Enhanced compensation on acquisition of agricultural land is income from other sources

Enhanced compensation on compulsory acquisition of agricultural land will be treated as income from other sources and not under the head capital gains.

In a recent judgment, ITAT Amritsar has held that enhanced compensation on compulsory acquisition of agricultural land will be treated as income from other sources and not under the head capital gains.

ABCAUS Case Law Citation:
4772 (2025) (10) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the order passed by CPC under section 143(1) of the Income Tax Act, 1961 (the Act) treating interest received on enhanced compensation on compulsory acquisition of agricultural land as “income from other source”.

The appellant assesee had received interest amount from Land Acquisition officer which had arisen on compulsory acquisition of rural agricultural lands by the Government, as enhanced compensation as part of compulsory acquisition, which had been claimed by the assessee as exempted income u/s 10 (37) of the Act.

The return filed by the assessee declaring taxable income at NIL, had been assessed u/s 143(1), by CPC, Bangalore, treating the interest received as “income from other source”.

In the first appeal, the assessee contended that the interest was exempt u/s 10(37) of the Act, on the ground that the interest received was a part of the compensation which is exempt u/s 10(37) of the Act.

However, the CIT(A) dismissed the ground relying on the law laid down by the Hon’ble jurisdictional High Court where the Hon’ble court had observed that interest received on compensation or enhanced compensation was to be treated as income from other sources, and not under the head ‘Capital gains.

However, the first appellate authority allowed the deduction of a sum equal to fifty percentage of such income, allowable u/s 57(iv) of the Act and the addition was reduced accordingly.

Before the Tribunal, the assessee claimed that the interest portion received on compensation was to be treated as income from capital gains and not income from other sources, and he relied on the decision of the Hon’ble Kerala High Court where the Hon’ble Court while analyzing  the provisions relating to interest amounts received by assessee in respect of delay payment of compensation under the Land Acquisition Act had held that the same will be treated as accruals to the principal compensation amount and be classified as capital gains for the purpose of Income Tax Act. 

The Hon’ble High Court had further held that the consequential interest amount will also get the benefit of section 10(37) of the Act if the land compulsorily acquired is agricultural land. The assessee prayed that the interest amount received may be treated as accruals to the principal compensation and be classified as capital gains which will be qualified for deduction u/s 10(37). 

The Revenue relied on the judgment of the Hon’ble jurisdictional High Court and pointed out that the SLP against the judgement of Hon’ble High Court in the aforesaid case where the Court held that section 10 deals with deductions and clause (37) thereof deals with capital gains arising from transfer of agricultural land and it nowhere provides as to what is to be included under the head ‘Capital gains.’ has been dismissed by the Hon’ble Apex Court. Thus, interest received on compensation or enhanced compensation was to be treated as income from other sources and not under the head capital gains.

The Tribunal following the decision of the Hon’ble jurisdictional High Court, opined that interest on enhanced compensation on compulsory acquisition of agricultural land will be treated as income from other sources and not under the head capital gains.

The Tribunal further held that the interest received on compensation by the assessee on compulsory acquisition of land will form part of the taxable income under the head income from other sources and shall be entitled to deduction u/s 57 (iv) of the Act.

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