Devaraya Pillai Subramanian Vs ITO (ITAT Chennai)
The Income Tax Appellate Tribunal (ITAT), Chennai Bench, in the case of Devaraya Pillai Subramanian Vs Income Tax Officer (ITO), allowed the assessee’s appeal, holding that the interest received on enhanced compensation for the compulsory acquisition of exempt agricultural land is also exempt from income tax. This decision addresses the taxability of interest received under Section 28 of the Land Acquisition Act, 1894 (LAA), specifically when the principal compensation itself is exempt.
Factual Background
The assessee, an individual with income from a bus transport service, received total proceeds of ₹59,95,496 during the Assessment Year 2017-18. This amount comprised initial compensation and enhanced compensation of ₹44,93,229, along with related interest, from the compulsory acquisition of his agricultural land by a Special Tahsildar for a railway project in 1999.
The assessee claimed the entire receipt as exempt from tax, arguing that the land, situated beyond eight kilometers from the Salem municipal limits, did not qualify as a capital asset under the Income Tax Act, 1961 (the Act). Consequently, the compensation received was exempt.
The Assessing Officer (AO) accepted that the land acquisition compensation was exempt but, invoking Section 56(2)(viii) read with Section 145B(1) of the Act, brought 50% of the interest on enhanced compensation (₹22,46,610) to tax under the head “Income from Other Sources.” The AO and the subsequent Commissioner of Income Tax (Appeals) [CIT(A)] held that Section 56(2)(viii), inserted by the Finance (No.2) Act, 2009, specifically made interest on enhanced compensation taxable as income from other sources, irrespective of the nature of the principal compensation. The CIT(A) further rejected the applicability of Section 10(37) of the Act, which provides exemption for capital gains on compulsory acquisition of agricultural land, stating that it applies only to ‘compensation’ and not the ‘interest on compensation’.
