Taxability of Interest on Enhanced Land Compensation: Punjab & Haryana High Court’s Ruling in Puneet Singh Vs CIT

The Punjab and Haryana High Court, in Puneet Singh Vs CIT, examined a recurring dispute: how interest received on enhanced compensation for compulsory acquisition of land should be taxed under the Income Tax Act 1961. A batch of three appeals, all involving the same legal controversy and similar facts, was decided together under Section 260A of the Income Tax Act 1961.

The central controversy was twofold:

  1. What is the true nature of interest awarded under Section 28 of the Land Acquisition Act 1894 – is it capital (part of compensation) or revenue (interest income)?
  2. In which year is such interest taxable – spread over past years on accrual basis or fully in the year of receipt after the Finance (No.2) Act 2009 amendments?

The High Court upheld the additions made by the Income Tax authorities, confirming that 50% of the interest received on enhanced compensation is taxable as “income from other sources” in the year of actual receipt, in line with Sections 56(2)(viii), 57(iv) and 145A(b).

Background of the Acquisition and Assessment Proceedings

Land Acquisition and Enhancement of Compensation

  • The Government of Haryana issued notifications dated 02.01.2002 under Sections 4 and 6 of the Land Acquisition Act 1894 for acquiring 344.31 acres of land located in village Budha Khera, Hadbast No.1, Tehsil and District Karnal.
  • The acquisition was for development of residential and commercial areas in Sector 9 Part 32 and 33, Urban Estate, Karnal.
  • The Land Acquisition Collector passed an award determining compensation.
  • Dissatisfied with the initial award, the landowners invoked Section 18 of the Land Acquisition Act 1894 seeking reference to the court.
  • By award dated 11.08.2009, the reference court enhanced the compensation and also granted interest on the enhanced amount.

Forms evidencing payment and TDS were prepared on 27.05.2010 and 30.03.2011, and Form 16A dated 22.03.2010 showed that interest of ₹14,71,162 had been paid, on which TDS of ₹1,66,682 was deducted for the financial year ending 31.03.2010.

Return Filing and Reassessment

  • The assessee filed a return of income on 31.07.2011 under Section 139(1) declaring ₹4,11,477 as income from salary and interest, and claimed refund of TDS of ₹1,79,587 deducted from compensation / enhanced compensation of agricultural land.
  • The return was processed under Section 143(1) on **26.05.2011`.
  • Subsequently, the Land Acquisition Officer, Panchkula, confirmed the figure of ₹14,71,162 and the related TDS deduction by letter dated **19.11.2014`.
  • On **07.04.2015, the Assessing Officer recorded reasons and issued notice under Section 148` initiating reassessment proceedings.

The assessee, together with others, filed CWP-2605-2015 before the High Court seeking refund of TDS. By order dated **01.07.2015`, the Court directed the Assessing Officer to complete reassessment by 31.08.2015 and, if any refund remained due, to grant the same within four weeks thereafter.

The assessee’s objections to the notice under Section 148 were rejected on **07.08.2015`, and written submissions dated 06.08.2015 were filed before the Assessing Officer.

Assessment, First Appeal, and Tribunal’s Decision

  • The Assessing Officer, by order dated 29.10.2015, applied Section 56(2)(viii) read with Section 57(iv) and Section 145A(b) (all as amended by the Finance (No.2) Act 2009 with effect from 01.04.2010) and:

    • Treated 50% of the interest received on enhanced compensation as taxable income from other sources.
    • Out of total interest of ₹11,30,561, an amount of ₹5,65,280 (50%) was brought to tax.
    • The assessee’s total income was assessed at ₹9,76,760.

  • The assessee appealed to the Commissioner of Income Tax (Appeals), filing detailed written submissions dated **15.12.2016`.

  • The CIT(A) dismissed the appeal on **06.01.2017`, affirming the assessment.

  • The assessee then filed a second appeal before the Income Tax Appellate Tribunal, Delhi ‘SMC’ Bench.

  • By order dated **11.10.2017`, the Tribunal also upheld the additions, applying the legal position laid down in earlier binding precedents.

Aggrieved, the assessee invoked Section 260A before the Punjab and Haryana High Court through three appeals, including ITA-132-2018, raising substantial questions of law.

Questions of Law Raised Before the High Court

The assessee framed, among others, the following principal questions:

  1. Whether interest on land acquisition compensation, in light of Section 145A(b) as introduced by the Finance (No.2) Act 2009 w.e.f. 01.04.2010, should be allocated and spread over the period from acquisition to payment rather than taxed entirely in the year of receipt?