In a key decision, the Kerala High Court clarified that any compensation received by a person for the compulsory acquisition of land will be treated as income under the head 'Capital Gains' as per the Income Tax Act.
A Division Bench comprising Justice A.K. Jayasankaran Nambiar and Justice Easwaran S. held that this treatment applies not only to the original compensation but also to any enhanced compensation and the interest paid for the delay in payment.
“Interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as 'Capital Gains' for the purposes of the I.T. Act,” the Court stated.
The Court also observed that if the land acquired is agricultural land, such compensation and related interest may be exempt under Section 10(37) of the Income Tax Act.
Background of the Case
In this matter, the assessee received compensation for the acquisition of agricultural land by the State. The initial compensation was decided by the Land Acquisition Officer (LAO) under the Land Acquisition Act, 1894 (LAA).
Not satisfied with the amount, the assessee approached the Reference Court seeking an increase in the compensation. The Reference Court allowed the claim and granted enhanced compensation along with interest under Section 28 of the LAA.
The assessee treated both the enhanced compensation and the interest as 'Capital Gains' and also claimed an exemption under Section 10(37) on the basis that the land was agricultural and compulsorily acquired.
However, during the appeal before the Income Tax Appellate Tribunal, the Tribunal disagreed with the assessee's claim. It held that due to the amendment of Section 56(2) of the Income Tax Act, effective from April 1, 2010, all interest received for delayed compensation must be taxed as 'Income from Other Sources'.
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According to the Tribunal, this classification made such interest ineligible for exemption under Section 10(37), which is only available for capital gains on compulsory acquisition of agricultural land.
The High Court overruled the Tribunal's interpretation, stressing that the interest paid on delayed compensation under Section 28 or Section 34 of the LAA is not ordinary interest, but rather a part of the compensation itself.
“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,” the Bench stated.
Therefore, both compensation and interest should be taxed under the 'Capital Gains' category. When the land in question is agricultural, Section 10(37) would apply, and such income would be excluded from total taxable income.
“The 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' for the purposes of the I.T. Act. 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 I.T. Act,” the Bench concluded.
This ruling ensures that interest on delayed compensation is not unfairly taxed under a different head and protects the rights of landowners receiving fair value for their acquired property, especially when it's agricultural land.
In view of the above, the bench allowed the appeal.
Case Title: Anvar Ali Poolakkodan v. The Income Tax Officer
Case Number: I.T.A.NO.32 OF 2023
Counsel for Petitioner/ Assessee: Anil D. Nair, Aaditya Nair and Telma Raju
Counsel for Respondent/ Department: P.G. Jayashankar and Keerthivas Giri
