Revisional Order Under Section 263 Invalid as Interest Under Section 28 Land Acquisition Act Forms Exempt Compensation
Issue
Whether interest received under Section 28 of the Land Acquisition Act, 1894 forms part of compensation exempt under Section 10(37), and whether the PCIT/CIT can invoke revision under Section 263 where the Assessing Officer accepted the claim after making inquiries during assessment.
Facts
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Land Acquisition & Receipt: The assessee’s land was compulsorily acquired under the Land Acquisition Act, 1894. During AY 2019-20, the assessee received ₹1.49 crores designated as interest under Section 28 of the Land Acquisition Act (at rates of 9% and 15%).
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Exemption Claim: The assessee claimed this amount as exempt from tax, treating it as an accretion to the principal compensation for compulsory acquisition of agricultural land.
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Assessment Inquiry: During the original assessment proceedings, the Assessing Officer (AO) issued a specific query regarding this receipt. The assessee furnished the acquisition award along with supporting documentation.
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AO’s Order: Relying on the Supreme Court precedent in CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC), the AO accepted the assessee’s non-taxable claim without making explicit detailed discussions in the body of the assessment order.
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Revisionary Proceedings: The CIT invoked Section 263, alleging the order was erroneous and prejudicial to the revenue, on the ground that such interest ought to be taxed under Section 145B(1) read with Section 56(2)(viii) after allowing deduction under Section 57(iv).
Decision
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Specific Query Addressed: Since the AO issued a questionnaire and the assessee submitted relevant documents in response, it is deemed that the AO examined the reply and satisfied himself before forming his conclusion, even if detailed discussion was absent in the assessment order.
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Plausible Legal View Taken: The AO took a legally sustainable and plausible view based on established judicial precedents (Ghanshyam HUF). An assessment order cannot be deemed erroneous and prejudicial to the interest of the Revenue merely because the CIT prefers an alternative view.
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Nature of Section 28 Interest: Interest awarded under Section 28 of the Land Acquisition Act, 1894 represents an enhancement of or accretion to the principal compensation value, rather than interest under Section 2(28A).
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Exemption Applicability: As the receipt partakes the character of capital compensation for compulsory acquisition of agricultural land, it attracts the benefit of exemption under Section 10(37) and falls outside the scope of taxable income under Section 56.
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Section 263 Order Quashed: The revision order passed by the CIT under Section 263 was held unsustainable and set aside. (In favour of assessee)
Key Takeaways
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Character of Section 28 Interest: Interest paid under Section 28 of the Land Acquisition Act is part of the compensation itself (capital receipt/gain), enabling exemption under Section 10(37) for agricultural land, unlike interest on delayed compensation paid under Section 34 which is revenue in nature.
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Limits of Section 263 Revision: When an AO conducts an inquiry by issuing a query and accepting a plausible legal view backed by judicial authority, Section 263 cannot be invoked to substitute the AO’s view with that of the CIT.
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Absence of Discussion Does Not Equal Lack of Inquiry: The non-recording of explicit reasoning in an assessment order does not render it erroneous if the underlying issue was duly queried, documented, and verified during assessment.
IN THE ITAT JAIPUR BENCH ‘THIRD MEMBER’
Naresh Kumar
v.
Principal Commissioner of Income-tax
Rajpal Yadav, VICE PRESIDENT
IT Appeal No. 209 (JPR) of 2024
[Assessment year 2019-20]
[Assessment year 2019-20]
MAY 5, 2026
Ms. Priyanka Garg, CA for the Appellant. Mrs. Alka Gautam, CIT for the Respondent.
ORDER
1. The present appeal is directed at the instance of the assessee against the order of 1d. Commissioner of Income Tax [in short ‘the CIT’] dated 07.02.2024 passed u/s 263 of the Income Tax Act, 1961 in assessment year 2019-20.
2. This appeal was listed before the Division Bench on 20.03.2025. The Division Bench had concluded the hearing and the Sr. Member has allotted this file to 1d. JM for preparing the draft order. The 1d. JM has prepared the draft on 02.04.2025. He drawn the conclusion as under :
“6.1 In view of the above decisions and discussion, with a view to ensuring consistency and preventing judicial inconsistency that may dilute public confidence, I deem it to be a fit case to seek a reference to the Hon’ble President to constitute a Special Bench on the issue involved and discussed above.
“in view of insertion of provisions of section 56(2)(viii) of the Income Tax ACT and enforcement of amendments made as per Finance Act. 2009 w.e.f. 01/04/2010, whether the decision of Hon’ble Apex Court in CIT v Ghanshyam (HUF) comes to the rescue of the assessee to claim that amount of interest received on compensation or enhanced compensation is to be dealt with under “Capital gains” or as per provisions of section 56(2)(viii) said amount of interest received on compensation or enhanced compensation is to be dealt under the head ‘Income from other sources”?
Registry to take steps accordingly in accordance with rules.
Sd/-
(Narinder Kumar)
Judicial Member
3. Since this draft was not in consonance with the procedure and without putting to the 1d. Accountant Member, hence it was again placed before the 1d. JM who thereafter put it before the 1d. AM. The 1d. AM did not concur with the view of the ld. JM and passed a dissenting order. He drafted the question of difference which reads as under :
“Since, the order under challenge is not to decide a question as to whether on the facts and circumstances of the case the provision of section 10(37) or that of the provision of section 56(2)(viii) will apply but is to decide the invocation of the provision of section 263 of the Act. Based on that set of facts available on record, I do not agree with the proposal of learned Brother Member to refer the issue before the Hon’ble President to constitute a Special Bench on the issue as framed vide his order dated 02.04.2025 placed before me. Based on this fact I propose a reference to Hon’ble third member through proper channel to decide the question as to:
1. “Whether based on the facts and circumstance of the case when the Id. AO has verified the issue of chargeability of interest in hands of the assessee and taken a plausible view. Whether that view taken by the Id. AO which is one of the plausible view can be subjected to revision as per provision of section 263 of the Act or not.”
4. The Hon’ble President first kept the file with himself as a Third Member but later on assigned it to me for adjudication.
5. I have heard the parties and a perusal of the record would indicate that there are basically two issues adjudicated by the Division Bench through dissenting orders, namely;
| (a) | Whether ld. CIT could take cognizance u/s 263 of the Income Tax Act on an issue which is debatable one and AO has taken one of the possible view; |
| (b) | Whether compensation received in the shape of interest u/s 28 of the Land Acquisition Act, 1894 deserves to be assessed as income of the assessee u/s 10(37), 56(2)(vii). |
6. First, I take the first question, “whether 1d. CIT has rightly taken action u/s 263 of the Income Tax Act or not ? 6.1 The brief facts of the case are that assessee has filed his return of income on 10.07.2019 declaring an income of Rs.9,81,530/-. The case of the assessee was selected for scrutiny assessment and a notice u/s 143(2) of the Income Tax Act was issued and served upon the assessee. According to the AO, he has issued questionnaire and assessee has filed replies to those questionnaires. Thereafter, AO, without making any discussion, accepted the returned income. The 1d. CIT was of the view that Assessing Officer has accepted the return without examining the issue and therefore, his order is erroneous which has caused prejudice to the interests of the Revenue. The 1d. CIT was of the view that assessee had received an amount of Rs.1,48,69,136/- which falls in the nature of interest as contemplated in Section 145B(1) read with Section 56(2)(viii) and Section 57(iv) of the Income Tax Act. The 1d. CIT thereafter made an elaborate discussion by taking cognizance of the above provisions as well as Section 28 of the Land Acquisition Act, 1894. He has reproduced the submissions made by the assessee. The relevant findings of the 1d. CIT read as under :
5. The assessee in his reply has stated that interest on enhanced compensation received under section 28 of the Land Acquisition Act, 1894, is not taxable as per the Income Tax Act, 1961. The assessee has also relied on Board’s Circular No.36/2016 dated 25/10/2016 on the subject relating to taxability of compensation received by the land owner for land acquired under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Re-settlement Act, 2013. The assessee has also relied upon various judgments of the Hon’ble Supreme Court and High Courts. The reply of the assessee has been considered and perused carefully but the same was not found tenable.
6. The provisions of section 145B(1) of the Act states that notwithstanding anything to the contrary in section 145 of the Act, the interest received by an assessee on any compensation or on enhanced compensation of land shall be deemed to be the income of the previous year in which it is received. As per the provisions of section 56(2)(viii) of the Act, income by way of interest received on compensation shall be chargeable to income tax under the head Income from Other Sources’. Section 56(2)(viii) of the Act was inserted by the Finance Act, 2009 w.e.f. 01/04/2010. Further section 57(iv) of the Act provides that in case of income of the nature referred to in section 56(2)(vii), a deduction of a sum equal to fifty percent of such income shall be allowed. As per the provisions of above section, interest income i.e. 50% of total Rs. 1,48,69,136/- is liable to be taxed. Thus there is an error in the assessment order under reference.
7. As discussed above, the Assessing Officer failed to apply his mind on the material available on record and failed to invoke the applicable provisions of law. This in turn has resulted in passing of an erroneous order by the AO in the case due to non-application of mind to relevant material, an incorrect assumption of facts and an incorrect application of mind to the law which is prejudicial to the interest of the revenue and hence liable for revision under section 263 of the Act. The Hon’ble Supreme Court in the case of Malabar Industrial Limited v. CIT 243 ITR it has held as under-
” ………………….. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.”
8. Considering all the facts and circumstances of the case and for the reasons discussed ai the assessment order dated 08/09/2021 for A.Y. 2019-20 passed by the AO is held to be erroneous in so far as it is prejudicial to the interest of the revenue for the purpose of section 263 of the Act. The said order has been passed by the AO in a routine and casual manner without applying the applicable sections of the Act. The AO has not verified under the details which were required to be verified under scope of scrutiny. The order of the AO is, therefore, liable to revision under the explanation (2) clause (b) and clause (a) of section 263 of the Act. The assessment order is set aside to be made afresh in the light of the observation made in this order. The AO is required to make necessary verification in respect of the observations made in this order after allowing reasonable opportunity to the assessee.
7. With the assistance of 1d. Representative, I have gone through the record carefully. Before I embark upon an enquiry on the facts and issues agitated before me to find out whether the action u/s 263 of the Act, deserves to be taken against the assessee or not, it is pertinent to take note of this Section. It reads as under:-
“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
[Explanation. – For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
| (a) | an order passed on or before or after the 1 st day of June, 1988 by the Assessing Officer shall include- |
| (i) | an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income Tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; |
| (ii) | an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; |
| (b) | “record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; |
| (c) | where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. |
| (2) | No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. |
| (3) | Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. |
Explanation. – In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
8. A bare perusal of the sub section-1 would reveal that powers of revision granted by Section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show-cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order.
8.1 A perusal of sub-clause (c) of the above would contemplate that if any order, which is subject matter for revision under section 263 is challenged in appeal, then, on the items which are subject matter of appeal, no power under section 263 could be exercised by the ld. Commissioner. We may elaborate further, for example— an assessment order was passed, it contains five issues, which were challenged before the 1d. CIT(A), but 1d. Assessing Officer failed to look into few issues, which may arise from the record, then inspite of the assessment order being challenged before the 1d. CIT(A), the 1d. Commissioner would have jurisdiction on such items, which are not subject matter of appeal in that assessment order.
8.2 At this stage, before considering the multi-fold contentions of the 1d. Representatives, I deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173/101 TTJ 1095 (Mum-Trib), analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT 243 ITR 83 (SC) and has propounded the following broader principle to judge the action of CIT taken under section 263.
| (i) | The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. |
| (ii) | Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted. |
| (iii) | An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. |
| (iv) | If the order is passed without application of mind, such order will fall under the category of erroneous order. |
| (v) | Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law. |
| (vi) | If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under S 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. |
| (vii) | The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. |
| (viii) | The CIT, before exercising his jurisdiction under S. 263 must have material on record to arrive at a satisfaction. |
| (ix) | If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard. |
9. In the light of the above, let us examine the facts of the present case. A perusal of the record would indicate that copy of the notice u/s 143(2) dated 31.03.2021 is placed at page 18. Similarly, copy of the notice dated 11.06.2021 issued u/s 142(1) has been placed on page 19. A perusal of this questionnaire would reveal that at Sr.No.3 of the annexures exhibiting the questions asked by the AO would reveal as under :
“In your ITR, you have claimed an amount of Rs. 1,48,69,130/- exempt income being interest received on enhanced compensation on land acquisition and in this regard, kindly furnish copies of all relevant orders and supporting evidence for receiving the amount so claimed.”
9.1 Apart from this one questionnaire, 1d. AO made 9 more queries. The assessee has replied and submitted that since it has received enhanced compensation u/s 28 of the Land Acquisition Act, 1894, it falls within the ambit of compensation, hence it is not taxable. The assessee has filed copies of Award passed by the Land Acquisition Collector under Section 9 of the Land Acquisition Act 1894. He also placed copy of the letter dated 11.06.2021 exhibiting the fact that this amount was paid @ 9% and 15% u/s 28 of the Land Acquisition Act. The AO was of the view that as per the judgement of Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) 315 ITR 1 (SC), the alleged interest u/s 28 is akin to compensation, therefore, not taxable. The AO accepted the claim of the assessee, though he has not made any discussion. It is pertinent to observe that assessee has no control over the AO as to in which manner, he would draft the assessment order. But it is discernable from the record that AO has raised a specific query on the receipt of alleged compensation u/s 28 of the Land Acquisition Act. The assessee has replied. Therefore, it is to be construed that AO must have gone through the questionnaire as well as reply of the assessee and after satisfying himself, did not make addition.
9.2 On the other hand, 1d. CIT was of the view that after the amendment by Finance Act, 2009 w.e.f. 01.04.2010, 50% of the alleged interest deserves to be taxed u/s 57(iv) read with Section 56(2)(vii). Thus, he treated the assessment order as erroneous.
10. The 1d. counsel for the assessee relied upon her submissions made before the Division Bench as well as before the AO whereas 1d. CIT DR, on the other hand relied upon the order of the ld. CIT and put emphasis on the ground that after the amendment by Finance Act, 2009, any interest received by the assessee would be taxable. This amendment was brought only to consider these aspects which has been resulted due to the decision of the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (Supra).
11. I have duly considered the rival contentions and gone through the record carefully. I would like to take note of the findings of the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (Supra) from paragraph No. 22 to 25 and 29 to 36 which read as under :
“22. Section 23(1A) was introduced in the 1894 Act to mitigate the hardship caused to the owner of the land who is deprived of its enjoyment by taking possession from him and using it for public purpose, because of considerable delay in making the award and offering payment thereof [See : Assistant Commissioner, Gadag Sub-Division, Gadagv. Mathapathi Basavannewwa and others – AIR 1995 SC 2492]. To obviate such hardship, Section 23(1A) was introduced and the Legislature envisaged that the owner is entitled to 12% per annum additional amount on the market value for a period commencing on or from the date of publication of the notification under Section 4(1) of the 1894 Act upto the date of the award of the Collector or the date of taking possession of the land, whichever is earlier. The additional amount payable under Section 23(1A) of the 1894 Act is neither interest nor solatium. It is an additional compensation designed to compensate the owner of the land, for the rise in price during the pendency of the land acquisition proceedings. It is a measure to offset the effect of inflation and the continuous rise in the value of properties. [See: State of Tamil Nadu and others etc. v. L. Krishnan and others etc. – AIR 1996 SC 497]. Therefore, the amount payable under Section 23(1A) of the 1894 Act is an additional compensation in respect to the acquisition and has to be reckoned as part of the market value of the land. Sub-section (1A) of Section 23 was introduced by Land Acquisition (Amendment) Act, 1984. It provides that in every case the Court shall award an amount as additional compensation at the rate of 12% per annum on the market value of the land for the period commencing on and from the date of publication of the notification under Section 4(1) to the date of the award of the Collector or to the date of taking possession of the land, whichever is earlier. In other words sub- section (1A) of Section 23 provides for additional compensation. The said sub-section takes care of increase in the value at the rate of 12% per annum.
23. In addition to the market value of the land, as above provided, the Court shall in every case award a sum of 30% on such market value, in consideration of the compulsory nature of acquisition. This is under Section 23(2) of the 1894 Act. In short, Section 23(2) talks about solatium. Award of solatium is mandatory. Similarly, payment of additional amount under Section 23(1A) is mandatory. The award of interest under Section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount. In such cases interest on that excess alone is payable. Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the Court includes the additional compensation awarded under Section 23(1A) and the solatium under Section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount, which is determined by the Court after a reference under Section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award for compensation [See: Ram Chand & others etc v. Union of India & Ors. – 1994(1) SCC 44]. In the case of Shree Vijay Cotton & Oil Mills Ltd. v. State of Gujarat – (1991) 1 SCC 262, this Court has held that interest is different from compensation.
24. To sum up, interest is different from compensation. However, interest paid on the excess amount under Section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under Section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under Section 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34.
25. It is clear from reading of Sections 23(1A), 23(2) as also Section 28 of the 1894 Act that additional benefits are available on the market value of the acquired lands under Section 23(1A) and 23(2) whereas Section 28 is available in respect of the entire compensation. It was held by the Constitution Bench of the Supreme Court in Sunder v. Union of India – (2001) 7 SCC 211, that “indeed the language of Section 28 does not even remotely refer to market value alone and in terms it talks of compensation or the sum equivalent thereto. Thus, interest awardable under Section 28, would include within its ambit both the market value and the statutory solatium. It would be thus evident that even the provisions of Section 28 authorise the grant of interest on solatium as well.” Thus solatium means an integral part of compensation, interest would be payable on it. Section 34 postulates award of interest at 9% per annum from the date of taking possession only until it is paid or deposited. It is a mandatory provision. Basically Section 34 provides for payment of interest for delayed payment. Taxability of additional compensation and interest under Section 45(5) of the 1961 Act in the context of the provisions of L.A. Act, 1894″
X X X
“29. From Section 45 it is clear that capital gains are not income accruing from day to day. It is deemed income which arises at a fixed point of time, viz, date of transfer. Section 45(5), newly inserted by the Finance Act, 1987, w.e.f. 1.4.88 and subsequently amended, retrospectively w.e.f. 1.4.88, by the Finance Act, 1991, enacts overriding provision and takes care of a situation –
where the capital gains arise from the transfer of a capital asset, being a transfer by way of compulsory acquisition and the compensation for such transfer stands enhanced in stages by any court, tribunal or authority. In such a situation, the capital gains so arising is, for and from assessment year 1988-89, has to be dealt with as under : –
| (i) | the capital gains computed with respect to the compensation awarded in the first instance would be chargeable as Income under the head “Capital Gains” of the previous year in which such compensation or part thereof was first received; and |
| (ii) | amount by which compensation or consideration is enhanced or further enhanced by the court, tribunal or authority is to be Deemed Income chargeable under the head “Capital Gains” of the previous year in which such amount is received by the assessee. |
30. For the said purpose, the cost of acquisition is to be taken as Nil [See: Explanation (i)]. Also, where the enhanced compensation is received by any person, other than the transferor by reason of the death of the transferor or for any reason, the amount of such additional compensation or additional consideration is to be deemed to be the income of the recipient of the previous year in which such amount is received by him.
31. Two aspects need to be highlighted. Firstly, Section 45(5) of the 1961 Act deals with transfer(s) by way of compulsory acquisition and not by way of transfers by way of sales etc. covered by Section 45(1) of the 1961 Act. Secondly, Section 45(5) of the 1961 Act talks about enhanced compensation or consideration which in terms of L.A. Act 1894 results in payment of additional compensation.
32. The issue to be decided before us – what is the meaning of the words “enhanced compensation/consideration” in Section 45(5)(b) of the 1961 Act? Will it cover “interest”? These questions also bring in the concept of the year of taxability.
33. It is to answer the above questions that we have analysed the provisions of Sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act. As discussed hereinabove, Section 23(1A) provides for additional amount. It takes care of increase in the value at the rate of 12% per annum. Similarly, under Section 23(2) of the 1894 Act there is a provision for solatium which also represents part of enhanced compensation. Similarly, Section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under Section 23(1A) and solatium under Section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under Section 18 of the 1894 Act. It depends upon the claim, unlike interest under Section 34 which depends on undue delay in making the award. It is true that “interest” is not compensation. It is equally true that Section 45(5) of the 1961 Act refers to compensation. But as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards “interest” both as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28 unlike interest under Section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under Section 34 of the 1894 Act. So also additional amount under Section 23(1A) and solatium under Section 23(2) of the 1961 Act forms part of enhanced compensation under Section 45(5)(b) of the 1961 Act. In fact, what we have stated hereinabove is reinforced by the newly inserted clause (c) in Section 45(5) by the Finance Act, 2003 w.e.f.1.4.2004. This newly added clause envisages a situation where in the assessment for any year,-
– -the capital gain arising from the transfer of a capital asset is computed by taking the-
– -compensation or consideration referred to in clause (a) of section 45(5) or, as the case may be,
– -enhanced compensation or consideration referred to in clause (b) of section 45(5), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority.
34. In such a situation, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration. For giving effect to such recomputation, the provisions of the newly inserted (w.e.f. 1.4.2004) section 155(16) by the Finance Act, 2003 (32 of 2003), have been enacted.
35. It was urged on behalf of the assessee that Section 45(5)(b) of the 1961 Act deals only with re-working, its object is not to convert the amount of enhanced compensation into deemed income on receipt. We find no merit in this argument. The scheme of Section 45(5) of the 1961 Act was inserted w.e.f. 1.4.88 as an overriding provision. As stated above, compensation under the L.A. Act, 1894, arises and is payable in multiple stages which does not happen in cases of transfers by sale etc. Hence, the legislature had to step in and say that as and when the assessee-claimant is in receipt of enhanced compensation it shall be treated as “deemed income” and taxed on receipt basis. Our above understanding is supported by insertion of clause (c) in Section 45(5) w.e.f. 1.4.04 and Section 155(16) which refers to a situation of a subsequent reduction by the Court, Tribunal or other authority and recomputation/amendment of the assessment order. Section 45(5) read as a whole (including clause “c”) not only deals with re- working as urged on behalf of the assessee but also with the change in the full value of the consideration (computation) and since the enhanced compensation/consideration (including interest under Section 28 of the 1894 Act) becomes payable/paid under 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under Section 155(16) of the 1961 Act, later on. Hence, the year in which enhanced compensation is received is the year of taxability. Consequently, even in cases where pending appeal, the Court/Tribunal/Authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under Section 45(5) of the 1961 Act. This is the scheme of Section 45(5) and Section 155(16) of the 1961 Act. We may clarify that even before the insertion of Section 45(5)(c) and Section 155(16) w.e.f. 1.4.04, the receipt of enhanced compensation under Section 45(5)(b) was taxable in the year of receipt which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt. It is important to note that compensation, including enhanced compensation/consideration under the 1894 Act, is based on the full value of property as on date of notification under Section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under Section 23(1A), or Section 23(2) or under Section 28 of the 1894 Act it is on the basis that award of Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification.
36. Having settled the controversy going on for last two decades, we are of the view that in this batch of cases which relate back to assessment years 1991-92 and 1992-93, possibly the proceedings under the L.A. Act 1894 would have ended. In number of cases we find that proceedings under the 1894 Act have been concluded and taxes have been paid. Therefore, by this judgment we have settled the law but we direct that since matters are decade old and since we are not aware of what has happened in Land Acquisition Act proceedings in pending appeals, the recomputation on the basis of our judgment herein, particularly in the context of type of interest under Section 28 vis- `-vis interest under Section 34, additional compensation under Section 23(1A) and solatium under Section 23(2) of the 1894 Act, would be extremely difficult after all these years, will not be done.”
11.1 There is no dispute with regard to the proposition that land of the assessee was acquired under the Land Acquisition Act of 1894. Hon’ble Supreme Court has specifically laid down that compensation awarded to an assessee u/s 28 of the Land Acquisition Act, 1894 would be akin to compensation granted originally by the Land Acquisition Collector. In other words, it is a different matter that nomenclature is used as interest but actually it is only compensation which is a capital receipt. Thus, 1d. AO has taken one of the possible views in the law and 1d. CIT has committed an error in taking action u/s 263 of the Income Tax Act. I concur with the view of the 1d. AM on this fold of difference. Accordingly, order of the 1d. CIT is not sustainable on this aspect.
12. The next question is whether this alleged interest deserves to be assessed in the hands of the assessee or not. This aspect has been considered by the Hon’ble Kerala High Court wherein an identical issue was involved. The 1d. counsel for the assessee has placed on record copy of the order of the Hon’ble Kerala High Court dated 11.04.2025 passed in Anvar Ali Poolakkodan v. ITO (Ker)/ITA No. 32 of 2023. Since it is identical on the issue, therefore, I deem it appropriate to take cognizance of this order elaborately. The substantial question of law considered by the Hon’ble High Court and the reasoning given thereon reads as under :
“5. In the appeals before us, the appellants raise the following substantial questions of law:
| i. | In the facts and circumstances of the case, ought not the Tribunal have allowed the claim of exemption on entire additional compensation received as the original compensation received was found to be entitled for exemption under Section 10(37) of the Act. |
| ii. | In the facts and circumstances of the case, ought not the Tribunal have allowed the entire additional compensation received by the appellant including 9% interest received and 15% interest received and one received under Section 28 of the Land Acquisition Act, more so in view of certificate issued by the learned Tahsildar. iii. In the facts and circumstances of the case, ought not the Tribunal have allowed the application filed under Section 154 of the Act more so, when the several High Court have taken a view in consonance with the Application filed by the Appellant. |
6. We have heard the learned senior counsel Sri. Anil D. Nair, assisted by Adv. Sri. Aaditya Nair for the appellants in these appeals and Sri. P.G. Jayashankar, the learned Standing Counsel for the Income Tax Department.
7. On a consideration of the rival submissions and after perusing the precedents relied upon by the learned counsel, we feel that a discussion of the issue must be preceded by an examination of the relevant statutory provisions under the I.T. Act.
“Section 2(28 A):
Definitions.
2. In this Act, unless the context otherwise requires, – —
(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;
Section 10(37):
Incomes not included in total income. – —
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-
| (37) | in the case of an assessee, being an individual or a Hindu undivided family, any income chargeable under the head “Capital gains” arising from the transfer of agricultural land, where – — |
| (i) | such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2; |
| (ii) | such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his; |
| (iii) | such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India; |
| (iv) | such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004. |
Explanation.–For the purposes of this clause, the expression “compensation or consideration” includes the compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority;
Section 45(5):
45. Capital gains.
| (5) | Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely: – — |
| (a) | the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as 2[income under the head “Capital gains” of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received]; and |
| (b) | the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which such amount is received by the assessee: |
[Provided that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which the final order of such court, Tribunal or other authority is made;]
| (c) | where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration. |
Explanation.– For the purposes of this sub-section, – —
| (i) | in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil; |
| (ii) | the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988; |
| (iii) | where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head “Capital gains”, of such other person. |
Section 56(1), (2) (viii):
Income from other sources. – —
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely: – —
| (viii) | income by way of interest received on compensation or on enhanced compensation referred to in sub-section (1) of section 145B. |
Section 57 (iv):
Deductions
57. The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:-
| (iv) | in the case of income of the nature referred to in clause |
| (viii) | of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section. |
| Section 145: |
Method of accounting
145. (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
| (2) | The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. |
| (3) | Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub- section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. |
| Section 145B: |
Taxability of certain income.
145B. (1) Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received.
| (2) | Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved. |
| (3) | The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.” |
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, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala – [(1964) 53 ITR 151]; Puneet Singh v. Commissioner of Income-Tax – [(2019) 415 ITR 215 (P&H)]; Mahender Pal Narang v. Central Board of Direct Taxes and Others – [(2020) 423 ITR 13 (P&H)]; Mahender Pal Narang v. Central Board of Direct Taxes and Others – [(2024) 462 ITR 498 (SC)]; T.N.K. Govindaraju Chetty v. Commissioner of Income-Tax, Madras – [(1967) 66 ITR 465]; Bikram Singh and Others v. Land Acquisition Collector and Others – [(1997) 10 SCC 243]; Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF) – [(2009) 8 SCC 412]; Commissioner of Income-Tax, Faridabad v. Chet Ram (HUF)] – [(2018) 15 SCC 270]; Commissioner of Income Tax, Rajkotv. Govindbhai Mamaiya – [(2014) 16 SCC 449]; Principal Commissioner of Income Tax 10 v. Inderjit Singh Sodhi (HUF) – [MANU/DE/2633/2024]; Manjet Singh (HUF) v. Union of India and Ors. – [MANU/PH/3409/2014] & Manjet Singh (HUF) Karta Manjeet Singh v. Union of India and Ors. -[[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 suffered 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) & Anr. v. State of Bihar & Ors. – [(2024) 10 SCC 605] the court pointed out that although the right to property ceased to be a fundamental right by the Constitution (44th Amendment) Act, 1978, it 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 & Anr. v. Bimal Kumar Shah & Ors. – [(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 in 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.
The upshot of the above discussions is that these appeals are allowed by answering the questions of law raised therein in favour of the assessee and against the revenue.
13. I put it specifically to the ld. CIT DR, that is there any contrary decision available from the jurisdictional High Court? but she replied in negative.
14. Considering the above situation, I deem it appropriate to take the decision in favour of the assessee on the basis of single judgement favourable to the assessee brought to my notice by the ld. counsel for the assessee. Therefore, on the second ground also, I am of the view that alleged compensation of Rs. 1,48,69, 136/ – received by the assessee is not taxable in the hands of the assessee.
15. As far as the question framed by the 1d. J.M. is concerned that this issue be referred to the Hon’ble President for constitution of a Special Bench, I am of the view that since judgement of Kerala High Court is available on the field which is squarely applicable on the facts of the present case, there is no need to make the reference for Special Bench.
16. The Registry is directed to place this order before the Division Bench for giving effect to the order of the Third Member.