ITAT Chandigarh on Taxability of Interest on Enhanced Compensation under Section 56(2)(viii)

The Chandigarh Bench of the Income Tax Appellate Tribunal in Karnail Singh Vs ITO has once again clarified that interest received on compensation or enhanced compensation is taxable as “Income from Other Sources” under Section 56(2)(viii) after the amendments brought in by the **Finance Act, 2009`. The appeal of the assessee for Assessment Year 2018-19 was dismissed, and the addition of ₹80,15,899/- was upheld.

This decision reiterates the legal position post-2009 that, regardless of the characterization under the Land Acquisition Act, 1894, such interest cannot be treated as exempt agricultural compensation under Section 10(37) of the Income Tax Act, 1961.

Background of the Case

Assessee’s Land Acquisition and Return Filing

  • The assessee, an individual agriculturist, had his agricultural land compulsorily acquired by the Government.
  • For Assessment Year 2018-19, he filed his income-tax return on 25.07.2018, declaring a total income of ₹78,64,420/-.
  • In the course of the land acquisition proceedings, he received an amount described as interest under Section 28 of the Land Acquisition Act, 1894 on enhanced compensation.

Claim of Exemption and Deduction

The assessee took the position that:

  • The amount received under Section 28 of the Land Acquisition Act was not merely “interest” but formed part of the compensation.
  • Therefore, according to him, the entire amount was exempt under Section 10(37) of the Income Tax Act, 1961, being compensation for compulsory acquisition of agricultural land.
  • He disclosed income of ₹1,60,31,799/-, and claimed a deduction of 50%, asserting that due to lack of full understanding of income-tax provisions, the balance should not be taxed.
  • His core contention was that the amount received as interest on the enhanced compensation was not taxable at all.

Assessment Proceedings and Addition by the AO

Stand of the Assessing Officer

The Assessing Officer (AO) rejected the assessee’s stand and held that:

  • The character of the receipt was that of interest on enhanced compensation, irrespective of its description in the Land Acquisition proceedings.
  • By virtue of Section 56(2)(viii) (inserted by the Finance Act, 2009), any interest received on compensation or enhanced compensation is specifically chargeable to tax under the head “Income from Other Sources”.
  • Consequently, the sum of ₹80,15,899/- was brought to tax as income under that head, in line with the statutory provisions.

No relief was granted on the plea that the amount should be treated as compensation or that it falls within the exemption of Section 10(37).

Appeal Before the Commissioner of Income Tax (Appeals)

Arguments Advanced by the Assessee

In the appeal before the CIT(A), the assessee reiterated that:

  1. Nature of Receipt under Section 28 of Land Acquisition Act

    • The amount received under Section 28 represented an integral part of the compensation awarded for compulsory acquisition.
    • Therefore, it should assume the same character as the principal compensation and be eligible for exemption under Section 10(37).

  2. Reliance on Judicial Precedents
    The assessee relied heavily on the following Supreme Court decisions:

    • CIT v. Ghanshyam (HUF)
    • Union of India v. Hari Singh & Others

    As well as various decisions of the Chandigarh Bench of the ITAT that had interpreted interest granted under Section 28 of the Land Acquisition Act as part of compensation in certain factual and legal contexts.

Findings of the CIT(A)

The CIT(A), after considering the submissions and case law cited, upheld the AO’s order and made the following key observations:

  • By the Finance Act, 2009, the legislature introduced:
    • Section 56(2)(viii), and
    • Section 145B(1)