ITAT Delhi on Section 263: No Revision Where AO Examines Section 28 Interest and Follows Supreme Court Law

1. Background of the Dispute

The Delhi Bench of the Income Tax Appellate Tribunal dealt with an important question: can the Principal Commissioner of Income Tax (PCIT) invoke revisionary powers under Section 263 where the Assessing Officer (AO) has already examined the nature of interest received under Section 28 of the Land Acquisition Act, 1894, and granted exemption under Section 10(37) of the Income Tax Act 1961 by following binding Supreme Court precedents?

The case arose from the assessment for AY 2018-19 of Pawan Kumar vs PCIT (ITAT Delhi), where the assessee, an individual, had received a substantial amount on account of enhanced compensation and interest under the Land Acquisition Act pursuant to compulsory acquisition of agricultural land.

The AO accepted the assessee’s stand that the interest received under Section 28 of the Land Acquisition Act formed part of the enhanced compensation and was therefore covered by Section 10(37). The PCIT, however, treated the assessment as both erroneous and prejudicial to the interests of Revenue and passed an order under Section 263 setting aside the assessment for fresh examination, primarily relying on the decision in Mahender Pal Narang vs. CBDT (2020) 423 ITR 13 (P&H).

The Tribunal ultimately quashed the Section 263 order and restored the assessment.

2. Facts of the Case and Original Assessment

2.1 Return filing and selection for scrutiny

  • The assessee, an individual, filed his return of income for AY 2018-19 on 29.08.2018, declaring total income of Rs. 6,35,470/-.
  • The return was processed under Section 143(1)(a) on 28.06.2019.
  • The case was picked up for complete scrutiny under the e-Assessment Scheme, 2019, with limited scrutiny issues specified as:
    • refund claim, and
    • winnings from lottery / crossword puzzle / horse races.

2.2 Assessment proceedings

  • Notice under Section 143(2) was issued on 22.09.2019.
  • Thereafter, a detailed notice under Section 142(1) dated 23.11.2020 called for specific details.
  • In particular, the AO required documentary proof regarding a sum of Rs. 6,86,17,767/- stated to have been received under Section 28 of the Land Acquisition Act, 1894.

2.3 Explanation given by the assessee

In response, the assessee submitted a detailed reply along with supporting documents, stating inter alia:

  • The assessee had received total enhanced compensation of Rs. 6,86,17,767/- on compulsory acquisition of agricultural land by the Haryana Government.
  • Out of this, Rs. 3,97,56,460/- represented interest under Section 28 of the Land Acquisition Act, as awarded by the appellate authority / court.
  • Relying on the Supreme Court judgment in CIT vs. Ghanshyam HUF (2009) 315 ITR 1 (SC), the assessee contended that interest under Section 28 is an accretion to the value of the land and forms part of the enhanced compensation, and consequently, where the land is an agricultural land covered by Section 10(37), such amount is exempt.

The AO accepted this explanation and completed the assessment under Section 143(3) r.w.s. 143(3A) and 143(3B) on 22.01.2021 without making any addition on this issue, and assessed income as returned.

3. PCIT’s Invocation of Section 263

3.1 Basis for revisionary proceedings

Exercising powers under Section 263, the PCIT, Rohtak issued a show cause notice to the assessee and finally passed the impugned order dated 28.03.2023 setting aside the assessment. The principal rationale of the PCIT was:

  • The AO allegedly failed to consider the binding judgment of the Punjab & Haryana High Court in Mahender Pal Narang vs. CBDT (2020) 423 ITR 13 (P&H), which, according to the PCIT, governed the tax treatment of interest on compensation and enhanced compensation after the introduction of Section 56(2)(viii) by the Finance (No. 2) Act, 2009, with effect from 01.04.2010.
  • The PCIT pointed out that the Special Leave Petition against Mahender Pal Narang vs. CBDT was dismissed by the Supreme Court in Mahender Pal Narang vs. CBDT (2021) 279 Taxman 74 (SC) by order dated 04.03.2021.
  • On that basis, the PCIT concluded that interest on enhanced compensation, including interest under Section 28, was now taxable as “income from other sources” under Section 56(2)(viii) and not as part of compensation under the head “capital gains”.

The PCIT, therefore, held that the assessment order was:

  1. Erroneous, as the AO did not apply the law as laid down in Mahender Pal Narang vs. CBDT, and
  2. Prejudicial to the interests of Revenue, since an allegedly taxable interest income had been allowed as exempt.

Consequently, the assessment was set aside with directions to the AO to reframe the assessment after carrying out further verification and enquiry on the taxability of interest on enhanced compensation.

4. Assessee’s Contentions Before the Tribunal

The assessee challenged the Section 263 order on multiple grounds:

4.1 No lack of enquiry – specific examination by AO