Facts of the Case

The Revenue filed an appeal before the Delhi High Court against the order of the Income Tax Appellate Tribunal (ITAT) dated 19.06.2020, whereby the ITAT had deleted additions made by the Assessing Officer (AO) under Section 56(2)(viii) of the Income Tax Act, 1961 for Assessment Year 2016-17.

The respondent-assessee (HUF) had received compensation and interest on compulsory acquisition of land under the Land Acquisition Act, 1894. In the income tax return, exemption was claimed on:

  • Compensation on compulsory acquisition
  • Interest on enhanced compensation
  • Dividend income

The AO treated the interest component as taxable income under the head “Income from Other Sources” and allowed a statutory deduction of 50% under Section 57(iv). Additions were accordingly made. The CIT(A) upheld the AO’s order, but the ITAT allowed the assessee’s appeal relying on the Supreme Court decision in CIT v. Ghanshyam (HUF). Aggrieved, the Revenue approached the High Court.

Issues Involved

  1. Whether interest received on compensation or enhanced compensation under Sections 28 and 34 of the Land Acquisition Act, 1894 is taxable as income from other sources.
  2. Whether such interest qualifies for exemption under Section 10(37) as part of compensation.
  3. Whether the 2010 amendment introducing Section 56(2)(viii) overrides earlier judicial precedents.
  4. Whether the ITAT erred in relying on pre-amendment Supreme Court decisions.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that after insertion of Section 56(2)(viii) by the Finance (No.2) Act, 2009 (effective 01.04.2010), interest on compensation is specifically taxable as income from other sources.
  • It was argued that reliance on CIT v. Ghanshyam (HUF) was misplaced since that decision predated the amendment.
  • The addition made by the AO was in accordance with the amended statutory framework.
  • Various judicial precedents supporting taxability of such interest were relied upon.

Respondent’s Arguments (Assessee)

  • The assessee contended that interest received under Section 28 of the Land Acquisition Act forms part of enhanced compensation.
  • It was argued that such interest represents accretion to the value of land and should be treated as compensation itself.
  • Consequently, the amount should qualify for exemption under Section 10(37).
  • The assessee supported the ITAT’s reliance on CIT v. Ghanshyam (HUF).

 Court Order / Findings

  • Sections 56(2)(viii) and 145-B clearly mandate that interest on compensation or enhanced compensation is taxable under the head “Income from Other Sources” in the year of receipt.
  • The 2010 amendment represents a conscious legislative departure from the earlier legal position.
  • Reliance on CIT v. Ghanshyam (HUF) was misplaced because that judgment preceded the statutory amendment.
  • Judicial precedents treating interest as part of compensation cannot override the express statutory provision.
  • Interest under Sections 28 or 34 of the Land Acquisition Act does not escape taxation merely because it relates to compensation.

Important Clarification

  • Interest on compensation or enhanced compensation is taxable as income from other sources post-2010 amendment.
  • The taxability applies regardless of whether the underlying compensation itself is exempt.
  • Only a statutory deduction of 50% under Section 57(iv) is permissible.
  • Earlier case law treating such interest as part of compensation cannot prevail over the amended provisions.
  • The ruling confirms that legislative amendments can alter the tax treatment established by prior judicial decisions.

 Link to download the order – https://www.mytaxexpert.co.in/uploads/1772275304_PRINCIPALCOMMISSIONEROFINCOMETAXDELHI10VsINDERJITSINGHSODHIHUF.pdf  

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