Income by way of interest on compensation or on enhanced compensation referred to in Section 145B(1) [Section 56(2)(viii)]

As per section 56(2)(viii), any income by way of interest received on compensation or on enhanced compensation, as the case may be, shall be chargeable to tax under the head ‘Income from other sources‘, and as per section 145B(1) such income shall be deemed to be the income of the year in which it is received, irrespective of the method of accounting followed by the assessee.

KEY NOTE

Up to assessment year 2010-11, such interest was taxable on due basis as per Supreme Court’s decision in the case of Rama Bai v. CIT (1990) 181 ITR 400 (SC).

Background

The statutory provisions for the income in the nature of ‘Interest received on compensation or on enhanced compensation’ were brought to Income Tax by the Finance Act, 2009. When these provisions were introduced, the Memorandum explaining the provisions of the Finance Bill, 2009 had this to say:

Rationalization of provisions for taxation of interest received on delayed compensation or enhanced compensation

The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai v. CIT (1990) 181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to taxpayers.

With a view to mitigate the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. Further, it is proposed to insert clause (viii) in section 56(2) to provide that income by way of interest received on compensation or on enhanced compensation referred to in section 145A(2) shall be assessed as “income from other sources” in the year in which it is received. This amendment will take effect from 01.04.2010 and shall accordingly apply in relation to assessment year 1998-99 (wrongly mentioned in the Bill, as it appears; please read as 2010-11) and subsequent assessment years.’’

Text of Section 56(2)(viii)

[1][Income by way of interest received on compensation or on enhanced compensation referred to in [2][sub-section (1) of section 145B;]

KEY NOTE

1. Inserted by the Finance (No. 2) Act, 2009, with effect from 01.04.2010.

2. Substituted for “clause (b) of section 145A” by the Finance (No. 2) Act, 2019 with retrospective effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent assessment years.

Text of Section 145B(1)

145B. (1) Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received.

Deduction from such Interest [Section 57(iv)]

In the case of above interest, which is taxable under other sources, a deduction of a sum equal to 50% of such income shall be allowed under section 57(iv) even if the actual expenditure is less than the said deduction. Apart from this no other deduction shall be allowed from such an income under any other clause of section 57.

PROVISIONS ILLUSTRATED

Mr. X whose property was compulsorily acquired in 2017 received enhanced compensation of Rs. 20,00,000 on 15.02.2021 which includes Rs. 6,00,000 as interest on such enhanced compensation. What is the taxability of such compensation.

SOLUTION:

Enhanced compensation of Rs. 20,00,000 – Rs. 6,00,000 = Rs. 14,00,000 shall be taxable under the head capital gain. Whereas interest on enhanced compensation shall be taxable under the head income from other sources as under:

• • Particulars Amount (Rs.)
  • Interest on Enhanced Compensation Received 6,00,000
  • Less : Deduction @ 50% 3,00,000
  • Balance Taxable 3,00,000

Interest received on compensation or enhanced compensation under Land Acquisition Act, 1894 is to be treated as ‘income from other sources’ and not under head ‘capital gains’- Language of section plain and unambiguous – External aids cannot be adopted to interpret provision

The issue involved in narrow circumference is “whether after the insertion of sections 56(2)(viii) and 57(iv) of the Act with effect from 01.04.2010, can the assessee claim that interest received under section 28 of the Land Acquisition Act, 1894 (for short, ‘the 1894 Act’) will part take the character of the compensation and would fall under the head “Capital gains” and not “Income from other sources”?

The relevant facts are that the land of the petitioner was acquired in the assessment years 2007-08 and 2008-09. The enhanced compensation was received on 21.03.2016. The petitioner filed Income-tax return for the assessment year 2016-17 treating the interest received under section 28 of the 1894 Act as income from other sources and claimed deduction for 50% as per section 57(iv) of the 1961 Act. The return was processed under section 143(1) of the 1961 Act. An application under section 264 of the 1961 Act was made claiming that by mistake the petitioner treated the interest income as income from other sources whereas the same is part of enhanced compensation. The revisional authority rejected the application on 30-1-2019.

The scheme with regard to chargeability of interest received on compensation and enhanced compensation has undergone a sea change with the insertion of sections 56(2)(viii) and 57(iv) of the 1961 Act. Section 56 deals with income from other sources and a specific provision has been inserted by way of sub-section 2(viii), whereby the interest received on compensation or enhanced compensation, as referred to in clause (b) to section 145A has been included under the head ‘Income from other sources’. In clause (iv) to section 57, deduction of fifty per cent is provided on interest received on compensation or enhanced compensation.

In view of the amendments, the decision of Apex Court in CIT v. Ghanshyam (HUF) (2009) 315 ITR 1 : 182 Taxman 368 (SC) does not come to the rescue of the petitioner to claim that interest received under section 28 of the 1894 Act is to be treated as compensation and to be dealt with under “Capital gains“. The fact that there is no amendment carried out under section 10(37) of the 1961 Act will not change the position. Section 10 deals with deductions and sub-section (37) thereof deals with capital gains arising from transfer of agricultural land, it no where provides as to what is to be included under the head “Capital gains”. The argument raised is not well founded.

Learned counsel has relied on Circular No. 5 of 2010 by merely reading clause 46.1. The said clause talks about undue hardship being caused as arrears of interest being taxable on accrual basis. Clause 46.2 states that Section 145A is amended to overcome the difficulty, by deeming the income for the year in which it is received. Clause 46.3 has been ignored in which section 56(2)(viii) is dealt with that interest on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be assessed as “income from other sources”.

Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO (2016) 388 ITR 343 : 70 taxmann.com 45 (Guj.) while dealing with deduction of tax at source relying upon Circular No. 5 of 2010 held that amendment to the provisions of the 1961 Act by Finance Act, 2010 Act was not in connection with the decision of Supreme Court in Ghanshyam’s case (supra) but to mitigate the hardship caused by the decision of Supreme Court in the case of Rama Sai v. CIT (1990) 181 ITR 400 : (1991) 54 Taxman 496 (SC). It was held that interest under section 28 of the 1894 Act continues to part take the character of compensation and will not fall within the ambit of expression “interest”. In view of discussion above, we with utmost respect are not in agreement with the view taken by Gujarat High Court. There is another aspect, i.e. the language of sections 56(2)(viii) and 57(iv) of the 1961 Act is plain, simple and unambiguous. There is no scope of taking outside aid for giving an interpretation to newly inserted sub-sections and clauses. Supreme Court in I.T.C. Ltd. v. CCE (2004) 7 SCC 591 held as under:

“23. ……..These decisions exemplify the general rule of statutory construction that words have to be construed strictly according to their ordinary and natural meaning, particularly when the statute is a fiscal one irrespective of the object with which the provision was introduced. Of course if there is ambiguity in the statutory language, reference may be made to the legislative intent to resolve the ambiguity. But if the statutory language is unambiguous then that must be given effect to. The legislature is deemed to intend and mean what it says. The need for interpretation arises only when the words used in the statute are, on their own terms ambivalent and do not manifest the intention of the legislature.”

In view of the above, it is held that the interest received on compensation or enhanced compensation is to be treated as “income from other sources” and not under the head “Capital gains”. The writ petition is dismissed. (Related Assessment year : 2016-17) – [Mahender Pal Narang v. CBDT (2020) 423 ITR 13 : 120 taxmann.com 400 (P&H)]

Where assessee, a landowner, received interest under section 28 of Land Acquisition Act, 1894, on enhanced compensation paid for acquisition of his land, 50 per cent of said interest was taxable as income from other sources as per provision of section 56(2)(viii) read with section 57(iv) and 145A(b) in year of receipt

Government of Haryana acquired the land for the development and utilization of land as residential and commercial area. The Land Acquisition Collector passed the award. The landowners were paid enhanced compensation vide award. The Assessing Officer made addition of 50 per cent of total amount of the interest amount received on compensation as taxable in the year of receipt as per provisions of section 56(2)(viii) read with section 57(iv) and assessed the income of the assessee at certain amount. On appeal, the Commissioner (Appeals) as well as the Tribunal also upheld the order passed by the Assessing Officer. On the assessee’s appeal to the High Court:

The Assessing Officer in ITA-132-2018 where the assessee had received Rs. 11.30 lakhs as interest income, held that the interest payment received on compensation/enhanced compensation to the tune of Rs. 5.65 lakhs (50 per cent of Rs. 11.30 lakhs) is taxable as incomefrom other sources as per provisions of section 56(2)(viii) read with 57(iv) and section 145A(b) for the assessment year 2010-11. The Commissioner (Appeals) and the Tribunal had upheld the order of the Assessing Officer in that regard. [Para 21] No illegality or perversity could be pointed out by the assessee in the concurrent findings of fact recorded by the authorities below which may warrant interference by this court. No question of law, much less, substantial question of law arise in these appeals. [Para 22]. Accordingly, finding no merit in the appeals, the same are hereby dismissed. – [Puneet Singh v. CIT, Karnal (2019) 110 taxmann.com 116 (P&H)]

It was held that the interest awarded under section 23(1A) and 23(2) read with section 28 of Land Acquisition Act was in nature of solatium and an integral part of compensation and receipt of the same was a capital receipt whereas, interest awarded under section 34 of the said Act was on account of delayed payment of compensation and was revenue receipt exigible to tax. – [Dnyanoba Shajirao Jadhav v ITO (2018) 90 taxmann.com 285 (ITAT Pune)]

Interest received under the Land Acquisition Act, 1894 is taxable as income from other sources

The assessee HUF received interest under section 28 of the Land Acquisition Act, 1894. Section 28 empowers the court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. Assessee contended that the said interest would partake the character of compensation or damage and therefore, would not be liable to tax. High Court held that the interest received under section 28 was on account of keeping back the amount payable to the owner and did not form part of the compensation or damages for the loss of right to retain possession. Accordingly it was held that amount received by the assessee was in the nature of interest and was taxable as income from other sources. (Related Assessment Year : 2010-11) – [Manjet Singh (HUF) Karta Manjeet Singhv UOI (2016) 237 Taxman 116 (P&H)]

Interest on enhanced compensation of land in case of cash system of accounting

Where the assessee is following cash system of accounting interest received on enhanced compensation under Land Acquisition Act, is taxable on receipt basis irrespective of pendency of appeal in higher Courts in respect of such compensation.—[CIT v. Smt. Burfi (2010) 46 DTR 354 (P&H)]