Anvar Ali Poolakkodan Vs ITO (Kerala High Court)
Conclusion: Interest received on delayed compensation for compulsory agricultural land acquisition would be treated as Capital Gain as it was an accrual to the principal compensation amount and therefore, the same couldn’t be treated as interest on compensation under Income from other sources as per section 56(2)(viii).
Held: Assessee had received compensation from the State for agricultural land acquired under the Land Acquisition Act, 1894 (LAA). Upon seeking enhancement of the awarded compensation through reference courts, they were granted not only an enhanced compensation but also statutory interest under Section 28 of the LAA. Assessee declared both amounts under the head “Capital Gains” and claimed exemption under Section 10(37) income tax legislation. However, Tribunal held that while compensation and enhanced compensation qualified as ‘Capital Gains’, the interest received was liable to be taxed as ‘Income from Other Sources’ under Section 56(2)(viii), thus denying exemption under Section 10(37). It was held by the Court that interest on delayed compensation was not a mere interest income, but a compensatory payment for the State’s failure to pay the compensation when it fell due. Therefore, such interest partook the character of the compensation itself. The Court further observed that the statutory obligation to pay compensation for compulsory acquisition was rooted in Article 300A of the Constitution, which safeguarded a citizen’s right to property. In addition, the court quoted the observation of the apex court in Dharnidhar Mishra (D) & Anr. v. State of Bihar & Ors, where it was pointed out that although the right to property ceased to be a fundamental right by the Constitution (44th Amendment) Act, 1978, it continued to be a human right in a welfare state, and a constitutional right under Article 300A of the Constitution. Accordingly, the State could not dispossess a citizen of his property except in accordance with the procedure established by law. With regards to the applicability of Section 56(2)(viii), the Court clarified that although the section deals with interest on compensation or enhanced compensation, it need not be presumed to apply automatically to cases involving compulsory acquisition of agricultural land. The key issue was whether the interest in question retained a distinct character or was an accretion to the compensation amount. The Court also pointed out that the definition of “interest” under Section 2(28A) did not encompass interest paid as compensation under the LAA. Since interest in these cases did not fall within the purview of Section 2(28A), Section 56 was not attracted. Therefore, the applicability of Section 56 (2)(viii) will depend upon whether or not, in the particular factual situation, the interest amount can be treated as different in nature from the principal compensation amount.” Accordingly, the case was decided in its favour.
