The Income Tax Appellate Tribunal (ITAT) set aside the assessment order that taxed the interest component of land-acquisition compensation, holding that such interest is exempt under section 10(37) of the Income-Tax Act, 1961. The decision underscores the necessity of a proper enquiry before taxing compensation-related interest and clarifies the tax treatment of land-acquisition proceeds.
Background & Facts
The Dispute
The appellant, Hemant Godara, appealed the order dated 26 July 2024 passed by the Commissioner of Income Tax (Appeals) (CIT(A)) in ITBA/APL/S/250/2024-25/1067047674(1). The order assessed, under section 57(iv) read with section 56(1)(a) and section 145A(b) of the Income-Tax Act, an interest component on compensation received under section 28 of the Land Acquisition Act, 1894. The central contention was whether this interest should be taxed as "income from other sources" or be exempt under section 10(37).
Key Facts
- The compensation related to compulsory acquisition of the appellant’s agricultural land in Haryana.
- The interest amount claimed by the appellant was Rs 6,86,17,767.
- The Assessing Officer (AO) issued a notice under section 143(2) on 22 September 2019 and a notice under section 142(1) on 23 November 2020, demanding documentary evidence of the interest claim.
- The appellant submitted a detailed letter (pages 3-58 of the paper book) confirming that the interest was part of the enhanced compensation under section 28 of the Land Acquisition Act.
- The AO completed the assessment on 22 January 2021 under section 143(3) without conducting a separate enquiry into the taxability of the interest.
- The department argued that the interest is taxable as "other income" based on Mahender Pal Narang v. CBDT (2020) and PCIT v. Inderjit Singh Sodhi HUF (2024).
- The tribunal referred to its own recent decision in Pawan Kumar v. PCIT (2024), which distinguished the present case on the basis that the assessee was an individual and the interest arose under section 28.
Procedural History
- 26 July 2024: CIT(A) order assessing interest as taxable income.
- 03 August 2026: Appeal filed before ITAT (ITA No. 6397/Del/2026); hearing held on the same day.
- 03 August 2026: Tribunal noted a 613-day delay in filing the appeal and, relying on Collector, Land & Acquisition vs. Mst Katiji & Others (1987), condoned the delay.
- 24 August 2026: Tribunal delivered its order, allowing the appeal and setting aside the assessment.
Relief Sought
The appellant sought:
- Declaration that the interest component under section 28 is exempt under section 10(37).
- Set-aside of the assessment order dated 22 January 2021.
- Refund of any tax, interest and penalties levied on the interest amount.
- Costs of the proceedings.
The Legal Issue
The central question was whether the interest awarded under section 28 of the Land Acquisition Act, 1894, is taxable as "income from other sources" under the Income-Tax Act, 1961, or whether it falls within the exemption provision of section 10(37).
Arguments Presented
For the Appellant
- The interest is part of the compensation for land acquisition and, under section 10(37), is expressly exempt.
- The AO failed to conduct a proper enquiry as mandated by section 263 of the Act, rendering the assessment procedurally infirm.
- Pawan Kumar v. PCIT (2024) distinguished earlier cases, holding that interest under section 28 for an individual assessee is exempt.
For the Respondent
- Citing Mahender Pal Narang v. CBDT (2020) and PCIT v. Inderjit Singh Sodhi HUF (2024), the department argued that the interest should be taxed as "other income".
- The department maintained that the AO’s assessment was based on a correct interpretation of the statutory provisions and that the interest is not covered by the exemption.
The Court's Analysis
The Tribunal began by examining the statutory framework. Section 28 of the Land Acquisition Act provides for interest on compensation payable to a landowner. The Income-Tax Act, section 10(37), expressly exempts any amount received as interest on compensation for land acquisition under section 28. The Tribunal noted that the language of section 10(37) is clear and unconditional; it does not require any additional conditions.
"In exercise of his powers under section 263 of the Act, the Ld. PCIT held that the interest awarded under section 28 of the Land Acquisition Act, 1894, is to be taxed as income from 'other' sources."
The Tribunal distinguished the department’s reliance on Mahender Pal Narang and PCIT v. Inderjit Singh Sodhi HUF on the ground that those decisions dealt with interest arising under section 34 of the Income-Tax Act, not under section 28 of the Land Acquisition Act. The Tribunal emphasized that the nature of the interest - being a statutory component of land-acquisition compensation - places it squarely within the ambit of the exemption.
The Tribunal also addressed the procedural defect. Under section 263, the assessing authority must conduct a proper enquiry before making a determination that affects tax liability. The AO’s reliance on the notices under section 143(2) and section 142(1), without a dedicated enquiry into the applicability of section 10(37), was deemed insufficient. The Tribunal cited Pawan Kumar v. PCIT (2024), where it held that a lack of enquiry renders an assessment vulnerable to reversal.
Applying the principle of lex specialis, the Tribunal held that the specific exemption in section 10(37) overrides the general provision of taxing "other income". Consequently, the interest component of Rs 6,86,17,767 was to be treated as exempt, and the assessment order taxing it was unsustainable.
The Tribunal further observed that the delay of 613 days in filing the appeal was condoned in view of the precedent set in Collector, Land & Acquisition vs. Mst Katiji & Others (1987), which allows condonation where the appellant demonstrates that the delay was not deliberate.
In sum, the Tribunal concluded that the AO’s order was both substantively and procedurally flawed. It allowed the appeal, set aside the assessment order, and directed that the interest be treated as exempt under section 10(37).
The Verdict
The appeal was allowed. The Tribunal set aside the assessment order dated 22 January 2021, held that the interest component of Rs 6,86,17,767 under section 28 of the Land Acquisition Act is exempt under section 10(37) of the Income-Tax Act, and ordered that no tax be payable on that amount. The Tribunal also directed the refund of any tax, interest or penalties previously levied and awarded costs to the appellant.
What This Means For Similar Cases
Interest on Land-Acquisition Compensation Is Exempt
- Practitioners must treat interest earned under section 28 as exempt under section 10(37), unless the compensation is not linked to a land-acquisition proceeding.
- Tax returns should reflect the exemption, and any demand notices taxing such interest should be contested.
Mandatory Enquiry Before Taxing Compensation-Related Interest
- Assessing officers must conduct a specific enquiry under section 263 before deciding on the taxability of interest components.
- Failure to do so renders the assessment vulnerable to reversal on appeal.
Distinguish Between Section 28 and Section 34 Interest
- Interest under section 34 (interest on delayed tax payments) remains taxable, whereas interest under section 28 (land-acquisition compensation) is exempt.
- Cite Pawan Kumar v. PCIT (2024) to support the distinction.
Procedural Delay Can Be Condoned
- Appeals filed beyond the prescribed period may still be entertained if the delay is explained and the precedent in Collector, Land & Acquisition vs. Mst Katiji is invoked.
Practical Checklist for Tax Practitioners
- Verify the statutory basis of any interest claimed in compensation.
- Ensure the AO issues a notice under section 142(1) demanding documentary proof.
- Prepare a detailed response with land-acquisition orders, compensation statements, and interest calculations.
- If taxed, promptly file an appeal citing section 10(37) and relevant case law.
