Section 263 Revision Fails Where AO Adopted a Legally Tenable View on Rs. 1.48 Crore Land Acquisition Interest: ITAT Jaipur
Overview
The Income Tax Appellate Tribunal, Jaipur Bench, has delivered a significant ruling affirming that the revisionary power conferred under Section 263 of the Income Tax Act, 1961 cannot be wielded merely because the Principal Commissioner of Income Tax (PCIT) holds a different view from that of the Assessing Officer (AO). The decision, rendered through a Third Member majority opinion following a Division Bench split, directly concerned an amount of Rs. 1,48,69,136 received by the assessee as interest under Section 28 of the Land Acquisition Act, 1894, on enhanced compensation for the compulsory acquisition of agricultural land. The Tribunal allowed the assessee's appeal and quashed the revision order.
This ruling carries practical significance on two distinct levels: first, it reinforces the well-established principle that an AO's examined and legally supportable conclusion cannot be overturned through revision; and second, it accepts — on the specific facts before it — that interest received under Section 28 of the Land Acquisition Act, 1894 constitutes an accretion to compensation and does not attract tax as ordinary interest income in the assessee's hands.
Background: The Assessment and the Disputed Exemption
The Assessee's Return and Claim
The assessee, Naresh Kumar, filed his return of income for Assessment Year 2019-20 declaring total income of Rs. 9,81,530. He simultaneously claimed exemption in respect of Rs. 1,48,69,136 received as interest on enhanced compensation consequent upon compulsory acquisition of agricultural land by the government. The claim rested on the position that such interest, flowing under Section 28 of the Land Acquisition Act, 1894, forms an integral part of the enhanced compensation rather than constituting a standalone taxable interest receipt.
Scrutiny Assessment and AO's Examination
The case was selected for complete scrutiny under the E-Assessment Scheme, 2019, specifically in connection with the refund claim. The AO issued notice under Section 143(2) of the Income Tax Act, 1961, followed by notice under Section 142(1). The questionnaire appended to the Section 142(1) notice dated 11.06.2021 contained a pointed query requiring the assessee to:
- Submit copies of all relevant orders and supporting documents pertaining to the exempt income of Rs. 1,48,69,130 claimed as interest received on enhanced land acquisition compensation; and
- Furnish an explanation as to the allowability of such interest as exempt income under the provisions of the Income Tax Act, 1961.
The assessee responded on 22.06.2021, furnishing the acquisition award, certificates issued by the Bhumi Arjan Adhikari, Shahari Sampada, Gurugram, Haryana, along with a detailed explanation grounding his claim in judicial authority — particularly the Supreme Court's ruling in CIT v. Ghanshyam (HUF), (2009) 315 ITR 1 (SC). His position was that Section 28 interest represents an enhancement of compensation value rather than interest on delayed payment, and therefore does not fall within the ambit of taxable interest income.
The AO, after examining the reply and the documents on record, passed the assessment order dated 08.09.2021 under Section 143(3) read with Section 144B, accepting the returned income without making any addition.
The PCIT's Revision Under Section 263
Grounds for Initiating Revision
Following completion of assessment, the PCIT initiated proceedings under Section 263 of the Income Tax Act, 1961 by issuing notice dated 04.11.2023. The PCIT's position, crystallised in the revision order dated 07.02.2024, was that the assessment order was erroneous and prejudicial to the interests of Revenue on the following basis:
Section 145B(1)of the Act mandates that interest received on compensation or enhanced compensation shall be deemed income of the previous year in which it is received.Section 56(2)(viii)expressly renders such interest chargeable under the head "Income from Other Sources".Section 57(iv)permits a deduction equal to 50% of such interest income.
Applying these provisions, the PCIT held that Rs. 74,34,568 — being 50% of the total interest of Rs. 1,48,69,136 — ought to have been brought to tax. The PCIT characterised the assessment as having been passed in a routine and casual manner, without application of mind to the relevant statutory provisions, and directed the AO to frame a fresh assessment.
The Assessee's Challenge
Before the Tribunal, the assessee challenged the revision order on multiple grounds:
- The PCIT failed to satisfy the twin statutory conditions under
Section 263— that the assessment order must be both erroneous and prejudicial to the interests of Revenue — both of which must concurrently exist. - The AO's order was consistent with binding Supreme Court precedents, particularly CIT v. Ghanshyam (HUF), (2009) 315 ITR 1 (SC), CIT, Rajkot v. Govindbhai Mamaiya, (2014) 367 ITR 498 (SC), and UOI v. Hari Singh, (2018) 91 taxmann.com 20 (SC).
- The taxability of interest under
Section 28of the Land Acquisition Act, 1894 is a debatable issue, and where two views are possible, the PCIT cannot exercise revisional jurisdiction simply because he favours the other view. - The assessee's claim had actually been examined by the AO during scrutiny, and the mere absence of an elaborate discussion in the assessment order does not equate to non-application of mind.
- Even if the AO's conclusion is not expressly recorded in the assessment order, that cannot ipso facto establish failure to apply mind.
Additionally, the assessee sought to raise an extra ground challenging the PCIT's territorial jurisdiction, contending that the assessee resided at Gurgaon and had neither a business presence nor any income situs in Rajasthan.