Interest received u/s 28 of Land Acquisition Act on enhanced compensation exempt from tax – ITAT
In a recent judgment, ITAT has held that AO was correct in holding that interest received u/s 28 of Land Acquisition Act on enhanced compensation exempt from tax following decision of the Hon’ble Supreme Court.
ABCAUS Case Law Citation:
ABCAUS 3849 (2024) (01) ITAT
Important Case Laws relied upon by parties:
CIT v. Ghanshyam (HUF) [2009] 182 Taxman 368/315 ITR 1(SC)
V, M. Salgaocar and Bros Pvt. Ltd. vs. CIT 243 ITR 383
CIT, Rajkot v Govindbhai Mamaiya [2014] 52 taxmann.com 270 [2015] 229 Taxman 138/2014) 367 ITR 498 (SC)
CIT vs. Hindustan Coca Cola Beverages P Ltd. (2011) 331 ITR 192 (Del.)
CIT vs. Ganpat Ram Bisnoi 296 ITR 292 (Raj.)
CIT vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del)
Mahender Pal Narang vs. CBDT (2020) 423 ITR 13 (P&H)
CIT vs. Sohana Woollen Mills (2008) 296 ITR 238
Rama Bai vs. CIT (1990) 181 ITR 400
Puneet Singh, Karnal vs. ACIT
UOI v. Hari Singh [2018] 91 taxmann.com 20 (SC)
Mahender Pal Narang vs. CBDT (2021) 279 Taxman 74 (SC)
In the instant case, the assessee had challenged the order passed by the Principal Commissioner of Income Tax (PCIT) passed under section 263 of the Income Tax Act, 1961 (the Act) in respect of the issue of taxability of interest u/s 28 of the Land Acquisition Act received as part of enhanced compensation.
The appellant assessee was an individual. The assessee received interest on enhanced compensation from State Development Authority after the compulsory acquisition of his agricultural land on which TDS @ 10% was also deducted. The assessee claimed the said interest as exempt. His return was processed under section 143(1)(a) of the Act.
His case was selected for complete scrutiny assessment under the e-assessment Scheme, 2019 on two issues, namely refund claim and winning from Lottery/crossword puzzle/horse races.
The Assessing Officer (“AO”) served notice under section 143(2) followed by issue of notice under section 142(1) of the Act. Later, the AO completed the assessment under section 143(3) r.w. section 143(3A) and 143(3B) of the Act on income returned with the observation that on aforesaid two issues no addition is made.
In exercise of his powers vested in him under section 263 of the Act, the PCIT held the impugned order of the AO as erroneous and prejudicial to the interest of Revenue. According to PCIT, the AO should have taken into consideration, the binding decision of Hon’ble Jurisdictional High Court wherein the Hon’ble High Court has dealt with the controversy arising from the judgment of Hon’ble Supreme Court relating to the taxability of interest received on compensation or enhanced compensation and also the amendments/provisions of section 56(2)(viii) introduced through Finance Act, 2009 on the above issue, which the AO failed to do. The Hon’ble High Court had given the finding that interest received on compensation or enhanced compensation will be taxed as per amended provisions introduced through Finance (No.2) Act, 2009 and the judgment of the Hon’ble Supreme Court would not come to the rescue of the assessee.
The PCIT pointed out that the SLP filed against the decision of the Hon’ble High Court had been dismissed by the Hon’ble Supreme Court. The PCIT therefore required the assessee to show cause as to why an appropriate order under section 263 of the Act be not passed.
In response the assessee submitted that the amount received under section 28 of Land Acquisition Act is exempt from tax relying on the decision of Delhi Bench of the Tribunal wherein placing reliance upon the decision of Hon’ble Supreme Court decided in favour of the assessee.
The submission of the assessee was not acceptable to the PCIT in view of the decision of Hon’ble High Court and dismissal of SLP filed against it by the Hon’ble Supreme Court. He, therefore, set aside the assessment order and directed AO to pass an order afresh after making requisite enquiries and proper verification with regard to taxability of interest on enhanced compensation.
The Tribunal noted that during assessment proceedings in response to notice under section 143(2) and 142(1) of the Act, with reference to specific query on receipt of interest under section 28 of Land Acquisition Act, the assessee explained that interest received under section 28 of the Land Acquisition Act has been held to be part of compensation by Apex Court, the same being exempt under section 10(37) of the Act has not been included in the total income of the assessee while filing return of income. The AO accepted the explanation of the assessee.
The Tribunal further observed that the issue of amended provisions of section 56(2)(viii) by the Finance Act, 2009 and the decision of Hon’ble High Court raised by the PCIT in notice under section 263 on the basis of audit objection.
It was also observed that before the PCIT the assessee explained that the amended provisions were not in connection with the decision of Hon’ble Supreme Court case but to make simple the taxation of interest income as earlier it was taxable on accrual/cash basis on the basis of accounting principles as held by the decision of Hon’ble Supreme Court. It was also explained that insertion of section 145A, 145B, 56(2)(viii) and 57(iv) by the Finance (No.2) Act, 2009 did not change the character of interest under section 28 of the Land Acquisition Act from ‘capital receipt’ forming part of enhanced compensation as envisaged in section 45(5) of the Act to ‘revenue receipt’ chargeable to tax as ‘income from other sources’.
The Tribunal noted that it was also explained to the PCIT that after analysing the provisions of section 28 and 34 of Land Acquisition Act the Hon’ble Supreme Court held that interest is different from compensation. However, interest paid on the excess amount under section 28 depends upon a claim by a person whose land is acquired whereas interest under section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under section 28 is part of the amount of compensation whereas interest under section 34 is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under section 34. It is thus evident that the view taken by the AO that interest under section 28 of Land Acquisition Act received by the assessee is exempt under section 10(37) of the Act is not contrary to law.
The Tribunal further observed that We notice that in CBDT Circular No. 5, dated 03.06.2010, it is stated that the Hon’ble Supreme Court 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. With a view to mitigate the hardship section 145A has been substituted and clause (viii) in sub-section (2) of section 56 has been inserted by the Finance (No.2) Act, 2009 so as to provide that the interest received on compensation or on 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. It is thus evident that the amended provisions of section 56(2)(viii) of the Act r.w. section 145A were brought on the statute to nullify the effect of Hon’ble Supreme Court’s ruling in another case and not the case relied upon by the assessee. Moreover, the decision in decision relied upon by the assessee was pronounced much later after the Finance Bill proposing amendment to section 56 was laid.
Further, the Tribunal noted that the decision of the Hon’ble Supreme Court was not brought to the notice of Hon’ble High Court while rendering decision in the case relied upon by the PCIT. Accordingly, the opinion of the PCIT that the AO should have passed the assessment in accordance with the amended law and binding decision of Hon’ble High Court overlooking the decision of Hon’ble Supreme Court was not sustainable.
Further, the Tribunal observed that Hon’ble Supreme Court has held that an order dismissing the Special Leave Petition (SLP) at the threshold without detailed reasons does not constitute any declaration of law or a binding precedent. Therefore, over-emphasising the fact of dismissal of SLP in limine by the Hon’ble Supreme Court in a case by the Revenue was not of any legal assistance to it.
The Tribunal also observed that mere audit objection cannot lead to an inference that the order of the AO is erroneous or prejudicial to the interest of the Revenue.
The Tribunal also observed that since the order of the AO was based on the decision of the Hon’ble Supreme Court on the issue of taxability of interest received by the assessee under section 28 of Land Acquisition Act, it can at best be said to be a debatable issue on which two views are possible and the AO accepted one of the views. In this view of the matter too, the PCIT cannot assume revisional jurisdiction as held by the Hon’ble Delhi High Court
The Tribunal held that the order of the PCIT was not sustainable. Accordingly, ITAT allowed the appeal of the assessee and quashed the impugned order of the PCIT.
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