No Tax on Interest awarded on enhanced compensation of compulsory acquisition of agriculture land : ITAT

ORDER

N.V. Vasudevan, Judicial Member – These are appeals filed by the revenue against two different orders, both dated 16-06-2017 of the CIT(Appeals), Belagavi relating to assessment year 2013-14.

2. The facts and circumstances under which these appeals arise for consideration are identical. These appeals were heard together and we deem it convenient to pass a consolidated order.

3. Despite service of notice, none appeared on behalf of the respondents in these two appeals. We therefore proceed to decide the appeals after hearing the submission of the ld. DR.

4. The facts under which these appeals arise for consideration are as follows. An extent of 5 acres 26 guntas in Sy.No.11/1 at Haveli, Bagalkot was compulsorily acquired by the Special Land Acquisition Officer [hereinafter referred to as “the SLAO”], Bagalkot under the provisions of the Land Acquisition Act, 1894 vide Notification dated 29-07-2000. There were five co-owners of the land so acquired. The assessee in ITA No.1744/B/17 is a legal heir of a deceased co-owner holding 1/5th share over the land acquired by the Govt. The assessee in ITA No.1750/B/17 is a co-owner who held 1/5th share in the land acquired by the Govt. Aggrieved by the award as originally passed awarding compensation for the land acquired by the Govt., the co-owners had filed a reference for enhanced compensation. The SLAO, Bagalkot vide order dated 23-06-2012 awarded enhanced compensation and interest which was paid on 18-05-2012. The details of enhanced compensation and interest on enhanced compensation awarded is as follows:—

5. The question is with regard to taxability of a sum of Rs. 92,87,258 which each of the assesses received as interest on enhanced compensation. Under the provisions of section 10(37) of the Income-Tax Act, 1961 [“the Act”] enhanced compensation received on acquisition of agricultural lands is exempt. The provisions of section 10(37) of the Act reads as follows:—

‘Section 10(37): Capital Gain on compulsory acquisition of urban Agricultural Land: In the case of an assessee, being an individual or a Hindu individual family, any income chargeable under the head” Capital gain” arising from the transfer of agricultural land, shall be exempted, where :

It may be noted in this connection that exemption is available only if compulsory acquisition has taken place on or after 1-4-2004. Exemption is also available if acquisition has taken place before 1-4-2004 but compensation has been received on or after 1-4-2004. 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.’

6. The assessees claimed that interest received by them is nothing but compensation and therefore even for the interest portion received, exemption u/s. 10(37) of the Act is applicable. The AO, however, was of the view that interest on enhanced compensation was chargeable to tax under the provisions of section 57(iv) r.w.s. 56(2)(viii) r.w.s. 145A(b) of the Act. These provisions read as follows:—

“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.”

“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 :—

to

(viii) income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A;”

Method of accounting in certain cases.

“145A. Notwithstanding anything to the contrary contained in section 145,—

(b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.”

7. The AO rejected the claim of exemption u/s. 10(37) of the Act and held that interest is chargeable to tax in the year of receipt, irrespective of the period for which the interest is calculated. The following were the relevant observations of the AO:—

‘4.4. As per the provisions of section 56(2)(viii) of the I.T. Act, 1961 inserted w.e.f. 01-04-2010, income by way of interest received on compensation or on enhanced compensation shall be chargeable to tax under the head ” Income from Other Sources” and clause (b) of Section 145 specifies the year of accounting of this income as the year in which it is received. The section 56(2)(viii) is unambiguous on this issue and includes interest of any nature and kind without making any distinction of interest received under different provisions of the Land Acquisition Act, 1894. Hence, the interest {one fifth share} of Rs. 92,87,258/-received on compensation or on enhanced compensation does not qualify for treatment as compensation or on enhanced compensation does not qualify for treatment as enhanced value of the asset and has to be brought to tax under the head ” Income from Other Sources”.

5. In the circumstances, Rs. 92,87,258/- being interest received as per the order dated 18-05-2012 is treated as the income of the assessee and added back to the total income subject to allowing the deduction of 50% as per the provisions of section 57(iv) of the I.T.Act, 1961. On account of this addition, penalty proceedings U/s 271(1)(c) of the Income Tax Act, 1961 are also initiated separately as the assessee has concealed his true income and furnished inaccurate particulars of the income.’

8. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(Appeals). The contention of the assessee before the CIT(Appeals) was that interest on enhanced compensation awarded to the assessee was in terms of section 28 of the Land Acquisition Act, 1894 and such interest was in the nature of compensation falling within the ambit of section 10(37) of the Act. The assessee in support of its contention placed reliance on the decision of the Hon’ble Gujarat High Court in the case of in Movaliya Bhikhubhai Balabhai v. ITO [2016] 388 ITR 343 (Guj).

9. The CIT(Appeals) accepted the plea of the assessee and held that interest to the extent of Rs. 90,37,666 which was interest awarded u/s. 28 of the Land Acquisition Act, 1894 partook the character of compensation for land acquired and fell within the ambit of section 10(37) of the Act and to that exempt was exempt. The remaining sum of Rs. 2,49,592 was brought to tax as income from other sources after allowing deduction of 50% u/s. 57(iv) of the Act. The following were the relevant observations of the CIT(Appeals):—

“8.1 From the facts it is observed that interest received of Rs. 90,37,666/- is under section 28 of Land Acquisition Act, 1894 out of total interest received of Rs. 92,87,258/-. Interest received under section 28 is eligible for exemption under section 10(37) of Income-tax Act, as discussed in above paras. Assessing Officer is directed to allow the interest received under section 28 of Land Acquisition Act at par with enhanced compensation and allow exemption u/s 10(37) of Income-tax Act, 1961. The balance interest of Rs. 2,49,592/- (Rs. 92,87,258 / minus Rs. 90,37,666/-) is to be treated as income from other sources and be taxed after allowing 50% of deduction u/s 57 of Income-tax Act,1961. The Assessing Officer is directed to work out taxable income accordingly.”

10. Aggrieved by the aforesaid orders of the CIT(Appeals), the revenue has preferred the present appeals before the Tribunal.

11. We have heard the rival submissions of the ld. DR, who relied upon the order of the AO. We have considered the submissions of the ld. DR. It is not disputed by the AO that the land acquired was agricultural land and the conditions laid down u/s. 10(37)(i) to (iv) are applicable to the land which is in question which was compulsorily acquired. It is also not in dispute that the interest in question was interest awarded u/s. 28 of the Land Acquisition Act, 1894. In the given circumstances, we are of the view that the decision of the Hon’ble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai (supra) will be applicable to the facts of the present case.

12. In Movaliya Bhikhubhai Balabhai (supra), the Hon’ble Gujarat High Court had to deal with the nature of the interest awarded u/s.28 of the Land Acquisition Act, 1894. The facts of the case before the Hon’ble Gujarat High Court was that the petitioner’s agricultural lands came to be acquired under the provisions of the Act of 1894 for the public purpose of the Ozat-2 Irrigation Scheme. The award passed by the Collector came to be challenged by the petitioner before the learned Principal Senior Civil Judge, Junagadh (hereinafter referred to as the “Reference Court”), who by an order dated 20th March, 2011 awarded additional compensation of Rs. 5,01,846/- in favour of the petitioner together with other statutory benefits. Pursuant to such award, the second respondent calculated the amount payable to the petitioner and in terms of the statement showing the amount of compensation to be deposited in the court, computed an amount of Rs. 20,74,157/- as payable to the petitioner by way of interest under section 28 of the Act of 1894. The petitioner made an application under section 197(1) of the Income Tax Act, 1961 (Act) for deciding the tax liability of interest and to issue a certificate as to NIL tax liability. The application was rejected on the ground that the interest amount on the delayed payment of compensation and enhanced value of compensation is taxable as per the provisions of section 57(iv) read with sections 56(2)(viii) and 145A(b) of the Act under the head income from other sources. Being aggrieved by such order, the Assessee filed writ petition before Hon’ble Gujarat High Court. The question before the Court was whether interest awarded u/s.28 of the Act of 1894 is akin to compensation and chargeable to tax u/s.45(5) of the Act or under the head “Income from other sources” u/s.57(iv) read with Sec.56(2)(viii) and 145A(b) of the Act. The Hon’ble Gujarat High Court held that interest under section 28 of the Act of 1894 is an accretion to compensation and forms part of the compensation and, therefore, exigible to tax under section 45(5) of the Act. In coming to the aforesaid conclusion, the Hon’ble Gujarat High Court followed the decision of Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 wherein it was held that interest under section 28 of the Act of 1894 is part of the amount of compensation whereas interest under section 34 thereof is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of the enhanced value of the land which is not the case in the matter of payment of interest under section 34. On the applicability of the provisions of Sec.57(iv) read with 56(2)(viii) and Sec.145A(b) of the Act, the Hon’ble Gujarat High Court held, :—

“Section 145A of the I.T. bears the heading “Method of accounting in certain cases”. Section 145A(b) provides that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Clause (viii) of sub-section (2) of section 56 of the I.T. Act provides for income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A which is chargeable as income from other sources. The first respondent Income Tax Officer seeks to tax the interest received by the petitioner under section 28 of the Act of 1894 as income from other sources under section 56(2)(viii) read with section 145A(b) of the I.T. Act. In the opinion of this court, in the light of the law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra), the interest received under section 28 of the Act of 1894 would not fall within the ambit of the expression “interest” as envisaged under section 145A(b) of the I.T. Act, inasmuch as, the Supreme Court in the above decision has held that interest under section 28 of the Act of 1894 is not in the nature of interest but is an accretion to the compensation and, therefore, forms part of the compensation.”

It was argued on behalf of the Revenue before the Hon’ble Gujarat High Court that the decision of Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra) was rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability cases pertaining to AY 2010-11 and afterwards. Such an argument was repelled by the Hon’ble Gujarat High Court as follows:

’11. It has been vehemently contended on behalf of the first respondent that the above decision has been rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability to the facts of the present case. The scope and effect of the substitution (with effect from 1st April, 2010) of section 145A, as also amendment made in section 56(2) by Act 33 of 2009 have been elaborated in the following portion of the departmental circular No. 5/2010, dated 3-6-2010, as follows:

“Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation.—

46.1 The existing provisions of Income Tax Act, 1961, provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further the Hon’ble Supreme Court in the case of Smt. Rama Bai v. CIT  (1990) 181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to the taxpayers.

46.2 With a view to mitigate the hardship, section 145A is amended to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it was received, irrespective of the method of accounting followed by the assessee.

46.3 Further, clause (viii) is inserted in sub-section (2) of the section 56 so as to provide that income by way of interest received on compensation or enhanced compensation referred to in clause (b) of section 145A shall be assessed as “income from other sources” in the year in which it is received.

46.4 Applicability. – This amendment has been made applicable with effect from 1st April, 2010, and it will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years.”

Thus, the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR 400 whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the words “interest received on compensation or enhanced compensation” in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)’s case (supra).’

13. The Hon’ble Gujarat High Court finally concluded, as follows:

’13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression “interest” as contemplated in section 145A of the I.T. Act. The first respondent – Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the I.T. Act to the petitioner for non-deduction of tax at source, inasmuch as, the petitioner is not liable to pay any tax under the head “income from other sources” on the interest paid to it under section 28 of the Act of 1894.

14. The petitioner had earlier challenged the communication dated 9th February, 2015 whereby its application for a certificate under section 197 of the I.T. Act had been rejected, and subsequently, tax on the interest payable under section 28 of the Act of 1894 has already been deducted at source. Consequently, the challenge to the above communication has become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 forms part of the compensation and not interest, the second respondent was not justified in deducting tax at source under section 194A of the I.T. Act in respect of such amount. The petitioner is, therefore, entitled to refund of the amount wrongly deducted under section 194A of the I.T. Act.’

14. In the light of the aforesaid decision of the Hon’ble Gujarat High Court and in the light of the admitted factual position in the present case, we are of the view that the CIT(Appeals) is fully justified in allowing exemption u/s. 10(37) of the Act on the interest received by the assessee u/s. 28 of the Land Acquisition Act, 1894. We find no grounds to interfere with the impugned orders of the CIT(Appeals).

15. Consequently, both the appeals of the revenue are dismissed.

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