₹46.47 Lakh Interest on Enhanced Land Compensation Not Taxable: ITAT Pune

Dharmaraj Kashinath Mhatre Vs NFAC (ITAT Pune)

Summary: The Income Tax Appellate Tribunal, Pune Bench, in Dharmaraj Kashinath Mhatre Vs NFAC, allowed the assessee’s appeal for Assessment Year 2016-17 and directed deletion of an addition of ₹46,47,395 representing interest received on enhanced compensation for compulsory acquisition of agricultural land. The Tribunal held that such interest, being in the nature of an accretion to the compensation awarded under Section 28 of the Land Acquisition Act, does not constitute interest taxable as income from other sources under Section 56(2)(viii) of the Income Tax Act, 1961. The Bench comprising Dr. Dipak P. Ripote, Accountant Member, and Vinay Bhamore, Judicial Member, followed the judicial principles recognised in CIT Vs Ghanshyam (HUF), Movaliya Bhikhubhai Balabhai Vs ITO and Sanjay Bhimrao Patil Vs ITO.

The assessee had filed his original income-tax return on 14 August 2016 declaring income of ₹34,78,550 and subsequently revised it on 31 December 2017, declaring income of ₹35,01,130. His case was selected for scrutiny assessment. The assessee held a one-third share in agricultural land jointly owned with two other persons, which had been compulsorily acquired. After challenging the original compensation, the landowners received enhanced compensation and interest pursuant to judicial proceedings. The Assessing Officer treated the interest component attributable to the assessee, amounting to ₹46,47,395, as taxable income from other sources under Sections 56 and 57. The Additional/Joint Commissioner of Income Tax (Appeals), Gurugram, upheld the addition by order dated 19 March 2026.

Before the Tribunal, the appeal was filed with a delay of 50 days. The assessee submitted an affidavit explaining the delay, and the Tribunal accepted that sufficient cause existed. Emphasising that substantial justice should prevail over procedural delay, the Bench condoned the delay and proceeded to decide the appeal on merits. Although nobody appeared on behalf of the assessee at the hearing, the Tribunal examined the records and heard the Departmental Representative. The principal issue was whether interest awarded on enhanced compensation for compulsorily acquired agricultural land constituted taxable interest or formed part of the compensation itself.

The Tribunal relied upon the Gujarat High Court judgment in Movaliya Bhikhubhai Balabhai Vs Income-tax Officer-TDS-1-Surat, (2016) 388 ITR 343, which explained the distinction between interest awarded under Sections 28 and 34 of the Land Acquisition Act, 1894. Interest under Section 28 represents an accretion to the value of the acquired land and consequently forms part of enhanced compensation. In contrast, interest under Section 34 is awarded for delayed payment of compensation and retains the character of interest income. The Gujarat High Court had further held that the amendments introduced by the Finance (No. 2) Act, 2009, including changes to Section 145A and insertion of Section 56(2)(viii), did not displace the Supreme Court’s interpretation in CIT Vs Ghanshyam (HUF). The amendments addressed the timing of taxation of interest and the hardship arising from accrual-based taxation but did not alter the legal character of Section 28 compensation.

The Revenue argued that, following the legislative amendments effective from 1 April 2010, the earlier Supreme Court decision concerning enhanced compensation was no longer applicable. The Tribunal rejected this submission because the Gujarat High Court had expressly examined the amended statutory provisions and nevertheless held that the principle established in Ghanshyam (HUF) continued to apply. The Tribunal also relied upon its earlier decision in Sanjay Bhimrao Patil Vs ITO, 200 ITD 575 (Pune-Trib.), where interest awarded under Section 28 for the period from possession of land until the relevant judicial determination was treated as part of compensation rather than taxable interest. That decision had considered the Bombay High Court’s ruling in Rupesh Rashmikant Shah Vs Union of India and the Gujarat High Court’s decision in Movaliya Bhikhubhai Balabhai.

The Tribunal observed that no contrary decision of the jurisdictional Bombay High Court had been brought to its notice. Respectfully following the judicial authorities discussed in the order, it held that the interest on enhanced compensation received by the assessee was not taxable under Section 56(2)(viii). Accordingly, the Assessing Officer was directed to delete the addition of ₹46,47,395, and the assessee’s appeal was allowed. The decision reiterates the legal distinction between interest awarded as an enhancement of compensation and interest paid merely for delay in disbursing compensation, a distinction that remains central to determining taxability under the Income Tax Act.

Cases Discussed

1. Smt. Rama Bai Vs CIT (Supreme Court); (1990) 181 ITR 400; (1991) 54 Taxman 496 — Discussed in the Gujarat High Court extract concerning accrual-based taxation of interest on delayed or enhanced compensation and the legislative background to the Finance (No. 2) Act, 2009 amendments.

2. CIT Vs Ghanshyam (HUF) (Supreme Court); (2009) 315 ITR 1 — Followed for the distinction between interest under Section 28 of the Land Acquisition Act, which forms part of enhanced compensation, and interest under Section 34, which relates to delayed payment.

3. CIT Vs Govindbhai Mamaiya (Supreme Court); (2014) 367 ITR 498 — Cited in the Gujarat High Court extract as following Ghanshyam (HUF) regarding the character of interest on enhanced compensation.

4. Movaliya Bhikhubhai Balabhai Vs Income-tax Officer-TDS-1-Surat (Gujarat High Court); (2016) 388 ITR 343 — Followed for holding that the Finance (No. 2) Act, 2009 amendments did not alter the compensatory character of interest awarded under Section 28 of the Land Acquisition Act.

5. Shri Rupesh Rashmikant Shah Vs Union of India and Others (Bombay High Court); 08/08/2019 — Discussed in the quoted Pune Tribunal precedent concerning the character and taxability of interest awarded on compensation.

6. Sanjay Bhimrao Patil Vs ITO (ITAT Pune); 200 ITD 575; AY 2013-14 — Followed for treating Section 28 interest on enhanced land acquisition compensation as an accretion to compensation rather than taxable income from other sources.

Other decisions mentioned in the judicial extracts: Manjet Singh (HUF), Hari Kishan, Bir Singh (HUF), Jagmal Singh and Sharda Kochhar — Discussed in the quoted Gujarat High Court judgment regarding competing interpretations of interest on compensation; full citations are not reproduced in the supplied order.

FULL TEXT OF THE ORDER OF ITAT PUNE

This is an appeal filed by the assessee against the order of the Learned Additional/Joint Commissioner of Income Tax (Appeals)-1, Gurugram [Ld. Addl./JCIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2016-17 on 19.03.2026, emanating from the assessment order u/s 143(3) of the Act dated 08.10.2018.

2. There was a delay of 50 days in filing of the appeal before this Tribunal. The assessee filed an affidavit explaining the reasons for delay. We have perused the affidavit and convinced that there was sufficient cause for delay. Substantial justice is more important than procedural delay. No assessee is going to gain by filing the appeal belatedly. Accordingly, delay condoned.

Findings and Analysis:

3. None appeared on behalf of the assessee. We have heard Ld. DR and perused the records. In this case, the original return of income for AY 2016-17 was filed by the assessee on 14.08.2016 declaring total income at Rs.34,78,550/-. The said return was revised on 31.12.2017 revising total income at Rs.35,01,130/-. The assessee’s case was selected for scrutiny. The assessee filed reply in response to notice. In the assessment order, it is noted by the Assessing Officer (AO) at page 2 that the agricultural land of the assessee and two others was compulsorily acquired under the Land Acquisition Act, 1873. The assessee filed petition before the Court against the compensation received. The Hon’ble Court enhanced the compensation. Accordingly, the assessee received enhanced compensation during the year and interest. The assessee’s share in the agricultural land was 1/3rd. The relevant paragraph of the assessment order is scanned and reproduced here as under :

3. During the course of assessment proceedings, it is noticed that the agricultural land of the assessee and two others was compulsorily acquired under the Land Acquisition Act, 1873. In lieu of such land acquisition, they were awarded some monetary compensation. However, being aggrieved from the amount of compensation, they had filed appeal before the Court. Consequently, they have been allowed enhanced compensation along with interest thereon. Accordingly, the assessee and others have received following emoluments:

As a result, the assessee has received his 1/3rd share of compensation and interest thereon. Since, the compensation on account of compulsory land acquisition of agricultural land is exempt from tax under the provisions of section 10(37) of the Income Tax Act, 1961, the assessee has offered interest on enhanced compensation for taxation. However, out of the total interest, the assessee has claimed interest on payment under section 28 of Land Acquisition Act, 1873 of Rs.46,47,395/- as exempt from taxation being part of compensation.

3.1 The AO held that interest received on enhanced compensation is taxable as income from other sources u/s 56(1) r.w.s. 57 of the Act. Accordingly, the AO taxed the interest income of Rs.46,47,395/-. The Ld. Addl./JCIT(A) upheld the same.

4. The only issue before us is as to whether the interest received on enhanced compensation is exempt or taxable. In this context, the Hon’ble High Court of Gujarat in the case of Movaliya Bhikhubhai Balabhaiv.Income-tax Officer-TDS-1-Surat [2016] 388 ITR 343 (Gujarat) held as under :

Quote,“ 8. The above referred decision in the case of Ghanshyam (HUF) (supra) came to be followed by the Supreme Court in the case of CIT v. Govindbhai Mamaiya [2014] 52 taxmann.com 270/367 ITR 498/[2015] 229 Taxman 138, wherein the court after referring to the above decision in the case of Ghanshyam (HUF) (supra) held that it is clear that whereas interest under section 34 of the Act of 1894 is not treated as a part of income subject to tax, the interest earned under section 28, which is on enhanced compensation, is treated as an accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to tax under section 45(5) of the Income Tax Act.

9. Thus, the Supreme Court in the case of Ghanshyam (HUF) (supra) has held that the interest under section 28 of the Act of 1894 unlike interest under section 34 is an accretion to the value and hence, it is a part of the enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. Therefore, interest under section 28 of the Act of 1894 would form part of the enhanced compensation and would be exigible to capital gains under section 45(5) of the I.T. Act. In other words, in case of a transaction which is otherwise exigible to capital gains tax under section 45 of the I.T. Act, the interest received under section 28 of the Act of 1894 being an accretion to the value, would form part of the compensation and would be exigible to tax under section 45(5) of the I.T. Act, whereas the interest received under section 34 of the Act of 1894 would be “interest” within the meaning of such expression as envisaged under section 145A of the I.T. Act and would be deemed to be the income of the year under consideration, chargeable to tax as income from other sources under section 56 of the I.T. Act.

10. In the facts of the present case, it is an admitted position………………………Thus, it is clear that the Supreme Court after considering the scheme of section 45(5) of the I.T. Act has categorically held that payment made under section 28 of the Act of 1894 is enhanced compensation, as a necessary corollary, therefore, the contention that payment made under section 28 of the Act of 1894 is interest as envisaged under section 145A of the I.T. Act and has to be treated as income from other sources, deserves to be rejected.

11. It has been vehemently contended on behalf of the first respondent that the above decision has been rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability to the facts of the present case. The scope and effect of the substitution (with effect from 1st April, 2010) of section 145A, as also amendment made in section 56(2) by Act 33 of 2009 have been elaborated in the following portion of the departmental circular No. 5/2010, dated 3.6.2010, as follows:

“Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation.- 46.1 The existing provisions of Income Tax Act, 1961, 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 Smt. Rama Bai v. CIT (1990) 84 CTR (SC) 164 :(1990) 181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to the taxpayers. 46.2 With a view to mitigate the hardship, section 145A is amended 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 was received, irrespective of the method of accounting followed by the assessee. 46.3 Further, clause (viii) is inserted in sub-section (2) of the section 56 so as to provide that income by way of interest received on compensation or enhanced compensation referred to in clause (b) of section 145A shall be assessed as “income from other sources” in the year in which it is received. 46.4 Applicability. – This amendment has been made applicable with effect from 1st April, 2010, and it will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years.”

Thus, the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR 400/[1991] 54 Taxman 496 whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the words “interest received on compensation or enhanced compensation” in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)’s case (supra).

12. On behalf of the first respondent, reliance has been placed upon decisions of different High Courts taking a different view. This court is not in agreement with the view adopted by the other High Courts which are not consistent with the law laid down in the case of Ghanshyam (HUF) (supra). In Manjet Singh (HUF) Karta Manjeet Singh’s case (supra), the Punjab and Haryana High Court has chosen to place reliance upon various decisions of the Supreme Court rendered during the period 1964 to 1997 and has chosen to brush aside the subsequent decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) which is directly on the issue by observing that the assessee cannot derive any benefit from the observations made by the Supreme Court as quoted therein. In Hari Kishan’s case (supra), the Punjab and Haryana High Court has placed reliance upon its earlier decision in the case of Manjet Singh (HUF) Karta Manjeet Singh (supra). In Bir Singh (HUF)’s case (supra), the Punjab and Haryana High Court has held that under the scheme of the 1894 Act, interest under section 34 is part of compensation while interest under section 28 is not the interest which partakes the character of compensation and is treated differently. In the opinion of this court, the above view of the Punjab and Haryana High Court is contrary to what has been held in the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) wherein it has been held that interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. This court is in agreement with the view adopted by the Punjab and Haryana High Court in Jagmal Singh’s case (supra), which has been extensively referred to in paragraph 4.1 above. The decision of the Delhi High Court in Sharda Kochhar’s case (supra), having been rendered in the context of a different controversy would have no applicability to the facts of the present case.

13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression “interest” as contemplated in section 145A of the I.T. Act……….” Unquote.

(emphasis supplied)

4.1 Thus, the Hon’ble Gujarat High Court (supra) considered the amendment and explained the law that Interest paid on enhanced compensation part takes the character of compensation. The Hon’ble Gujarat High Court held that even after amendment, interest received on compensation or enhanced compensation” in section 145A of the I.T. Act, have to be construed in the manner interpreted by the Supreme Court in CIT v. Ghanshyam (HUF) case.

5. The Ld. DR pleaded that after amendment introduced by the Finance Act, 2009, the decision of Hon’ble Supreme Court is not applicable. However, the Hon’ble Gujarat High Court (supra) has discussed the amendment and held that even after the amendment decision of the Hon’ble Supreme Court in the case of Ghanshyam (HUF) is applicable. Hence, arguments of the Ld. DR are rejected.

6. Similar view has been taken by the Pune Tribunal in the case of Sanjay Bhimrao Patil Vs. ITO, 200 ITD 575 (Pune-Trib.). The relevant paragraphs of the said are reproduced here as under :

Quote, “20. Having referred to the various case laws placed reliance by the Id.AR and ld. DR, as discussed by us in the above referred paragraphs of this order, we find the Hon’ble Jurisdictional High Court of Bombay in the case of Rupesh Rashmikant Shah (supra) discussed the issue in detail with reference to effect of substitution of section 145A with effect from 1-04-2010 read with amendment by inserting clause (viii) in section 56(2) of the Act, as the AO in the present case proceeded to allow 50% deduction u/s. 57(iv) and brought to tax remaining 50% u/s. 56(2)(viii) of the Act which is evident from the computation made in para 3.10 of the assessment order. The Hon’ble High Court was pleased to agree with the ratio laid down by the Hon’ble High Court of Gujarat in the case of Movaliya Bhikhubhai Balabhai (supra), where, it held, the ratio of Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra) would continue to apply post amendment in section 145A by virtue of Finance Act, 2009. We note that the Hon’ble High Court of Gujarat in the case of Movaliya Bhikhubhai Balabhai (supra) held the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra), but was brought into with a view to mitigate the hardship caused to the assessee on account of the decision of Hon’ble Supreme Court in the case of Rama Bai v. CIT [1991] 54 Taxman 496/[1990] 181 ITR 400, taking into account Circular No. 5/2010 dated 3-06-2010 issued by the CBDT. It is pertinent to note the law laid down by the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra) held, interest u/s. 28 is not like interest granted u/s. 34, the interest granted u/s. 28 is an accretion to the value of land and is a part of enhanced compensation. Further, it also held additional amount granted u/s. 23(1A) and solatium u/s. 23(2) of the Land Acquisition Act is also forms part of enhanced compensation. The Hon’ble High Court of Bombay in view of law laid down by the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra) which was followed by the Hon’ble High Court of Gujarat in the case of Movaliya Bhikhubhai Balabhai (supra) observed there are three crucial dates in the context of determination of interest under motor accident claims i.e. date of accident, date of filing of the claim petition and date of passing of the award by Claims Tribunal, while observing so, held the AO had committed an error in levying tax on the interest components of the compensation awarded to the claimant till the date of judgment of the High Court, further held, any interest paid to the claimant post the judgment tax had to be collected as income from other sources. Therefore, it is clear from the judgment of Hon’ble Jurisdictional High Court that no interest could be brought to tax from the date of claim petition till the judgment of High Court. Applying the same principle to the present facts of the case that the interest granted u/s. 28 of Land Acquisition Act on enhanced compensation/compensation by the reference court u/s. 18 of Land Acquisition Act, from the date of possession of land and till the judgment of High Court, is part of compensation, could not be taxed in view of amendments by substitution of section 145A read with clause (iii) of section 56(2) of the Act.

21. In the present case, the AO simply proceeded on the premise that the amendments to provisions u/s. 145A which bears the heading method of accounting in certain cases, section 145A(b) provides that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or on enhanced compensation shall be deemed to be the income of the year in which it is received read with section 56(2)(viii) of the Act which provides income by way of interest on compensation or on enhanced compensation referred to in sub-section (1) of section 145B of the Act shall be chargeable to income tax under the head “Income from other sources”. Therefore, we hold that the interest granted by the reference Court u/s. 28 of the Land Acquisition Act from the date of possession of land till the date of judgment of High Court is an accretion of the value of the land acquired. Thus, we reject the arguments of ld. DR, Shri M.G. Jasnani that the principle laid down by the Hon’ble Jurisdictional High Court of Bombay in the context of motor accident claims is not applicable to the present facts of the case. Admittedly, the Learned Civil Judge, S.D., Ahmedpur at Udgir passed decree on 22-04-2008 in L.A.R. No. 2 of 2004, a reference court, granted enhanced amount of Rs. 71,84,186/- to the assessee which is evident from the execution petition filed to realize the decree amount which is on record, clearly shows the interest of Rs. 6,46,577/- on enhanced compensation amount of Rs. 71,84,186/- u/s. 28 of the Land Acquisition Act @ 9% from 17-06-1992 to 16-06-2000 (for one year). Further, interest of Rs. 92,29,639/- u/s. 28 of the Land Acquisition Act @ 15% from 17-06-2002 to 21-02-2009 (for 103 months). Therefore, respectfully following the decision of Hon’ble Jurisdictional High Court of Bombay in the case of Rupesh Rashmikant Shah (supra), we hold the interest received u/s. 28 of the Land Acquisition Act would not fall within the ambit of the expression interest as envisaged u/s. 145A(b) of the Act, further, hold that the amendment by way of substitution of section 145A by Finance (No. 2) Act, 2009 w.e.f. 1-04-2010 and amendment by way of insertion of clause (iii) in section 56(2) by Finance Act, 2009 would have no applicability to the facts of the present case and in view of the same the order of CIT(A) in confirming the order of AO is not justified. Thus, ground Nos. 1 and 2 raised by the assessee are allowed.” Unquote.

7. No contrary decision of the Hon’ble Jurisdictional High Court has been brought to our notice. Respectfully following the above referred decisions (supra), we hold that the interest on enhanced compensation is not taxable u/s 56(2)(viii) of the Act. Accordingly, we direct the AO to delete the addition. Thus, the grounds raised by the assessee are allowed.

8. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 22nd October, 2026