Interest on Enhanced Compensation is Contingent, Not Taxable Under Section 56(2)(viii) of the Income Tax Act: ITAT [Read Order]

The case arose from the assessment year 2019–20, where the assessee, Anant Changu Mokal, received compensation and interest following the acquisition of his agricultural land located in Navhe village, Raigarh. The compensation awarded amounted to ₹1.56 crore, while the interest on delayed compensation, under Section 28 of the Land Acquisition Act, 1894, amounted to ₹2.73 crore.

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While the compensation itself was accepted as tax-exempt under Section 10(37) of the Income Tax Act (since the land was rural agricultural land beyond 8 km from municipal limits), the assessing officer treated the interest as taxable under Section 56(2)(viii), read with Section 145B. A deduction of 50% under Section 57(iv) was allowed, but the balance of ₹1.36 crore was added to the taxable income.

The assessee argued that the interest received under Section 28 of the Land Acquisition Act forms a part of enhanced compensation and is capital in nature. The assessee also contended that this compensation is currently under dispute, as the Maharashtra government has challenged the award before the Bombay High Court. Therefore, the interest remains a contingent receipt and cannot be taxed until the matter attains finality.

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To support this, the assessee referred to multiple judgments, including the landmark rulings of the Hon’ble Supreme Court in CIT v. Ghanshyam (HUF) and Govindbhai Mamaiya , which distinguished between interest under Sections 28 and 34 of the Land Acquisition Act. The Apex Court held that interest under Section 28 is a part of compensation and not income per se, whereas interest under Section 34 is compensatory in nature and taxable.

The assessee asserted that the compensation and interest were deposited into a joint bank account held by six individuals, yet the entire interest was assessed in his hands. Additional evidence, including bank statements and court documents, was submitted to support this claim. The Revenue leaned heavily on the decision of the Punjab & Haryana High Court in Mahender Pal Narang v. CBDT, which was upheld by the Supreme Court. According to the department, the provisions of Section 56(2)(viii) clearly mandate that interest on compensation should be taxed in the year of receipt, regardless of any pending litigation.

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The Pune Bench of the Tribunal, comprising Judicial Member Vinay Bhamore and Accountant Member Dr. Dipak P. Ripote, noted that the land acquired was undisputedly rural agricultural land, qualifying for exemption under Section 10(37). The assessee’s claim that the interest was received under Section 28 of the Land Acquisition Act, which forms part of the enhanced compensation, was supported by documentary evidence. It was held that the appeal filed by the Maharashtra government against the award was still pending before the Bombay High Court. This made the interest income contingent and uncertain.

The Tribunal acknowledged that these facts were not fully evaluated by the Assessing Officer, as the bank and legal documents were not submitted during the assessment stage. Therefore, while agreeing in principle with the assessee’s arguments, the ITAT remanded the matter back to the Assessing Officer for a fresh examination, with a direction to treat the issue of taxability of interest as contingent, pending judicial outcome.

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