Taxability of interest received u/s 28 of Land Acquisition Act 1894-Settled Law

Taxability of interest received u/s 28 of Land Acquisition Act 1894. ITAT quashed CIT order believing that division bench order of the Supreme Court was not good law  

ABCAUS Case Law Citation:
ABCAUS 2748 (2019) (01) ITAT

Important Case Laws Cited/relied upon:
Ghanshyam, HUF reported at 315 ITR 1 (2009)

Manjit Singh Vs Union of India & others
Dr. Shamlal Narula Vs CIT (1964) 53 ITR 151
Bikram Singh Vs Land Acquisition Collector (1997) 224 ITR 551
Sunder Vs Union of India JT 2001 (8) SC 130
Naresh Kumar Jain & Ors. Vs State of Haryana & Ors.
Union of India & Ors. Vs Hari Singh & Ors.

The instant case deals with the issue of order passed u/s 263 of the Income Tax Act, 1961 ( the Act) on account of issue relating to taxability of interest received u/s 28 of the Land Acquisition Act, 1894 (LA Act).

The Principal Commissioner of Income Tax (Pr. CIT) noted from the assessment record of the assessee that during the impugned year, certain land belonging to it was acquired by the Land Acquisition Officer and compensation, enhanced compensation and interest thereon were awarded in lieu thereof.

As a result, the assessee received interest on enhanced compensation amounting u/s 28 of the LA Act during the year under consideration and was claimed exempt as capital gains earned from sale of rural agricultural land, in view of the judgement of the Hon’ble Apex Court.

The Pr. CIT noted that the jurisdictional High Court had observed that the benefit of two Judges Bench decision of the Supreme Court could not be derived by the assessee and held that the said interest awarded by the Court on enhanced compensation u/s 28 of the Land Acquisition Act fell for taxation u/s 56 of the Income Tax Act,1961 as ‘income from other sources’ in the year of receipt.

The Pr. CIT further noted that SLP against the order of the High Court had been dismissed by the Hon’ble Supreme Court. The Pr. CIT, therefore, noted that the issue of taxability of interest awarded u/s 28 of the LA Act had become final. He, therefore, confronted the assessee as to why the assessment order passed in the present case was not erroneous since the AO had not subjected the same to tax.

After considering the detailed reply of the assessee, the Pr. CIT held that the interest received u/s 28 of the L.A. Act, 1894 was taxable as in view of the amended provisions of Section 56 sub-section (2) sub-clause (viii), 57(iv)and Section 145A(b) of the Act and in view of the larger Bench decision of the Supreme Court which had held that interest u/s 28 was akin to interest u/s 34 and did not form part of the compensation but was taxable as revenue receipt.

The Pr. CIT held that the decision of the larger/Constitution Bench had been followed by the jurisdictional High Court while holding that the decision of the division bench of the Apex Court was not good law and hence would not apply.

The Pr. CIT further held that the Hon’ble jurisdictional High Court in a recent case had again held that no benefit can be derived by assessees from the division bench decision of the Apex Court.

Considering the same, the Pr. CIT held that the assessment order passed by the Assessing Officer (AO) u/s 143(3) of the Act, having failed to add 50% of the interest income as per the provisions of Section 56(2)(viii), 57(iv) and 145A(b) of the Act under the head ‘income from other sources’ ,and having not properly examined the facts of the case and accepted the version of the assessee without due examination of the issue of interest on enhanced compensation, was erroneous in so far as it was prejudicial to the interests of the Revenue.

He, therefore, set aside the order passed by the AO restoring it to the AO for making fresh assessment with the direction to add 50% of interest income to the assessed income of the assessee.

The Tribunal observed that Pr. CIT had heavily relied on the decisions of the jurisdictional High Court to hold that the proposition laid down by the division bench of the Apex Court that interest received u/s 28 of the Land Acquisition Act, 1894 was part of the enhanced compensation, was not good law.

The Tribunal noted that as pointed out by the assessee, the Hon’ble Supreme Court has gain reiterated the proposition laid down by the division bench subsequent to the decision of the High Court relied upon heavily by the Pr. CIT.

The Tribunal went through the recent order of the Apex Court and found that the Union of India had come before the Supreme Court against the decision of the High Court in writ petition filed by the asseseees before the High Court. The issue before the High Court was that the assessees had received enhanced compensation on which tax had been deducted at source as per the provision of Section 194LA of the Act. The assessee had contended that no tax was deductible on the same as land was agricultural land and without examining these facts, taxes had been deducted at source. The Hon’ble High Court had directed refund of the taxes to the assessees and had directed the Land Acquisition Officer/Collector to examine whether their lands were agricultural or not and decide whether taxes were liable to be deducted therefrom as per the provisions of the Act. The Union of India had come in appeal before the Hon’ble Supreme Court against this order of the High Court stating that it was the Assessing Officer who was capable of determining the nature of land as being agricultural or not for the purposes of taxability under the Income Tax Act, 1961. The same was agreed to by the Hon’ble Apex Court and directed the AO to examine this aspect and further categorically stated that the proposition laid down by its division Bench vis a vis interest received u/s 28 of the LAA,1894 be kept in mind to ascertain whether the interest received amounts to compensation or not.

In view of the categorical affirmation of the proposition laid down by the division bench of the Hon’ble Supreme Court in its latest decision, the Tribunal held that there was no error in the order of the AO treating the interest received by them u/s 28 of the LAA, 1894, as compensation following the proposition laid down by the division bench of the Apex court.

As a result, the ITAT set aside the revisionary order passed by the Pr.CIT u/s 263. 

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