IMPORTANT POINT
Interest on delayed compensation for compulsory acquisition is classified as 'Capital Gains' and eligible for exclusion under Section 10(37) of the Income Tax Act.

JUDGMENT :

A.K. Jayasankaran Nambiar, J.

As these two Income Tax Appeals involve a common issue with regard to 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, they are taken up together for consideration and disposed by this common judgment.

2. I.T.A.No.32 of 2023 is preferred against the order dated 30.03.2023 of the Income Tax Appellate Tribunal that remands the issue of taxability of such interest to the Assessing Officer with a direction that while the interest amounts received @ 9% p.a will qualify for exclusion from total income under Section 10 (37) of the Income Tax Act [hereinafter referred to as the “I.T. Act”], the interest amounts received @ 15% p.a will be assessable as ‘Income from other sources’ under Section 56 (2)(viii) of the I.T. Act.

3. I.T.A.No.60 of 2024 is preferred against the order dated 19.04.2024 of the Income Tax Appellate Tribunal that dismissed an appeal preferred by the appellant against an order of the Assessing Officer under Section 154 of the I.T. Act whereby he had dismissed a rectification application filed by the assessee and held that the interest received by the assessee on the enhanced compensation for the agricultural land acquired from him would be taxable under the head ‘Income from other sources’ under Section 56 (2)(viii) of the I.T. Act.

4. The assessees in both the appeals had received compensation as fixed by the Land Acquisition Officer [LAO] for the agricultural lands acquired from them by the State. Immediately thereafter, they had approached the Reference court under the Land Acquisition Act, 1894 [hereinafter referred to as the “LAA”] seeking enhancement of the compensation awarded to them by the LAO. 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. While the assessees returned the income received by way of enhanced compensation and interest as income under the head of ‘Capital Gains’, they also claimed the benefit of Section 10 (37) whereby the said income would stand excluded from the total income for the purposes of assessment under the I.T. Act. In the orders of the Appellate Tribunal impugned in these appeals, the Tribunal has 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 I.T. 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 I.T. Act. In fact, the impugned order in I.T.A.No.32 of 2023 makes a distinction between interest received @ 9% and interest received @ 15% and states that while the former would be classifiable as ‘Capital Gains’ and obtain the benefit under Section 10 (37) of the I.T. Act, the latter would not. The impugned order in I.T.A.No.60 of 2024 however takes the view that, after the amendment of Section 56 (2) of the I.T. Act w.e.f 01.04.2010, all interest amounts received for delayed payment of compensation under the LAA will merit classification only as ‘Income from other sources’ and hence the said amounts will not get the benefit of Section 10 (37) of the I.T. Act.

5. In the appeals before us, the appellants raise the following substantial questions of law:

i. In the facts and circumstances of the case, ought not the Tribunal have allowed the claim of exemption on entire additional compensation received as the original compensation received was found to be entitled for exemption under Section 10(37) of the Act.

ii. In the facts and circumstances of the case, ought not the Tribunal have allowed the entire additional compensation received by the appellant including 9% interest rec