ITAT Delhi rules out Section 263 revision on interest under Section 28 of Land Acquisition Act

1. Background of the dispute

The Delhi Bench ‘SMC’ of the Income Tax Appellate Tribunal has allowed the appeal of Satender Kumar Vs ITO (ITAT Delhi) for Assessment Year 2020-21 and has set aside a revisionary order passed under Section 263 of the Income Tax Act 1961 by the Principal Commissioner of Income Tax (PCIT).

The controversy revolved around the tax treatment of:

  • Interest of Rs. 3,97,56,460/- received by the assessee under Section 28 of the Land Acquisition Act, 1894
  • Such interest was part of enhanced compensation of Rs. 6,86,17,767/- paid by HUDA on compulsory acquisition of agricultural land
  • TDS of Rs. 39,75,646/- was deducted @ 10% on the said interest component

The assessee treated the interest under Section 28 as an integral part of the enhanced compensation for compulsory acquisition of agricultural land and claimed it as exempt under Section 10(37) of the Income Tax Act 1961.

The original scrutiny assessment under Section 143(3) accepted this position and no addition was made. Later, the PCIT invoked revisional jurisdiction under Section 263, alleging that the Assessing Officer (AO) had not made proper enquiry and had ignored the legal position after amendments made by the Finance (No. 2) Act, 2009.

The Tribunal in the present appeal has followed its earlier detailed ruling in Pawan Kumar Vs. PCIT (2024) 159 taxmann.com 61 (Del.-Trib.), which dealt with an almost identical fact pattern and legal issue.

2. Assessment proceedings and AO’s enquiry

2.1 AO’s scrutiny and specific queries

During the original assessment proceedings, the AO:

  • Selected the case for scrutiny under Section 143(3)
  • Issued notice under Section 142(1)
  • Specifically called for documentary evidence and clarification regarding:
    • The nature of the amount received under Section 28 of the Land Acquisition Act, 1894
    • The assessee’s claim of exemption under Section 10(37)

In response, the assessee submitted a detailed explanation, including:

  • That the land compulsorily acquired was agricultural land
  • That enhanced compensation of Rs. 6,86,17,767/- included interest under Section 28 of Rs. 3,97,56,460/-
  • Reliance on the decision of the Hon’ble Supreme Court in CIT Vs. Ghanshyam HUF (2009) 315 ITR 1 (SC), where interest under Section 28 of the Land Acquisition Act 1894 was held to be part of the enhanced compensation

Upon examining these submissions, the AO accepted the assessee’s contention that:

  • Interest under Section 28 was not an independent interest income
  • It formed part of compensation for compulsory acquisition of agricultural land and was therefore exempt under Section 10(37)

The assessment order under Section 143(3) was passed without making any addition on this count.

2.2 No failure of enquiry

The Tribunal noted that the AO:

  • Raised pointed queries on the very issue which later became the subject of Section 263 proceedings
  • Considered the assessee’s explanation and judicial precedents cited
  • Took a conscious view that interest under Section 28 was part of enhanced compensation

The mere absence of detailed reasoning in the assessment order was held not to mean that there was either no enquiry or inadequate enquiry. This approach aligns with the principles laid down in:

  • CIT Vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del.)
  • CIT Vs. Ganpat Ram Bisnoi 296 ITR 292 (Raj.)

3. PCIT’s action under Section 263

3.1 Basis of the revisionary order

The PCIT invoked Section 263, holding that the assessment order was:

  • Erroneous and
  • Prejudicial to the interests of the Revenue

The principal reasons cited were:

  • The AO allegedly did not examine the impact of amendments made by the Finance (No. 2) Act, 2009 to:
    • Section 145A
    • Section 145B
    • Section 56(2)(viii)
    • Section 57(iv)
  • The AO allegedly failed to follow the decision of the Hon’ble Punjab & Haryana High Court in Mahender Pal Narang Vs. CBDT (2020) 423 ITR 13 (P&H), which interpreted interest on compensation/enhanced compensation as taxable under the head “Income from other sources”
  • The PCIT took note that the Special Leave Petition against Mahender Pal Narang Vs. CBDT had been dismissed by the Hon’ble Supreme Court in (2021) 279 Taxman 74 (SC)

On this basis, the PCIT set aside the assessment order and directed the AO to frame a fresh assessment after making “necessary enquiry and verification” regarding taxability of the interest received on enhanced compensation.

3.2 Role of audit objection

The Tribunal recorded that Section 263 was invoked primarily on the strength of an audit objection. The internal audit had objected that:

  • Interest under Section 28 of Rs. 3,97,56,460/- should be taxed under Section 56(2)(viii) as “Income from other sources”
  • Only a deduction under Section 57(iv) to the extent of 50% could be allowed