Interest Received on Compulsory Land Acquisition under Section 28 of the Land Acquisition Act is Exempt Compensation, Not Taxable Interest

By | January 29, 2026
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Interest Received on Compulsory Land Acquisition under Section 28 of the Land Acquisition Act is Exempt Compensation, Not Taxable Interest

1. The Core Dispute

The primary issue was the taxability of ₹2,06,01,408 received by the assessee as interest on enhanced compensation under Section 28 of the Land Acquisition Act, 1894.

  • AO’s Stand: The interest is “Income from Other Sources” under Section 56(2)(viii) of the Income Tax Act, and only 50% is deductible under Section 57(iv).

  • Assessee’s Stand: The interest is part of the compensation itself and is exempt under Section 10(37) as the land was agricultural.

2. Legal Ruling: Reopening of Assessment Quashed

I. Validity of Approval under Section 151

The assessee challenged the reopening on the grounds that the JCIT granted approval mechanically by simply stating “Satisfied it is a fit case.”

  • The Ruling: The Tribunal followed the Delhi High Court (Meenakshi Overseas Pvt. Ltd.), holding that as long as the approving authority expresses satisfaction based on the AO’s reasons, the mandate of Section 151 is fulfilled. The approval was held valid.

II. Interest u/s 28 vs. Interest u/s 34 (The “Ghanshyam” Precedent)

The Tribunal relied heavily on the Supreme Court judgment in CIT vs. Ghanshyam, HUF [315 ITR 1].

  • Section 28 Interest: This is paid when the Court finds the initial compensation awarded by the Collector was insufficient. The Supreme Court held this is an accretion to the value of the land and forms an integral part of the “compensation.”

  • Section 34 Interest: This is paid for delay in payment after the compensation is determined. This is “simpliciter interest” and is taxable.

3. Exemption under Section 10(37)

The Tribunal observed that the land in question was agricultural land compulsorily acquired.

  • Mandate of Section 10(37): Any “Capital Gain” arising from the compulsory acquisition of agricultural land by an individual/HUF is exempt from tax if received on or after April 1, 2004.

  • The Decision: Since interest under Section 28 is legally treated as “compensation” (as per Ghanshyam, HUF), it qualifies as part of the capital gain arising from the transfer. Therefore, it falls within the ambit of the exemption provided under Section 10(37).

4. Final Order Summary

The ITAT concluded that there was no “escapement of income” because the amount received was exempt by law.

  • Reopening: Quashed. The AO misread the legal position regarding Section 28 interest.

  • Addition: Deleted. The interest is considered part of the enhanced compensation and is exempt under Section 10(37).

  • Outcome: Appeal of the Assessee is Allowed.

Key Takeaways for Landowners

  1. Identify the Section: Check your award letter. If the interest is granted under Section 28, it is part of the compensation. If it is under Section 34, it is taxable interest.

  2. Agricultural Land Exemption: If the acquired land was agricultural, ensure you claim exemption under Section 10(37) even on the interest component (Section 28).

  3. TDS Recovery: If the Department has deducted TDS on Section 28 interest, you can claim a refund by filing a return based on this and similar rulings.

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, ‘A’ CHANDIGARH
Shri Suresh Kumar, Village – Batholi, Yamuna Nagar.
Vs
The ITO, Ward No. 4, Yamuna Nagar.
Date of Pronouncement : 20.01.2026
ITA No. 390/CHD/2023

Source :- Judgemnet