Treatment of Interest u/s 28 of Land Acquisition Act as Compensation: ITAT Delhi Rules on Capital vs Revenue Character

Introduction

The Income Tax Appellate Tribunal (ITAT), Delhi E Bench has delivered a significant ruling concerning the taxation treatment of interest received under section 28 of the Land Acquisition Act, 1894. In the matter of Lakhi Ram Vs ITO for Assessment Year 2019-20, the Tribunal conclusively determined that such interest constitutes an integral component of enhanced compensation and must be treated as a capital receipt rather than taxable revenue under the head "income from other sources."

This judicial determination carries substantial implications for assessees who receive compensation awards in land acquisition proceedings, particularly regarding the proper classification and tax treatment of the interest component calculated under section 28 of the Land Acquisition Act, 1894.

Factual Matrix of the Case

The appeal before the Delhi ITAT arose from the order passed by the National Faceless Appeal Centre (NFAC), Delhi bearing DIN & order No. ITBA/N FAC/S/250/2023-24/106 1566876(1) dated 27.02.2024. The assessment proceedings were completed under section 144 read with section 142(1) of the Income Tax Act, 1961.

The central controversy revolved around the Assessing Officer's action in taxing the interest component received by the assessee on land acquisition compensation under section 28 of the Land Acquisition Act, 1894. The Revenue authorities invoked section 57(iv) read with section 56(1)(a) read with section 145A(b) of the Income Tax Act, 1961 to assess this interest as income from other sources.

During the hearing proceedings, the case was called twice, but nobody appeared on behalf of the assessee. Consequently, the Tribunal proceeded to decide the matter ex-parte.

Revenue's Contentions

The learned Senior Departmental Representative appearing for the Revenue forcefully contended that the issue under consideration had been conclusively settled by judicial precedents. Specific reliance was placed upon the Punjab & Haryana High Court's decision in Mahender Pal Narang Vs. CBDT (2020) 423 ITR 13 (P&H) and the Delhi High Court's ruling in PCIT Vs. Inderjit Singh Sodhi HUF (2024) 161 com 301 (Del.).

According to the Revenue's position, these authoritative pronouncements had established that the interest component arising from land acquisition compensation should invariably be assessed as income falling under the category of "other sources" rather than being treated as part of capital compensation.

Tribunal's Detailed Analysis

Application of Binding Precedents

The Tribunal conducted a comprehensive examination of the legal position by referring to its recent coordinate bench decision in Pawan Kumar Vs. PCIT (2024) 159 com 61 (Del.-Trib.). This decision had meticulously distinguished the case law relied upon by the Revenue and provided detailed reasoning on the fundamental nature of interest awarded under section 28 of the Land Acquisition Act, 1894.

Distinction Between Section 28 and Section 34 Interest

A crucial aspect of the Tribunal's analysis centered on distinguishing the character of interest awarded under different provisions of the Land Acquisition Act, 1894:

Interest under Section 28: This represents interest computed on the enhanced compensation amount and constitutes an accretion to the land's value itself. Such interest forms an inseparable part of the enhanced compensation awarded when appellate authorities or courts determine a higher compensation amount than initially granted.

Interest under Section 34: This category of interest is payable for delay in making payment after the acquiring authority takes possession of the land. It compensates for the time lag and does not form part of the compensation for the land's value.

Supreme Court's Position in Ghanshyam (HUF)

The Tribunal placed significant reliance on the Supreme Court's authoritative pronouncement in CIT vs. Ghanshyam HUF (2009) 315 ITR 1 (SC). In this landmark ruling, the Apex Court had explicitly held that interest computed under section 28 of the Land Acquisition Act, 1894 represents an accretion to the value of the acquired property and therefore constitutes an integral component of enhanced compensation.

Unlike interest under section 34, which compensates for delay in payment, interest under section 28 directly relates to the valuation of the land itself. This fundamental distinction determines its character as capital rather than revenue.

Subsequent Affirmation by Supreme Court

The Tribunal noted that the Supreme Court had subsequently affirmed its position in Union of India v. Hari Singh (2018) 91 taxmann.com 20 (SC). This decision reconfirmed that interest under section 28 maintains its character as part of compensation rather than independent income.

Additionally, the Supreme Court's ruling in ITO, TDS v. Muktanangiri Maheshgiri in Civil Appeal No. 18475 of 2017 dated 10.11.2017 had further reinforced the legal position established in Ghanshyam (HUF).

Interpretation of Legislative Amendments

The Tribunal examined the amendments introduced through the Finance (No.2) Act, 2009, which inserted section 56(2)(viii), section 57(iv), and sections 145A/145B into the Income Tax Act, 1961.

Purpose Behind Amendments

According to the Tribunal's analysis, these amendments were specifically designed to address the practical hardship caused by the Supreme Court's decision in Rama Bai vs. CIT (1990) 181 ITR 400. In that case, the Apex Court had held that interest on delayed or enhanced compensation was taxable on an accrual basis, creating significant difficulties for assessees.