Interest on delayed payment of Land Acquisition compensation is taxable as capital gain

Interest for delayed payment of compensation under Land Acquisition Act is taxable as capital gain not interest u/s 56 and also eligible for exemption u/s 10(37) – High Court

In a recent judgment Kerala High Court has held that interest amounts received by an assessee in respect of delayed payment of compensation under the Land Acquisition Act will be treated as accruals to the principal compensation amount and be classified as “Capital Gains’ for the purposes of the Income Tax Act, 1961. Consequently, the interest amounts will also get the benefit of Section 10(37) if the land compulsorily acquired is agricultural land. Further, since the interest amounts is not in the nature of interest as defined under Section 2 (28A), the provisions of Section 56 shall not be attracted in such cases.

ABCAUS Case Law Citation:
4613 (2025) (06) abcaus.in HC

The sole issue in this case was determination of the head of income under which interest amounts, paid on the delayed payment of compensation or enhanced compensation for compulsory acquisition of agricultural land, is to be classified.

The Income Tax Appellate Tribunal (Tribunal) vide its order had remanded the issue of taxability of such interest to the Assessing Officer (AO) with a direction that while the interest amounts will qualify for exclusion from total income under Section 10(37) of the Income Tax Act, 1961 (the Act), the interest amounts will be assessable as ‘Income from other sources’ under Section 56 (2)(viii) of the Act.

In pursuance of the order of the ITAT, the AO passed rectification order under Section 154 of the Act treating the interest received by the assessee on the enhanced compensation for the agricultural land acquired from him as taxable under the head ‘Income from other sources’ under Section 56 (2)(viii) of the Act.

The Tribunal dismissed the appeal of the assessee against the said rectification order passed by the AO.

The assessees had received compensation as fixed by the Land Acquisition Officer [LAO] for the agricultural lands acquired from them by the State.  The Reference Court granted them enhanced compensation and also directed interest to be paid on the enhanced compensation in accordance with Section 28 of the LAA.

In his return of income, the assessees classified the income received by way of enhanced compensation and interest as income under the head of ‘Capital Gains’, he also claimed the exemption u/s 10(37) of the Act.

The Tribunal had taken the stand that while the compensation and enhanced compensation amounts received by the assessees would merit classification as ‘Capital Gains’ for the purposes of assessment under the Act, the interest amounts paid to the assessees for the delayed payment of compensation or enhanced compensation would merit classification only as ‘Income from other sources’ and therefore would not get the benefit of Section 10(37) of the Act.

The Hon’ble High Court opined that a conjoint reading of the statutory provisions, it is clear that amounts received by an assessee as compensation or enhanced compensation for compulsory acquisition of his landed property would be treated as income under the head of ‘Capital Gains’. Also. if the said compensation amounts are received in relation to agricultural property, then by virtue of the provisions of Section 10 (37) of the I.T. Act, the amounts would stand excluded from the total income of the assessee for the purposes of the Act.

The Hon’ble High Court further observed that as for the interest amounts received by an assessee in terms of Section 28 or Section 34 of the LAA, it is debatable as to whether the said interest would qualify as interest for the purposes of the Act as well going by the definition of the term under Section 2(28A) of the Act. This is because there are conflicting precedents on the issue as to whether the interest paid to an assessee for delayed payment of compensation for compulsory acquisition of his land partakes the character of the compensation itself or merely that of an interest payment.

Placing reliance on several judgments, the Hon’ble High Court held that the payment of interest on delayed payment of compensation to an assessee, be it under Section 28 or Section 34 of the LAA, would partake the character of the principal compensation itself since it is essentially paid to compensate the assessee for the loss he suffered on account of not having the use of the principal compensation amount at the time when it fell due. We cannot lose sight of the fact that compensation amounts paid to a person towards compulsory acquisition of his property traces its roots to the constitutional obligation to pay such compensation under Article 300A of the Constitution. Recent judicial pronouncements have also recognised the right to property as a human right.

Accordingly, the appeals were allowed by answering the questions of law raised in favour of the assessee and against the revenue.

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