Delhi ITAT: Tax Deduction on Interest from Enhanced Compensation U/S 28 of Land Acquisition Act

The Income Tax Appellate Tribunal (ITAT), Delhi Bench has permitted an income tax deduction for interest acquired from higher compensation for the forceful acquisition of agricultural land.

The single-member bench chaired by C.M. Garg noted that the assessee’s interest in enhanced compensation received under Section 28 of the Land Acquisition Act, as part of the enhanced compensation, shall be treated as tax-free in the matter of a person under Section 10(37) if the transfer is regarding agricultural land.

The assessee appealed the order of the CIT (A), NFAC, which maintained the A.O.’s action by not removing the addition made for interest earned on enhanced compensation for compulsorily acquired agricultural land.

The assessee contended that the interest given to the landowner as enhanced compensation for the compulsory acquisition of his agricultural land under Section 28 of the Land Acquisition Act of 1894 is only an increase in the value of the land and not in the nature of interest. It comes under the provisions of Section 45(5) read with Section 10(37) of the Income Tax Act of 1961, and if the original compensation is liable to be taxed, it will also be taxable and if the original compensation is exempt due to compulsorily acquisition of agricultural land, it will also be exempt.

The assessee relied on the CBDT Circular dated 25th October 2016, which clarified that compensation received in respect of an award or agreement that has been exempt from levy of income tax shall not be taxable under the provisions of the Income Tax Act, 1961, even if the Income Tax Act makes no particular provision for compensation exemption.

The court noted that the assessee’s land had been purchased long ago under the old Land Acquisition Act, and so the CBDT Circular relating to land acquisition under Section 96 of the new Land Acquisition Act is inapplicable.

The court ordered the Assessing Officer (AO) to sanction a deduction under Section 10(37) to the assessee for the entire amount of interest acquired on enhanced compensation.