Interest
received on enhanced compensation is taxable as Income from other sources as
per section Section 57(iv) read with 56(2)(viii). However, compensation amount
received by any assessee, in case of rural agricultural land, which is acquired
by way of compulsory acquisition, is exempt under section 10(37). Now, there
are many instances when the amount of compensation fixed by Collector is
disputed before Courts, who may or may not order enhanced compensation at their
discretion. Issue arises, as to what will be the tax consequences of interest
received on such enhanced compensation, in case the same, is awarded by Courts.
Text of Section 28 of
Land Acquisition Act, 1894
Collector may be directed to pay interest on
excess compensation
28. If the sum which, in
the opinion of the Court, the Collector ought to have awarded as compensation
is in excess of the sum which the Collector did award as compensation, the
award of the Court may direct that the Collector shall pay interest on such
excess at the rate of nine per centum per annum from the date
on which he took possession of the land to the date of payment of such excess
into Court:
Provided that the award of the Court may also direct
that where such excess or any part thereof is paid into Court after the date of
expiry of a period of one year from the date on which possession is taken,
interest at the rate of fifteen per centum per annum shall be payable from the
date of expiry of the said period of one year on the amount of such excess or
part thereof which has not been paid into Court before the date of such expiry.
Text of Section 34 of
Land Acquisition Act, 1894
Payment of interest
34. When the amount of such compensation is not paid or
deposited on or before taking possession of the land, the Collector shall pay
the amount awarded with interest thereon at the rate of nine per centum per
annum from the time of so taking possession until it shall have been so paid or
deposited:
Provided that if such
compensation or any part thereof is not paid or deposited within a period of
one year from the date on which possession is taken, interest at the rate of
fifteen per centum per annum shall be payable from the date of expiry of the
said period of one year on the amount of compensation or part thereof which has
not been paid or deposited before the date of such expiry.
Interest on late receipt of compensation from Compulsory
Acquisition
§ Interest on late receipt of
compensation is taxable under the head “Income from other sources”. [under section 56(2)(viii)]
§ However, 50% of this interest shall
be exempted. [under section 57(iv)]
§ Such interest would be taxable in
the year of receipt. [under section 145B(1)]
CBDT’s
Circular No. 36 of 2016, Dated: 25.10.2016 [F.No. 225/S8/2016-ITA.II]
Subject: Taxability
of the compensation received by the land owners for the land acquired under the
Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation
and Resettlement Act, 2013 ('RFCTLAAR Act') - regarding
Under the existing provisions of the Income-tax Act 1961
('the Act'), an agricultural land which is not situated in specified urban
area, is not regarded as a capital asset Hence, capital gains arising from the
transfer (including compulsory acquisition] of such agricultural land is not
taxable. Finance (No, 2] Act, 2004 inserted section 10(37) in the Act from
01.04.2005 to provide specific exemption to the capital gains arising to an
Individual or a HUF from compulsory acquisition of an agricultural land
situated in specified urban limit, subject to fulfilment of certain conditions.
Therefore, compensation received from compulsory acquisition of an agricultural
land is not taxable under the Act (subject to fulfilment of certain conditions
for specified urban land).
2. The RFCTLARR Act which came into effect from 1st January,
2014, in section 96, inter alia provides that income-tax shall not be levied on
any award or agreement made [except those made under section 46) under the
RFCTLARR Act Therefore, compensation received for compulsory acquisition of
land under the RFCTLARR Act (except those made under section 46 of RFCTLARR
Act), is exempted from the levy of income-tax.
3. As no distinction has been made between compensation
received for compulsory acquisition of agricultural land and non-agricultural
land in the matter of providing exemption from income-tax under the RFCTLARR
Act, the exemption provided under section 96 of the RFCTLARR Act is wider in
scope than the tax-exemption provided under the existing provisions of Income-tax
Act, 1961. This has created uncertainty in the matter of taxability of
compensation received on compulsory acquisition of land, especially those
relating to acquisition of non-agricultural land. The matter has been examined
by the Board and it is hereby clarified that compensation received in respect
of award or agreement which has been exempted from levy of income-tax vide
section 96 of the RFCTLARR Act shall also not be taxable under the provisions
of income-tax Act, 1961 even if there is no specific provision of exemption for
such compensation in the Income-tax Act, 1961.
4. The above may be brought to the notice of all concerned.
5. Hindi version of the order shall follow.
Agricultural land – Acquired by Government – Enhanced
compensation including interest received would be eligible for exemption
Allowing the appeal of the assessee the Tribunal held that,
where the Agricultural land is acquired by Government, enhanced compensation
including interest received by the assessee is exempt from the tax. Accordingly
TDS amount that was deducted on account of enhanced compensation was to be
refunded. (Related Assessment year : 2011-12) - [Baldev Singh v. ITO (2019)
176 ITD 1 (ITAT Delhi)]
Interest paid under section 28 of
the Land Acquisition Act amounts to enhance compensation and is not taxable as
interest income
It
was held that no income tax is payable on the amount received as enhanced
compensation for the compulsory acquisition of the agricultural land under Land
Acquisition Act. The bench was hearing an appeal filed against the order of the
first appellate authority wherein the authority held that the interest received
under section 28 of the Land Acquisition Act in case of compulsory acquisition
of agricultural land is in the nature of interest income. The assessee, on
second appeal, contended that the above finding is in contravention of the
judgment of Hon’ble Supreme Court in case of Union of India & ors v. Hari
Singh & Ors and the interest paid under section 28 of the Land Acquisition
Act amounts to enhance compensation and is not taxable as interest income. The
Tribunal noticed the admitted fact that the assessee has not received interest
under section 28 of the Land Acquisition Act, 1894. “This issue has been
decided by the Hon’ble Apex Court in case of Union of India v. Hari Singh and ors. (Civil Appeal No. 15041/2017 order
dated 15.09.2017) wherein it is held that on agricultural Land no tax
is payable when the compensation/enhance compensation is received by the
assessee as their land was agricultural land. The compensation was received in
respect of agricultural land belonging to the assessee which had been acquired
by the state government. Therefore, the same comes under the purview of Section
28 of the Land Acquisition Act,” the Tribunals said. In the light of the
judicial decisions, the Tribunal held that the assessee is eligible for the
exemption under section 10(37) of the Act in respect of the interest received
by the assessee under
section 28
of the Land Acquisition Act, 1894. (Related Assessment year : 2013-14)] -
[Jagmal Singh v. ITO, Gurgaon – Date of
Judgement : 20.09.2018 (ITAT Delhi)]
Acquisition of
agricultural land- Interest -Interest awarded on enhanced compensation paid by
Government for acquisition of agricultural land under Section 28 of Acquisition
Act, 1894 would partake of character of compensation and would be eligible for
exemption
It was held that interest awarded on enhanced
compensation paid by Government for acquisition of agricultural land of
assessee under Section 28 of Acquisition Act would partake of character of
compensation and would be eligible for exemption. (Related Assessmnet year
: 2013-14) - [ITO v. Vinayak Hari Palled (2018) 173 ITD 399 (ITAT Bangalore)]
Interest on
compensation- Interest awarded under section 28 of Land Acquisition Act, 1894
on enhanced compensation paid for acquisition of agricultural land, would be
eligible for exemption
It was held that
interest awarded under section 28 of Land Acquisition Act, 1894 on enhanced
compensation paid for acquisition of agricultural land, would be eligible for
exemption. (Related Assessmnet year : 2013-14) – [ITO v. Sangappa S. Kudarikannur. (2018) 172 ITD 332 (ITAT Bangalore)]
Interest
awarded under Land Acquisition Act is in nature of solatium and an integral
part of compensation and receipt of same is a capital receipt whereas, interest
awarded under the said act is on account of delayed payment of compensation and
is revenue receipt
It was held that interest awarded
under Section 28 of Land Acquisition Act is in nature of solatium and an
integral part of compensation and receipt of said compensation is a capital
receipt whereas, interest awarded under Section 34 of Land Acquisition Act is
on account of delayed payment of compensation and is revenue receipt. (Related
Assessment Year : 2011-12) – [Dnyanoba Shajirao Jadhav v. (2018) 169 ITD 291
(ITAT Pune)]
Interest paid under section 28 of
the Land Acquisition Act amounts to enhance compensation and is not taxable as
interest income
It was held
that on agricultural Land no tax is payable when the compensation/enhance
compensation is received by the assessee as their land was agricultural land.
The compensation was received in respect of agricultural land belonging to the
assessee which had been acquired by the state government. Therefore, the same
comes under the purview of Section 28 of the Land Acquisition Act. – [Union of India v. Hari Singh and ors.
(Civil Appeal No. 15041/2017 order dated 15.09.2017) (SC)]
Interest
awarded on enhanced compensation paid for compulsory acquisition of agriculture
land not taxable
Interest awarded under section 28 of Land Acquisition Act, 1894, on
enhanced compensation paid for compulsory acquisition of agricultural land,
would be eligible for exemption under section 10(37) -
It is not disputed by the Assessing
Officer that the land acquired was agricultural land and the conditions laid
down under section 10(37)(i) to (iv) are applicable to the land which is in
question which was compulsorily acquired. It is also not in dispute that the
interest in question was interest awarded under section 28 of the Land
Acquisition Act, 1894. In the given circumstances, the decision of the Gujarat
High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO (2016) 388 ITR
343 : 70 taxmann.com 45 /will be applicable to the facts of the present case.
[Para 11]
In the light of the aforesaid
decision of the High Court and in the light of the admitted factual position in
the present case, the Commissioner (Appeals) is fully justified in allowing
exemption under section 10(37) on the interest received by the assessee under
section 28 of the Land Acquisition Act, 1894. [Para 14] In the result, the
revenue's appeal is dismissed. (Related
Assessment Year 2013-14) – [ITO v. Basavaraj M Kudarikannur (2018) 95
taxmann.com 106 (ITAT Bangalore)]
The Hon'ble
Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO, Surat
(2016) 70 taxmann.com 45 (Guj) finally concluded, as follows:
"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 Income Tax Act. The first respondent - Income Tax Officer was,
therefore, not justified in refusing to grant a certificate under section 197
of the Income Tax Act to the petitioner for non-deduction of tax at source,
inasmuch as, the petitioner is not liable to pay any tax under the head
"income from other sources" on the interest paid to it under section
28 of the Act of 1894.
14. The
petitioner had earlier challenged the communication dated 9th
February, 2015 whereby its application for a certificate under section 197 of
the Income Tax Act had been rejected, and subsequently, tax on the interest
payable under section 28 of the Act of 1894 has already been deducted at
source. Consequently, the challenge to the above communication has become
infructuous and hence, the prayer clause came to be modified. However, since
the amount paid under section 28 of the Act of 1894 forms part of the
compensation and not interest, the second respondent was not justified in
deducting tax at source under section 194A of the Income Tax Act in respect of
such amount. The petitioner is, therefore, entitled to refund of the amount
wrongly deducted under section 194A of the Income Tax Act."
14. In the
light of the aforesaid decision of the Hon'ble Gujarat High Court and in the
light of the admitted factual position in the present case, we are of the view
that the CIT (Appeals) is fully justified in allowing exemption under section
10(37) of the Act on the interest received by the assessee under section 28 of the Land Acquisition Act, 1894. We find
no grounds to interfere with the impugned orders of the CIT(Appeals).
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