Sandeep Vs ITO (ITAT Delhi)
Interest Under Section 28 On Enhanced Compensation Is Part Of Compensation—Delhi ITAT Allows Exemption Under Section 10(37)
Summary: The Delhi Bench of the ITAT has held that interest awarded under section 28 of the Land Acquisition Act, 1894 forms part of the enhanced compensation and cannot be assessed separately as “income from other sources” under section 56(2)(viii). Since the underlying agricultural land had been compulsorily acquired and the compensation was exempt under section 10(37), the interest forming part of such compensation was also held to be exempt.
However, the decision requires considerable caution because the assessee was assessed at Sonipat and the Tribunal did not consider the directly contrary jurisdictional decision of the Punjab & Haryana High Court in Mahender Pal Narang v. CBDT, wherein such interest was held taxable after the amendments made with effect from AY 2010-11.
Facts of the case
The assessee had not originally filed his return of income. Based on information appearing in the AIMS module, the assessment was reopened on the ground that the assessee had received interest from the Land Acquisition Officer on which tax had been deducted under section 194A.
In response to the notice under section 148, the assessee filed his return on 30 October 2021 declaring income of ₹1,03,687.
The Assessing Officer noticed that the assessee had received ₹36,33,013 as interest on enhanced compensation. The assessee claimed that the amount represented interest awarded under section 28 of the Land Acquisition Act in connection with the compulsory acquisition of agricultural land.
It was contended that interest under section 28 was not ordinary interest for delayed payment. It was an accretion to the value of the land and consequently formed part of the enhanced compensation. Therefore, the entire receipt was claimed as exempt under section 10(37).
The Assessing Officer rejected the explanation. He treated the amount as interest taxable under section 56(2)(viii), allowed the statutory deduction of 50% under section 57(iv), and added the balance amount of ₹18,16,507.
The NFAC confirmed the addition. The assessee consequently approached the Tribunal.
Tribunal’s decision
The Tribunal noticed that the amount had been awarded under section 28 and not under section 34 of the Land Acquisition Act.
It relied upon the coordinate Bench decision in ITO v. Girish Kumar, ITA No. 5084/Del/2019, dated 6 July 2022, which had followed the Supreme Court decisions in CIT v. Ghanshyam (HUF), 315 ITR 1 and Union of India v. Hari Singh.
The distinction recognised in these decisions is important. Interest under section 34 is awarded for the delay in paying compensation already determined and is, therefore, interest in its conventional sense. On the other hand, interest under section 28 is awarded by the court on the excess compensation determined in reference proceedings. It is discretionary and is treated as an accretion to the value of the land.
Following Girish Kumar, the Tribunal held that interest under section 28 formed part of the enhanced compensation. As the compensation for compulsory acquisition of agricultural land was exempt under section 10(37), the addition of ₹18,16,507 was deleted and the assessee’s appeal was allowed.
Author’s comments—decision overlooks binding jurisdictional High Court ruling
The distinction between interest under sections 28 and 34 was clearly recognised by the Supreme Court in Ghanshyam (HUF). However, that decision was rendered in the context of the law before the insertion of the specific provisions governing interest on compensation.
With effect from AY 2010-11, section 56(2)(viii) specifically provides that interest received on compensation or enhanced compensation shall be taxable as income from other sources. Correspondingly, section 57(iv) allows a flat deduction of 50%, while section 145A—subsequently section 145B—taxes the interest in the year of receipt.
The Punjab & Haryana High Court considered the effect of these amendments in Mahender Pal Narang v. CBDT, 423 ITR 13. It held that the scheme had undergone a “sea change” after the amendments. Consequently, even interest under section 28 was taxable under section 56(2)(viii), subject to the 50% deduction under section 57(iv). The High Court expressly held that Ghanshyam (HUF) could not assist the assessee for the period governed by the amended provisions. The SLP against that decision was dismissed by the Supreme Court on 4 March 2021.
The TaxGuru publication on Mahender Pal Narang Vs Central Board of Direct Taxes records the Punjab & Haryana High Court ruling and its treatment of interest on land-acquisition compensation.
The present assessee was assessed by the ITO at Sonipat, Haryana. Therefore, Mahender Pal Narang was not merely a contrary decision—it was the decision of the jurisdictional High Court binding upon the authorities and the Tribunal in the assessee’s case. The location of the ITAT Bench at Delhi would not ordinarily alter the jurisdictional High Court determined by the situs of the Assessing Officer.
Surprisingly, neither Mahender Pal Narang nor the dismissal of its SLP finds any discussion in the present order. The Tribunal merely reproduced substantial portions of Girish Kumar and allowed the appeal. The decision may, therefore, be vulnerable on the ground that it was rendered without considering the binding jurisdictional precedent and the specific post-2010 statutory amendments.
There is also a factual inconsistency in the order. At one place, the information is stated to relate to ₹35,33,013, whereas the actual interest considered by the Assessing Officer was ₹36,33,013. The addition of ₹18,16,507 and TDS of ₹3,63,301 indicate that ₹36,33,013 was apparently the correct figure.
Further, although the assessee had challenged the reopening and denial of TDS credit of ₹3,63,301, the Tribunal did not separately adjudicate these grounds. Its reasoning is confined entirely to the taxability of section 28 interest, though the concluding paragraph broadly states that all grounds are allowed.
Thus, while the decision is strongly favourable to landowners, it should not be treated as settling the controversy, particularly in Punjab and Haryana. For assessments falling within that jurisdiction, the Revenue is likely to rely upon Mahender Pal Narang and contend that 50% of the section 28 interest remains taxable under sections 56(2)(viii) and 57(iv).
Cases Discussed
- ITO Vs Girish Kumar (ITAT Delhi)
- CIT Vs Ghanshyam (HUF), [2009] 315 ITR 1 (SC)
- Union of India Vs Hari Singh
- Mahender Pal Narang Vs Central Board of Direct Taxes (Punjab & Haryana High Court)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, DELHI BENCH
1. This appeal is filed by the assessee against the order passed by the ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [for short ‘ld. CIT (A)] dated 08.01.2026 for the Assessment Year 2014-15.
2. Brief facts of the case are, Assessee has not filed its return of income. Based on the above, assessment was reopened. Based on the information available on AIMS module, the assessee has received cash of Rs.35,33,013/- on account of interest under section 194A of the Income-tax Act, 1961 (for short ‘the Act’). Accordingly notice under section 148 was issued and served on the assessee. Subsequently, assessee filed its return of income as required under section 148 of the Act on 30.10.2021 electronically declaring total income of Rs.1,03,687/-. Accordingly notices under section 143(2) and 142(1) were issued and served on the assessee. During assessment proceedings, AO observed that assessee has received enhanced interest income from Land Acquisition Officer of an amount of Rs.36,33,013/- on which TDS under section 194A was deducted. He observed that assessee has claimed the same as exempt income in its return of income. When the details were called for, assessee has submitted as under:
“I have received compensation against compulsory acquisition of agriculture land. LAO has wrongly deducted TDS on interest of enhanced compensation which I received under section 28 of land acquisition act, 1894 and this interest should be exempt under section 10(37) of the Income Tax Act. Further in financial year 2013-14. I have received only 50 percent interest of enhanced compensation and 50% of enhanced principal amount. Enhanced compensation including interest received on enhanced compensation under section 28 of land acquisition act is exempted from tax.”
3. After considering the assessee’s submissions, AO rejected the same and relying on several decisions proceeded to make the addition to the extent of 50% of the compensation received by the assessee i.e. to the extent of Rs.18,16,507/-.
4. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi. After considering the detailed submissions, NFAC, Delhi sustained the additions made by the AO.
5. Aggrieved with the above order, assessee is in appeal before the ITAT raising following grounds of appeal :-
“1. That the impugned order passed u/s 250 of the Act is contrary to law, facts on record and judicial precedents and therefore deserves to be quashed.
2. That the Ld. CIT(A) has erred in law in upholding the reopening of assessment u/s 147 of the Act, which is bad in law, void ab initio and without any independent application of mind.
3. That the Ld. CIT(A) has erred in law in upholding the reopening of assessment u/s 147 of the Act which is based on incorrect reasons to believe solely based on surmises and conjectures.
4. That the Ld. CJT(A) has erred both in law and on facts in confirming the addition of Rs.18,16,507/- made by the Ld. AO on account of alleged interest on enhanced compensation.
5. That on the facts and circumstances of the case and in law, the Ld. AO as well as the Ld. CIT(A) have erred in not granting credit of Tax Deducted at Source (TDS) amounting to Rs.3,63,301/- deducted by the Land Acquisition Officer and duly reflected in the Form 26AS of the appellant.”
6. At the time of hearing, learned AR of the assessee submitted that assessee has received interest on enhanced compensation. In this regard, he brought to my notice pages 6 and 7 of the paper book and submitted that assessee has received interest on enhanced compensation under section 28 of the Land Acquisition Act and not under section 34 of the Act. In this regard, he brought to my notice page 114 of the case law paper book, wherein exact similar facts were dealt by the coordinate Bench in the case of ITO vs. Girish Kumar in ITA No.5084/Del/2019 for AY 2016-17 order dated 06.07.2022 and decided the issue in favour of the assessee.
7. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
8. Considered the rival submissions and material placed on record. I observed that assessee has received enhanced interest compensation under section 28 of the Land Acquisition Act. The coordinate Bench in the case of ITO vs. Girish Kumar (supra) has dealt with the above issue. The relevant findings of the aforesaid decision is reproduced below :-
“7. We have heard the parties, verified the material on record and gave our thoughtful consideration. The only question arises as to whether interest received u/s 28 of Land Acquisition Act, 1894 is taxable u/s 56(2) (viii) read with Section 57(iv) and 145A of the Income Tax.
8. As per Section 10(37) of the Act, any income chargeable under the head of capital gain arising from transfer of agricultural land by way of compulsory acquisition under the law is exempt from taxation. Further, as per provisions of Section 56(2) (viii) of the Act, income by way of interest received on compensation on an enhanced compensation is taxable and a deduction of a sum equal of 50% of such income is allowable u / s 57 (iv) of the Act on that interest. The interest under Land Acquisition Act, is payable under two different Sections i.e. Section 34 & Section 28 of Land Acquisitions Act. There is no dispute in so far as payment of interest u/s 34 of the Land Acquisition Act is concerned. Now, the question whether the interest paid under the provisions of Section 28 of Land Acquisition Act is a part of enhanced compensation or is it taxable as interest income or not. The said issue has been considered by the Hon’ble Supreme Court in the case of CIT Vs. Ghanshyam HUF 315 ITR 1 held that the interest paid on the excess amount u/s 28 of Land Acquisition Act, 1894, depends upon a claim by the person whose land is acquired, where as interest u/s 34 of Land Acquisition Act is for delay in making payment. Interest u/s 28 of Land Acquisition Act is a part of enhanced value of land which is not the case in the matter of payment of interest u/s 34 of the Land Acquisition Act. The relevant portions of the Judgment of the Apex Court are hereunder.-
“In addition to the market value of the land, the Court shall in every case award a sum of 30 per cent on such market value, in consideration of the compulsory nature of acquisition. This is under section 23(2) of the 1894 Act. In short, section 23(2) talks about solatium. Award of solatium is mandatory. Similarly, payment of additional amount under section 23(1 A) is mandatory. The award of interest under section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount. In such cases, interest on that excess amount alone is payable. Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount, which is determined by the Court after a reference under section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award of compensation. [Para 23.”
9. The above ratio has also been followed by the Hon’ble Supreme Court in its order dated 15/09/2017 in the case of Union of India Vs. Hari Singh & ors in Civil Appeal No. 15041/2017 wherein the Hon’ble Supreme Court has held as follows:-
“While determining as to whether the compensation paid was for agricultural land or not, the AOs will keep in mind the provisions of section 28 of the Land Acquisition Act and the law laid down by this court in commissioner of Income Tax, Faridabad V. Ghanshyam (HUF) (2009 (8) SCC 412) in order to ascertain whether the interest given under the said provisions amounts to compensation or not.”
10. The Ld.CIT(A) has considered all the judgments mentioned in the present grounds of Appeal and since the judgment of Hon’ble Supreme Court in the case of Hari Singh & Ors (Supra) and also in the case of Ghanshyam HUF (Supra) are binding precedents, relied on the same.
11. In our considered opinion, the Ld.CIT(A) has committed no error and there is no infirmity in allowing the Appeal of the assessee. We are also of the view that the judgment rendered in the case of Ghanshyam HUF and Hari Singh (Supra) of the Hon’ble Supreme Court are applicable to the present case having binding effect over the High Court Judgments relied by the Revenue. Therefore, the Grounds of Appeal of the Revenue are dismissed.”
9. Respectfully following the above decision, the grounds raised by the assessee are allowed. Accordingly, the appeal filed by the assessee is allowed.
10. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on this 18th day of September, 2026.
