Interest on enhanced compensation taxable as Other Income post Section 56(2)(viii) amendment

Ajay Kumar Vs ITO (ITAT Chandigarh)

ITAT: Interest on enhanced compensation taxable as Income From Other Sources post-amendment u/s 56(2)(viii); Ghanshyam (HUF) ruling inapplicable

• The assessee, Shri Ajay Kumar, is an individual whose agricultural land was compulsorily acquired by the Haryana Urban Development Authority (HUDA). Consequent to the enhancement of compensation by the learned Additional District Judge vide order dated 24.12.2013, which was further affirmed and enhanced by the Hon’ble Punjab & Haryana High Court vide order dated 22.07.2015, the assessee received a sum of Rs.56,34,922 towards enhanced compensation along with interest of Rs.34,65,610 awarded under section 28 of the Land Acquisition Act, 1894. The Land Acquisition Officer deducted tax at source amounting to Rs.3,46,561 under section 194A on the interest component.
• The assessee filed his original return of income on 29.09.2018 declaring an income of Rs.3,51,090. In this return, the assessee had included the interest received on enhanced compensation as taxable income. Subsequently, taking the position that interest awarded under section 28 forms an integral part of the compensation payable for compulsory acquisition of agricultural land, the assessee filed a revised return withdrawing the interest income and claiming that the entire receipt, including interest, was exempt under section 10(37) of the Income-tax Act, 1961. While withdrawing the interest income, the assessee simultaneously retained the full credit of tax deducted at source as appearing in Form 26AS.
• The case was selected for complete scrutiny under the e-Assessment Scheme, 2019 on account of (i) reduction in income in the revised return, and (ii) mismatch between interest income reported in Form 26AS and that offered in the revised return. Statutory notices under sections 143(2) and 142(1) were issued. The Assessing Officer examined the matter and rejected the assessee’s revised claim. According to the Assessing Officer, section 10(37) provided exemption only in respect of capital gains arising from compulsory acquisition of agricultural land and did not extend to interest received on delayed or enhanced compensation. The Assessing Officer further held that by virtue of section 56(2)(viii) read with section 145B(1), introduced by the Finance (No. 2) Act, 2009 with effect from 01.04.2010, interest received on compensation or enhanced compensation is specifically chargeable to tax under the head “Income from Other Sources” in the year of receipt. The Assessing Officer also observed that the assessee could not claim credit of TDS under section 199 without offering the corresponding income to tax. On these findings, the Assessing Officer added the interest amount of Rs.34,65,610 to the total income and completed the assessment, while also initiating penalty proceedings under section 270A.
• The CIT(A)/NFAC upheld the assessment and held that the assessee had brought no material to demonstrate the applicability of section 10(37) to the interest component. The appellate authority further noted that the revised return had been used only to exclude taxable income while simultaneously retaining the tax credit, which was impermissible under the statutory scheme. Aggrieved by the said appellate order, the assessee carried the matter in further appeal before this Tribunal, reiterating that interest awarded under section 28 assumes the character of compensation and is therefore exempt when the land acquired is agricultural in nature.

Issues:

• Whether interest received under section 28 of the Land Acquisition Act forms part of compensation exempt under section 10(37), or whether it is taxable under section 56(2)(viii) read with section 145B(1).
• Whether the post-2010 statutory amendments override the ratio of CIT v. Ghanshyam (2009) 315 ITR 1 (SC).
• Whether the assessee can claim TDS credit under section 199 without offering the corresponding interest income to tax.

Observations:

• In considering the first issue, the Tribunal observed that the assessee had received interest under section 28 of the Land Acquisition Act pursuant to enhancement of compensation awarded for compulsory acquisition of agricultural land. The assessee contended that such interest formed part of the compensation and was therefore exempt under section 10(37), relying upon the principle laid down in CIT v. Ghanshyam (HUF) (2009) 315 ITR 1 (SC), wherein the Hon’ble Supreme Court held, in the context of the pre-2010 regime, that interest awarded under section 28 partakes the character of compensation. The Tribunal noted, however, that the legal framework underwent a material change with the insertion of sections 56(2)(viii) and 145B(1) by the Finance (No. 2) Act, 2009, effective from 01.04.2010, which expressly provide that interest received on compensation or enhanced compensation is taxable as “Income from Other Sources” in the year of receipt. The Assessing Officer had taxed the receipt strictly in accordance with this statutory mandate, and the assessee had not produced any computation or documentary evidence demonstrating that the interest itself—distinct from the compensation—qualified for exemption under section 10(37).
• Turning to the second issue, the Tribunal observed that the assessee’s reliance on Ghanshyam (HUF) had to be appreciated in the proper statutory context. The Supreme Court in State of Orissa v. Sudhansu Sekhar Misra AIR 1968 SC 647 and again in Major Bahadur Singh v. State of Uttar Pradesh (2006) 1 SCC 368 has held that a judicial decision is an authority for what it actually decides, and that a precedent cannot be applied to a statutory context that the Court had not examined. Applying this principle, the Tribunal held that Ghanshyam (HUF) was decided in relation to the legal position prevailing prior to the insertion of section 56(2)(viii), and that the post-2010 statutory regime establishes an independent charging mechanism governing the taxability of interest on compensation. Accordingly, the Tribunal found that the later statutory provisions must govern the assessment year in question, and the earlier ratio cannot override the explicit command of the amended statute.
• With regard to the third issue, the Tribunal noted that even though the assessee had withdrawn the interest income in the revised return, he continued to retain the corresponding TDS credit. Under section 199 read with Rule 37BA, TDS credit follows the income and can be allowed only where the related income is offered to tax. The Tribunal found that the assessee could not claim credit for tax deducted at source on an income which he himself had excluded from his total income in the revised return. The conduct of withdrawing the interest income while simultaneously retaining the tax credit was, therefore, inconsistent with the statutory provisions and could not be sustained.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH