Taxability of ₹7.11 Crore FD Interest in Land Compensation: ITAT Orders Fresh Assessment [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) ordered a fresh assessment on the taxability of ₹7.11 crore Fixed Deposit (FD) interest earned from land compensation.

Ranjitsinh Narsinh Vaghela, appellant-assessee, did not file a return for the assessment year 2012-13, stating his income was below the taxable limit. However, the Assessing Officer (AO) received information that he had received ₹4.32 crore in cash during the financial year 2011-12, which was not disclosed. The AO reopened the assessment and issued a notice under Section 148 on March 28, 2019.

In response, the appellant filed a return on May 22, 2019, declaring ₹1,40,764 as total income and claiming an exemption of ₹6.22 crore under Section 10(37) for compensation received from the compulsory acquisition of agricultural land in Dholakuva, Gandhinagar.

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The land was originally owned by the Thakor Brothers, who had inherited it. They appointed the appellant’s father, Narsinh Shivsinh Vaghela, as their Power of Attorney (POA) holder to claim compensation from the government. After legal disputes, a court settlement in 2004 recognized Vaghela as the rightful owner. Following a Gujarat High Court order in 2005, the government enhanced the compensation and deposited ₹14.93 crore with the Principal Senior Civil Judge, Gandhinagar. Due to ownership disputes, the court kept the amount in fixed deposits, which grew to ₹22.33 crore, including ₹7.39 crore in interest.

The AO questioned the taxability of the interest and treated ₹7.11 crore as "income from other sources" under Section 56, rejecting the claim that it was exempt as part of the compensation. The AO completed the assessment under Section 144 read with Section 147.

The assessee filed an appeal before the Commissioner of Income Tax(Appeals)[CIT(A)], which was dismissed. The CIT(A) upheld the reopening under Section 148, stating that the AO had obtained the necessary approval and had reason to believe that income had escaped assessment. The assessee’s objection was rejected as the reopening was found to be valid.

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The CIT(A) held that the AO’s failure to mention a specific addition in the initial reasons did not affect the reassessment. The addition related to FD interest of ₹7.11 crore, which emerged during the proceedings. It was observed that the Civil Court had kept the disputed amount in FDs until the land ownership issue was resolved. The CIT(A) ruled that the interest earned was separate from the compensation and taxable as "income from other sources" under Section 56 of the Act.

The CIT(A) noted that while Section 10(37) exempts capital gains from the compulsory acquisition of agricultural land, it does not cover interest on FDs made by the Civil Court. It was also clarified that Sections 28 and 34 of the Land Acquisition Act, 1894, apply only to statutory interest on delayed compensation, not to FD interest.

The two member bench comprising T.R.Senthil Kumar(Judicial Member) and Makarand V.Mahadeokar(Accountant Member) upheld the reassessment, noting that the assessee’s failure to file a return justified reopening beyond four years. While the AO initially referred to ₹4.32 crore, the inquiry revealed ₹7.11 crore as FD interest income, making the addition valid as it stemmed from the reassessment.

The tribunal reviewed the submissions and records and found that the AO and CIT(A) had not clearly explained the distribution and reconciliation of the Rs. 14.93 crore compensation. The AR claimed the interest was exempt under Section 10(37) or eligible for a 50% deduction under Section 57(iv), while the DR argued it was taxable under Section 56 and pointed out discrepancies.

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Due to the need for further verification, the ITAT ordered a fresh assessment without commenting on the exemption or deduction claims. The AO was directed to verify the reconciliation, assess the taxability of the recipient's income, and ensure no double taxation. The CIT(A)’s order was set aside and the matter was restored to AO.

In short the appeal filed by the assessee was partly allowed.

To Read the full text of the Order CLICK HERE

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