfer took place. However, capital gains arising from transfer of agricultural land situate in any area referred to in item (a) or item (b) of section 2(14)(iii) by way of compulsory acquisition under any law is exempt from tax under section 10(37) of the Act. Accordingly, any income by way of capital gains engrained in the receipt of compensation and/ or enhanced compensation is exempt in the hands of the recipient land owners.
The ITAT bench ofShri N.K. Billaiya, Accountant Member and Ms.Astha Chandra, Judicial Member while allowing the appeal held that “in the light of the legal provisions set out above and following the judgment of the Honorable Supreme Court in Ghanshyam (HUF) (supra), we hold that interest received by the land owners on enhanced compensation awarded to them by the court under section 28 of the LA Act is not in the nature of income from other sources in the hands of the recipient land owners under section 56 of the Act and therefore, the LAO was not under any legal obligation to comply with the TDS provisions of section 194A of the Act. Accordingly, we allow the grounds raised by the assessee by way of additional grounds taken before the Tribunal. The assessee succeeds. The original grounds become infructuous”.
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