Interest on compensation for the compulsory acquisition of exempt agricultural land is also exempt.

ORDER

S.R. Raghunatha, Accountant Member.- This appeal by the assessee is filed against the order of the learned Commissioner of Income Tax (Appeal), Addl/JCIT(A), Thane (in short Ld.CIT(A)) for the assessment year 2017-18, vide order dated 08.01.2025.

2. The grounds raised by the assessee are as follows:

3. The brief facts of the case are that the assessee is an individual, earning income from bus transport service in the name and style of M/s. Arulmurugan Bus Service. The assessee is in receipt of rental income, bank interest during the assessment year under consideration and had filed his return of income on 29.03.2018 in declaring the taxable total income at Rs.4,11,980/-.

4. The return of income filed for the assessment year under consideration was selected for scrutiny assessment and the assessee during the course of assessment proceedings had placed on record the details regarding the receipt of compensation amounting to Rs.15,02,267/- as well as interest on enhanced compensation amounting to Rs.44,93,229/- (in total aggregating to Rs.59,95,496/-) on sale of agricultural land measuring about 0.25 Hector in survey No.19/3A, which had been compulsorily acquired by Special Tahsildar (LA) for Salem Karur Broad-gauge Railway line Project during the year 1999.

5. The Assessing Officer further observed the fact further observed that the said agricultural land was located at Vengampatti village, Salem District, located beyond 8 Kms from Salem municipal limits.

6. The assessee in the return of income filed for the assessment year under consideration had claimed entire compensation received amounting to Rs.59,95,496/- as exempt from taxation. However, the Assessing Officer while passing the scrutiny assessment order in terms of Section 143(3) of the Act dated 26.12.2019 in bringing to tax 50% (Rs.22,46,610/-) of interest on enhanced compensation (Rs.44,93,229/-) as income of the assessee by invoking the Section 56(2)(viiii) r.w.s 145B(i).

7. The assessee being aggrieved by the said assessment, had challenged the same in filing appeal before the Ld. CIT(Appeals) and the assessee during the course of first appeal had submitted that the compensation received, including interest on enhanced compensation, could not be brought to tax under the provisions of the Act, as the same was received in terms of Section 28 of the Land Acquisition Act, 1984.

8. Further, the assessee had contended that the agricultural land in question is situated beyond 8 kilometers from the municipal limits of Salem, and therefore, the same would not qualify as a capital asset for the purpose of levying tax there on in as much the assessee contended that the action of the AO in bringing to tax 50% of the interest on enhanced compensation as income of the assessee in terms of Section 56(2)(viii) of the Act was wrong and not sustainable in law.

9. However, the Ld.CIT(Appeals) observed that the provisions in Section 34 of the Land Acquisition Act provides for payment of interest on delayed payment of compensation and whereas the provisions in Section 28 of the Land Acquisition Act provides for the interest on enhanced compensation awarded by the Court.

10. The Ld. CIT(Appeals) as consequence had held the “Interest” in terms of Section 34 is meant to compensate for the delay in payment after the compensation amount has been determined, whereas “Interest” in terms of Section 28 is inherent to the enhanced value of the land inasmuch in contra distinction to interest u/s.34, the interest u/s.28 of the Land Acquisition Act is integrally linked to the augmented compensation while concluding that on the facts of the present case the payment of interest u/s.34 of the Land Acquisition Act was undisputed and the sole debate would lie in the treatment of interest paid u/s.28 of the Land Acquisition Act.

11. The Ld. CIT(Appeals) after analysing the amendment introduced in bringing in clause (viii) of sub-section 2 to Section 56 of the Act, vide Finance (No.2) Act, 2009 (with effect from 01.04.2010) as well as section 145B(1) of the Act, in order to bring the interest on compensation or on enhanced compensation as taxable as ‘income from other sources’ had concluded that the in view of the language used in Section 56(2)(viii) as well as Section 145B(1) of the Act, the interest amounting to Rs.58,57,470/- received by the assessee during the year on enhanced compensation u/s.28 of the Land Acquisition Act, 1894 was rightly brought to tax by the AO in invoking Section 56(2)(vii) r.w.s 145B(1) of the Act.

12. The Ld. CIT(Appeals) in the process had also rejected the assessee’s claim of the same also being exempt in terms of Section 10(37) of the Act by holding that the provisions in Section 10(37) deal with ‘compensation’ only and not “interest on compensation or enhanced compensation” and accordingly dismissed the appeal filed by the assessee in confirming the addition made by the AO in this regard.

13. The assessee, aggrieved by the same has filed the present appeal.

14. Before us, the Ld. AR argued that the AO went wrong in invoking the provisions in Section 56(2)(vii) r.w.s 145B() of the Act to the facts and in the circumstances of the present case inasmuch it was argued that interest component received was inarguably related to the compensation received from Special Tahsildar on account of compulsory Acquisition and any attempt by the AO in bifurcating the total amount as exempt and taxable would not stand the test of law.

15. Further, the Ld. AR argued that the insertion of Section 145A, Section 145B, Section 56(2)(viii) & Section 57(iv) by the Finance (No.2) Act. 2009 did not change the character of interest u/s.28 of the Land Acquisition Act from capital receipt forming part of enhanced compensation as envisaged in section 45(5) of the Act to revenue receipt’ chargeable to tax as income from other sources.

16. It was also argued that the Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF)  368/315 ITR 1, after analysing the provisions in Section 28 and 34 of Land Acquisition Act had held that interest is different from compensation. However, interest paid on the excess amount u/s.28 would depend upon a claim by a person whose land is acquired whereas interest u/s.34 is for delay in making payment. The Interest u/s.28 is part of the amount of compensation whereas interest u/s.34 is only for delay in making payment after the compensation amount is determined.

17. Thus, it was argued that interest u/s.28 is a part of enhanced value of the land which is not the case in the matter of payment of interest u/s.34. The Ld. AR in this regard had placed reliance upon the decision of the Hon’ble Kerala High Court in the case of Anvar Ali Poolakkodan v. ITO  461 (Kerala) in support of the arguments put forth before this bench by him.

18. Per contra, the Departmental Representative had argued that the Ld. CIT(A) after a detailed analysis of the impact of the amendment brought out in Section 56(2)(viii) by the Finance (No.2) Act. 2009 had rightly confirmed the addition made by the AO and further relied on the judgment of the Punjab & Haryana High Court in the case of Puneet Singh v. CIT  415 ITR 215 (Punjab & Haryana). Accordingly pleaded for dismissal of the assessee’s appeal in confirming the order of the Ld. CIT(A).

19. We have heard rival submissions and perused the material on record along with paper book filed and gone through the orders of the authorities. Admittedly the assessee had received the disputed interest in consequence to the compulsory acquisition and hence the only issue to be adjudicated in the present appeal is whether the AO was correct in bringing to tax the sum of Rs.22,46,610/- (50 % of the of interest on enhanced compensation amounting to Rs. 44,93,229/- as income of the appellant by invoking the Section 56(2)(viii) r.w.s 145B(i).

20. We have perused the judgments of the Punjab & Haryana High Court and Kerala High Court referred supra wherein the identical issues were considered by the Hon’ble Courts. We note that on this issue there are divergent views expressed by the Hon’ble High Courts. The Hon’ble Punjab & Haryana High Court had decided the issue in favour of the Revenue and the Hon’ble Kerala had held the issue in favour of the Assessee. In such a scenario, as held by the Hon’ble Supreme Court in the case of Vegetable Products (supra), we are inclined to follow the decisions in favour of the assessee on the issue in hand.

21. The ratio laid down by the Hon’ble Kerala High Court in the case of Anvar Ali Poolakkodan (supra) under identical circumstances reads as under:

“8. On a conjoint reading of the above statutory provisions, it is clear that amounts received by an assessee as compensation or enhanced compensation for compulsory acquisition of his landed property would be treated as income under the head of ‘Capital Gains’ for the purposes of the I.T. Act. If the said compensation amounts are received in relation to agricultural property, then by virtue of the provisions of Section 10 (37) of the I.T. Act, the amounts would stand excluded from the total income of the assessee for the purposes of the I.T. Act. As for the interest amounts received by an assessee in terms of Section 28 or Section 34 of the LAA, it is debatable as to whether the said interest would qualify as interest for the purposes of the I.T. Act as well going by the definition of the term under Section 2 (28A) of the I.T. Act. This is because there are conflicting precedents on the issue as to whether the interest paid to an assessee for delayed payment of compensation for compulsory acquisition of his land partakes the character of the compensation itself or merely that of an interest payment [Dr. Sham Lal Narula v. Commissioner of Income-Tax [1964] 53 ITR 151 (SC)]; Puneet Singh v. CIT, Karnal 415 ITR 215 (Punjab & Haryana)(Punjab & Haryana); Mahender Pal Narang v. CBDT, New Delhi 423 ITR 13(Punjab & Haryana); Mahender Pal Narang v. CBDT, Ministry of Finance 462 ITR 498(SC); T.N.K. Govindaraju Chetty v. Commissioner of Income-tax 1967] 66 ITR 465 (SC); Bikram Singh v. Land Acquisition Collector (1997) 10 SCC 243 119/224 ITR 551 (SC)]; Commissioner of Income-tax, Faridabad v. Ghanshyam (HUF) 315 ITR 1 (SC)(SC)]; Commissioner of Income-tax. Faridabad v. Chet Ram (HUF) 4/400 ITR 23(SC)]; Commissioner of Income Tax, Rajkot v. Govindbhai Mamaiya –  270/229 367 ITR 498 (SC)]; Principal Commissioner of Income-tax 10 v. Inderjit Singh Sodhi (HUF) [MANU/DE/2633/2024/ 301(Delhi)]; Manjet Singh (HUF) v. Union of India [MANU/pH/ 3409/2014]/2016]116(Punjab & Haryana) & Manjet Singh (HUF) Karta Manjeet Singh v. Union of India [MANU/SCOR/ 55128/2014].

9. Going by the nature of the payment of interest under the LAA, we are inclined to hold that the payment of interest on delayed payment of compensation to an assessee, be it under Section 28 or Section 34 of the LAA, would partake the character of the principal compensation itself since it is essentially paid to compensate the assessee for the loss he sulflered on account of not having the use of the principal compensation amount at the time when it fell due. We cannot lose sight of the fact that compensation amounts paid to a person towards compulsory acquisition of his property traces its roots to the constitutional obligation to pay such compensation under Article 300A of the Constitution. Recent judicial pronouncements have also recognised the right to property as a human right. In Dharnidhar Mishra (D) v. State of Bilhar [(2024) 10 SCC 605] the court pointed out that although the right property ceased to be a fundamental right by the Constitution (44th Amendment) Act, 1978, continues to be a human right in a welfare state, and a constitutional right under Article 300A of the Constitution. Accordingly, the State cannot dispossess a citizen of his property except in accordance with the procedure established by law. The court went on to observe that the obligation to pay compensation, though not expressly included in Article 300A, can be inferred from that Article since the court has recognized the right to property as a basic human right. That apart, recently in Kolkata Municipal Corporation v. Bimal Kumar Shah [(2024) 10 SCC 533] the court, while rejecting the contention of the Corporation that it had effectively acquired the property of a citizen, drew a distinction between a statutory provision that confers a power of acquisition to the Corporation and other provisions that dealt with the procedure to be followed in the exercise of that power. The court found that Article 300A of the Constitution, that prohibited the deprivation of property of a citizen save as authorized by law, conferred on a citizen seven sub-rights viz. (i) the right to a notice of the proposed acquisition, (ii) the right to be heard on the objections if any to such proposal (iii) the right to a reasoned decision thereon (iv) the right to insist that the acquisition could only be for a public purpose (v) the right to restitution or fair compensation (vi) the right to an efficient and expeditious process and (vii) the right to a conclusion of the proceedings. In essence, the court saw the concepts of substantive and procedural due process as integral aspects of the phrase ‘authority of law’ in Article 300A of the Constitution. The developed jurisprudence on property rights therefore unambiguously points to the necessity of treating interest payments for delayed payment of principal compensation amounts for compulsory acquisition of property, as an accretion to the compensation amount itself. For a citizen whose property has been compulsorily acquired by the State, the right to receive the compensation in full accrues from the date of his dispossession and any statutory interest paid to him for delayed payment of the principal compensation amounts partakes the character of the compensation itself. This is irrespective of whether the interest that is paid is under Section 28 or Section 34 of the LAA because the interest payments under both of the said provisions are premised on the same rationale [See: The constitution bench decision in Sundar v. Union of India (2001) 7 SCC 211].

10. In the light of the discussion above, we hold that interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as “Capital Gains’ for the purposes of the I.T. Act. Consequently, the interest amounts will also get the benefit of Section 10 (37) of the I.T. Act if the land compulsorily acquired is agricultural land. Further, since the interest amounts so received are not the nature of interest as defined under Section 2 (28A), the provisions of Section 56 of the I.T. Act will not be attracted in such cases. While the provisions of Section 56 (2)(viii) deal with interest on compensation or enhanced compensation, the said reference to compensation or enhanced compensation need not be seen as made in connection with compulsory acquisition of property. The applicability of Section 56 (2)(viii) will depend upon whether or not, in the particular factual situation, the interest amount can be treated as different in nature from the principal compensation amount.”

In the present facts and circumstances of the case by respectfully following the above ratio laid down by the Hon’ble Kerala High Court, we are inclined to allow the grounds raised by the Assessee and direct the AO to delete the addition made.

22. In the result, appeal filed by the assessee is allowed.