Compensation for land compulsorily acquired under RFCTLARR Act is exempt; interest on compensation remains taxable.

By | October 7, 2026
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Compensation for land compulsorily acquired under RFCTLARR Act is exempt; interest on compensation remains taxable.

Issue

  1. Whether compensation received on compulsory acquisition of land for national highway widening is exempt from income tax under Section 96 of the RFCTLARR Act, 2013, read with CBDT Circular No. 36/2016.
  2. Whether interest received on delayed payment of enhanced compensation under compulsory acquisition is taxable under “Income from Other Sources” under Section 56(2)(viii).

Facts

  • Land Acquisition: The assessee’s land located in Village Gill Patti, Bathinda, was compulsorily acquired for four-laning/widening of National Highway No. 15.
  • Timeline: The acquisition notification was issued in February 2014, the award was pronounced in November 2014, and compensation disbursement took place in May 2015 (AY 2016-17).
  • Exemption Claim: The assessee filed a revised return claiming total compensation as exempt under Section 96 of the RFCTLARR Act, 2013.
  • AO Disallowance: The AO rejected the capital gains exemption, holding that the National Highways Act, 1956 was covered under the Fourth Schedule to the RFCTLARR Act, and taxed the receipt as Long-Term Capital Gains under Section 45(5)(a).
  • Taxation of Interest: The assessee received compensation of approximately ₹28.81 lakhs along with interest of ₹3.57 lakhs for delayed payment. The AO taxed 50% of the interest (about ₹1.78 lakhs) under Section 56(2)(viii) after allowing a 50% standard deduction under Section 57(iv).

Decision

  • Capital Gains Exempt: Following the decision in Pr. CIT v. Durgapur Projects Ltd. and CBDT Circular No. 36/2016, compensation received for compulsory acquisition of both agricultural and non-agricultural land under the RFCTLARR Act, 2013 is exempt from tax under Section 96. Addition made under LTCG was deleted (In favour of assessee).
  • Interest Taxable: Following the jurisdictional High Court ruling in Mahender Pal Narang v. CBDT, interest received on delayed payment of compensation is governed by Sections 56(2)(viii) and 57(iv) and remains taxable under “Income from Other Sources”. Addition confirmed (In favour of Revenue).

Key Takeaways

  1. Universal Exemption for Compulsory Acquisition Compensation: Section 96 of the RFCTLARR Act, 2013 applies across both agricultural and non-agricultural land, exempting principal compensation received from income tax regardless of whether the acquisition falls under scheduled acts like the National Highways Act, 1956.
  2. Interest Distinguished from Principal Compensation: Interest paid on delayed compensation is treated as revenue income under Section 56(2)(viii) rather than an integral part of the tax-exempt capital compensation.
  3. Statutory Deduction on Interest: Taxable interest on compensation receives a flat standard deduction of 50% under Section 57(iv), with the remaining 50% subject to tax under “Income from Other Sources.”
IN THE ITAT AMRITSAR BENCH
Inderpreet Singh
v.
Income-tax Officer
Udayan Das Gupta, Judicial Member
and M. Balaganesh, Accountant Member
IT Appeal No. 804 (Asr) OF 2025
[Assessment year 2016-17]
SEPTEMBER  15, 2026
Rohit Kapoor, Adv. and V.S. Aggarwal, ITP for the Appellant. Smt. Kulwinder Kaur, Sr. DR for the Respondent.
ORDER
Udayan Dasgupta, Judicial Member. – This appeal is filed by the assessee against the order of ld. Addl/JCIT (A) Panaji, passed u/s 250 of the IT Act, 1961, dated 29.08.2025, which has emanated from the order of the AO, passed u/s 143(3) of the Act, dated 12.12.2018.
2. The grounds of appeal taken in Form No. 36 are as follows:
“1) That the CIT(A) has erred, both in facts and in law, in sustaining the addition of 128,78,577, comprisin 227,00,092 as Long Term capital Gains by incorrectly holding that Section 96 of the RICTLAR Act, 2011 inapplicable to compensation received for land acquired under the National Highways Act, 1956, and Rs. 1,78,485 u/s 56(2)(viii) by erroneously treating 50% of the interest of 43,56,970 as taxable interest income
2) That the CIT(A) erred in sustaining the addition of Rs.27,00,092 on account of Long Term Capital Gainsarising out of land acquisition, ignoring the fact that the award was announced on 07.11.2014 (prior to 31.12.2014), while the compensation was received in May 2015 (post 31.12.2014), a situation squarely covered by the decisions of the Hon’ble ITAT Amritsar in Sh. Ranjeet Singh v. ITO, Word 1(1), Bothinda and M/s Ranjeet Poultry Farm v. DCIT, Circle- 1, Bathinda.
3) That the CIT(A) erred in sustaining the addition of 27,00,092 as Long-Term Capital Gains, disregarding CBDT Circular No. 36/2016, which expressly clarifies that compensation exempt under Section 96 of the RECTLARR Act is not taxable under the Income-tax Act, 1961, and further supported by the judgment of the ITAT Chandigarh Bench, Chandigarh.
4) That the CIT(A) erred in law and on facts in confirming the addition of Rs.1,78,488 under Section 56(2)(viii) of the Incometax Act, 1961 (ie. 50% of interest of 23,56,970) by wrongly treating it as interest income, whereas it formed part of compensation received under the Right to fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
5) That the appellant craves leave to add or alter any of the grounds of appeal on or before the date of hearing.”
3. Brief facts arising from records are that the appellant, Sh. Inderpreet Singh, is a resident individual had filed his original return of income for the A.Y. 16-17 on 30.07.2016 declaring a total income of Rs. 37,90,890/-, which included longterm capital gains of Rs. 27,00,092/- computed on the compensation received on the compulsory acquisition of his land.
4. Thereafter, the assessee REVISED his return on 30th March, 2018, declaring a total income of Rs. 9,12,300/-, upon becoming aware that compensation received on compulsory acquisition of land stood exempt in view of Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (hereinafter, the “RFCTLARR Act”) read with CBDT Circular No. 36/2016 dated 25.10.2016.
5. That the land in question, situated in Village Gill Patti, District Bathinda, was compulsorily acquired by the Government for the widening/four- lane, maintenance, management and operation of National Highway No. 15. The acquisition notification was issued on 04.02.2014 and the Award was pronounced by the Land Acquisition Collector, Bathinda, on 07.11.2014 , and the disbursement of compensation to the affected landowners commenced in May 2015.
5.1 It was submitted before the AO, that the compensation so received on such compulsory acquisition was wholly exempt under Section 96 of the RFCTLARR Act, the benefit whereof stood extended to acquisitions under the National Highways Act, 1956 by virtue of the notification dated 31.12.2014 (effective 01.01.2015), and was further clarified to be exempt from income tax by CBDT Circular No. 36/2016 dated 25.10.2016.
6. The AO however, vide order under Section 143(3) dated 12.12.2018, rejected the claim of exemption by holding that the National Highways Act, 1956 is one of the enactments specified in the Fourth Schedule to the RFCTLARR Act, that by virtue of Section 105(1), the provisions of the RFCTLARR Act do not apply to enactments relating to land acquisition specified in Fourth Schedule, and that the notification dated 31.12.2014 issued by Ministry of Law & Justice with effet from 01-01-2015 had extended only the benefits contained in the First, Second and Third Schedules relating to determination of compensation, rehabilitation and resettlement, and not the exemption under Section 96, in consequence whereof the appellant was held ineligible for exemption and Circular No. 36/2016 dated 2510-2016 was held inapplicable to his case.
7. The assessment was completed on a total income of Rs. 37.90 lakhs (including an addition of Rs. 27 lakhs as LTCG u/s 45(5)(a) of the Act plus an amount of Rs. 1.78 lakhs under head other source, being the chargeable interest portion received after deduction u/s 57(iv)
8. The matter carried in first appeal has been represented by written submissions filed by the assessee but the said additions has been sustained with the observation that the assessee has failed to produce land acquisition awards, revenue records, and proof of classification of lands.
8.1 In course of hearing before the Tribunal , the Ld AR of the assessee has filed paper book containing copies of Award of acquisition of land issued by the Competent Authority , Land Acquisition cum Sub Divisional Magistrate , Bhatinda , copy of financials , bank statement, Copy of 26AS and other relevant particulars , which are all filed before the AO and also in first appeal .
9. The Ld AR of the assessee also filed a tabular chart explaining the date wise sequence details of the Enactment of the RFCTLAAR Act , which is reproduced below for ready reference:
Particulars Date
Enactment of RFCTLAAR Act 01.01.2014
Notification no.320(E) dated 04-02-2014 under section 3D(1) issued by Ministry of Road Transport and Highways, Government of India, regarding the acquisition of land for the widening/four-laning of the Bathinda Section on National Highway No. 15 in Bathinda District, Punjab Section 105 of the RFCTLARR Act, 2013, read with the Fourth Schedule thereto, excludes land acquired under the National Highways Act, 1956, including acquisitions undertaken for the NHAI, from the application of the provisions of the RFCTLARR Act. 04.02.2014
Notification dated 31-12-2014 issued by Ministry of Law and Justice emphasising that ”
“105(3)The provisions of this Act relating to the determination of compensation in accordance with the First Schedule,rehabilitation and resettlement in accordance with the Second Schedule and infrastructure amenities in accordance with the Third Schedule shall apply to the enactments relating to land acquisition specified in the Fourth Schedule with effect from 1st January 2015.”		 01.01.2015
The provisions of Ordinance (No.9 of 2014) dated31.12.2014 were continued further vide Ordinance (No.4 of 2015) dated 03.04.2015 and Second Ordinance dated 30.05.2015 (No.5of 2015) and the same were valid up to 31.08.2015. 03-04-2015 and 30-05-2015
The Department of Land Resources, Ministry of Rural Development, Government of India issued the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Removal of Difficulties) Order, 2015 vide Notification dated 28.08.2015. The said Order is reproduced below:-

“ (1) This Order may be called the Right to Fair Compensation and Transparency in Land Acquisition,Rehabilitation and Resettlement (Removal of Difficulties)Order, 2015.
(2) It shall come into force with effect from the 1st day of September, 2015.
(3) The provisions of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, relating to the determination of compensation in accordance with the First Schedule,rehabilitation and resettlement in accordance with the Second Schedule and infrastructure amenities in accordance with the Third Schedule shall apply to all cases of land acquisition under the enactments specified in the Fourth Schedule to the said Act.

” From the above, it is clear that the applicability of the Acquisition Act of 2013 has been given effect in respect of the enactment specified in Fourth Schedule including the NH Act of1956 with effect from 01.01.2015.

 28-08-2015
Circular No.36/2016 (Relevant Para 3)

3. As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax under the RFCTLARR Act, the exemption provided under section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961.
25-10-2016
Notification dated 28-12-2017 in which it has been stated that RFCTLARR Act, 2013 is applicable to NH Act,1956 with effect from 01-01-2015 28-12-2017

 

10. Thereafter, the Ld AR submitted that the detailed submissions has been made before the appellate authority were duly placed before the Ld. CIT(A) and are reproduced at Page 53 to 81 of the Paper Book, corresponding to Internal Pages 6 to 34 of the impugned appellate order and the Ld CIT(A) has neither disputed nor controverted the statutory and legal contentions advanced by the Appellant. The claim has been rejected solely on the ground that the land-acquisition award, revenue records and evidence regarding the classification of the land were allegedly not furnished.
11. On this aspect he drew out notice to Page 83 of the Paper Book, corresponding to Internal Page 36 of the impugned order and submitted that the aforesaid findings of the Ld. CIT(A) are factually incorrect and contrary to the material available on record.
12. The Ld AR further submitted that the compensation has been received in May 2015 and the present case is squarely covered by the judgment of the Coordinate Bench in the case of Ranjit Singh v. ITO [IT Appeal Nos. 91 & 135 (Asr) of 2023, dated 30-08-2023]/[2023(8) TMI 1617 – ITAT Amritsar where in an identical matter, the Hon’ble ITAT held that because the award of compensation had not been paid as of December 31, 2014, and was instead paid during Financial Year 2015-16 (Assessment Year 2016-17), the assessee was entitled to relief.
Particulars Date
Purchase of Land by assessee 22.09.1989
Award Announced in the Court of Damanjit Singh Maan, P.C.S., Sub Divisional Magistrate- Cum 07.11.2014
Payment Received by the appellant against the compensation May 2015
Compensation received 28,80,761.00

 

13. Before concluding the Ld AR further relied upon the following decisions in support:
• Gopa Ram v. UOI (supra): The Hon ‘ble Rajasthan High Court, after considering the decision of the Chandigarh Bench of the ITAT in Satish Kumar (supra), held that the provisions of the RFCTLARR Act, 2013, are applicable to acquisitions made under the National Highways Act, 1956.
• UOI v. Tarsem Singh [Civil Appeal No. 7064 OF 2019, dated 19-9-2019]: The Hon’ble Supreme Court observed that the provisions of the RFCTLARR Act, 2013, are applicable to land acquired under the National Highways Act, and that compensation must be calculated and paid in accordance with the provisions of the RFCTLARR Act, 2013.
• NHAI v. Modan Singh [FAO 756-2022, dated 11.04.2023] : The Hon’ble Jurisdictional Punjab & Haryana High Court held that the RFCTLARR Act, 2013, applies to cases where the award was announced prior to 31.12.2014 but compensation had not yet been paid as of 31.12.2014, even if the said acquisitions were executed under the National Highways Act, 1956.
• Raghavan Nair v. Asstt. CIT  (Kerala) [2018 (1) TMI 863 – Kerala High Court].
• I TO v. Suresh Prasad [IT Appeal No. 210 (PAT) of 2018, dated 4-8-2022]/[2022 (9) TMI 337 – ITAT Patna] .
• 2021 (12) TMI 161 – ITAT CHANDIGARH Satish Kumar v. ITO [IT Appeal Nos. 1182 and 1183 (Chd) of 2019, dated 31-08-2021], Sangrur.
14. The Ld AR further submitted that the Hon’ble Apex Court in the case of Tarsem Singh, the decision of the Hon’ble Jurisdictional Punjab & Haryana High Court in Modan Singh (supra), and the decision of the Coordinate Bench in Ranjeet Singh(supra) have categorically established that if the compensation was received after 31st December 2014, the matter squarely falls under the beneficial exemption provisions of Section 96 of the RFCTLARR Act, 2013 and he prayed for deletion of the additions made under the head Capital gains .
15. Regarding the Ground relating to Interest on compensation the Ld AR of the assessee the submission of the Ld AR is that the addition of ?1,78,488 under Section 56(2)(viii) of the Income-tax Act, 1961 (i.e. 50% of interest of Rs.3,56,970) by wrongly treating it as interest income, is not legally justified because it formed part of compensation received under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
16. He further submitted that the interest received on delayed payment of compensation forms an integral part of the compensation itself and, consequently, retains the character of a capital receipt and in support of the aforesaid proposition, he relied on the decision of the Hon’ble Kerala High Court, Anvar Ali Poolakkodan v. ITO (Kerala)/[2025 (4) TMI 867] wherein it has been held that interest awarded on delayed payment of compensation constitutes part of the compensation and is, therefore, capital in nature. He further relied on, the Hon’ble Supreme Court in UOI v. Hari Singh  (SC)/[2017 (11) TMI 923 – SUPREME COURT] to contend that interest awarded under Section 28 of the Land Acquisition Act continues to partake the character of compensation and, therefore, cannot be brought to tax under the head “Income from Other Sources.
17. The Ld DR relied on the order of the Ld CIT (A) and has brought to our notice that this issue is already decided against the assessee by the Hon’ble Jurisdictional high court in the case of Mahender Pal Narang v. CBDT  222 (Punjab & Haryana)/2020 (3) TMI 1115 -PUNJAB AND HARYANA HIGH COURT and the jurisdictional High Court decision is binding within the State.
18. We have heard the rival submissions and considered the materials on record , and we are of the opinion that this issue is already covered in favour of the assessee by the decision of the coordinate Bench in the case of Surinder Kumar v. ITO  (Amritsar – Trib.) and also in case of Ranjit Singh(supra) ITAT Amritsar where in an identical matter, the Hon’ble ITAT held that because the award of compensation had not been paid as of December 31, 2014, and was instead paid during Financial Year 2015-16 (Assessment Year 2016-17), the assessee was entitled to relief.
19. At this stage we would also like to refer to a decision of the Hon’ble Calcutta High court in the case of Pr. CIT v. Durgapur Projects Ltd.   (Calcutta), [24 February, 2023 ITAT NO. 282 OF 2022 (G.A. NO. 02 OF 2022)] where the Hon’ble court also had the occasion to make an observation on the circular issued by the CBDT dated 25.10.2016 in Circular No. 36/2016 in the backdrop of taxability of the compensation received by the assessee for the lands compulsory acquired under the 2013 Act. The relevant portion is reproduced for ready reference: [Paragraph – 11 of the Hon’ble High Court order]:
Coming back to the taxability of the compensation received by the assessee for the lands compulsory acquired under the 2013 Act, it is relevant to take note of the circular issued by the CBDT dated 25.10.2016 in Circular No. 36/2016. It was pointed out that under the existing provisions of the Income Tax Act an agricultural land which is not situated in specified urban area is not regarded as a capital asset and hence capital gain arising from the transfer (including compulsory acquisition) of such agricultural land is not taxable. It is further stated that Finance (No. 02) Act, 2004 inserted Section 10(37) in the Act from 01.04.2005 to provide specific exemption to capital gains arising to an individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban limited subject to fulfillment of certain conditions. Thus, it was ordered that the compensation received from the compulsory acquisition of an gricultural land is not taxable under the Income Tax Act subject to the fulfillment of certain conditions for specified urban land. It was further stated that the 2013 Acquisition Act came into effect from 01.01.2014 and Section 96 inter alia provides that income tax shall not be levied on any award or agreement made except those made under Section 46 of the said Act. Therefore, it was directed that compensation for compulsory acquisition of land under the 2013 Acquisition Act except those made under Section 46 of the said act is exempted from the levy of income tax. Further it was ordered that as no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income tax under 2013 Acquisition Act, the exemption provided under Section 96 of the 2013 Acquisition Act is wider in scope than the tax exemption provided under the existing provisions of the Income Tax Act, 1961. It was pointed out that this aspect has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land especially those relating to acquisition of non-agricultural land. This matter was examined by the CBDT and it was clarified that compensation received in respect of award or agreement which has been exempted from the levy of income tax under Section 96 of the 2013 Acquisition Act shall also not be taxable under provisions of the Income Tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income Tax Act, 1961. The said Circular No. 36 of 2016 would come to the aid and assistance of the assessee and the compensation received by the assessee on account of the compulsory acquisition of land under the 2013 Acquisition Act is exempt from the tax.
20. Respectfully, following the law laid down by the Hon’ble Courts and the coordinate Bench of the Tribunal on the issue we delete the addition of Rs. 27 lakhs made under the head LTCG and treat the same as exempted .
21. As such the ground Nos 1, 2 and 3 of the assessee are allowed.
22. Regarding the addition of Rs. 1.78 lakhs being the interest portion assessed under the head Other Source , we are bound by the decision of the Hon’ble Jurisdictional High court on the issue in the case of Mohinder Pal Narang 2020 (3) TMI 1115 – PUNJAB AND HARYANA HIGH COURT and as such respectfully following the same we decide the issue against the assessee and in favour of the revenue and this addition is confirmed.
23. As such ground No 4 of the assessee is dismissed and decided in favour of the revenue.
24. In the result the appeal of the assessee is partly allowed.