The Income Tax Appellate Tribunal, Delhi, has clarified that interest received under Section 28 of the Land Acquisition Act, 1894, forms an integral part of enhanced compensation and qualifies for exemption under Section 10(37) of the Income-tax Act, 1961. This ruling reverses a revisionary order by the Commissioner of Income Tax (Appeals) that incorrectly treated such interest as taxable income from other sources, restoring long-standing precedent on the nature of compensation receipts.
Background & Facts
The Dispute
The appellant, Shri Daya Ram Shukla, an individual and HUF member, received enhanced compensation for the compulsory acquisition of his agricultural land by the Haryana Government. The compensation included an interest component of Rs. 3,97,56,460 under Section 28 of the Land Acquisition Act, 1894, which he claimed as exempt under Section 10(37) of the Income-tax Act. The Income Tax Officer (ITO) accepted this claim in the assessment order dated 22.01.2021. However, the Commissioner of Income Tax (Appeals) [CIT(A)/NFAC] invoked its revisionary powers under Section 263, set aside the assessment, and directed a fresh assessment treating the interest as taxable under Section 56(1)(a) read with Section 57(iv) and Section 145A(b).
Key Facts
- The appellant’s agricultural land was compulsorily acquired by the Haryana Government under the Land Acquisition Act, 1894.
- Enhanced compensation, including interest under Section 28, was awarded and received on 21.03.2016.
- The interest amount received was Rs. 3,97,56,460.
- TDS of Rs. 39,75,646 (10%) was deducted at source on this interest.
- The appellant filed his return for AY 2020-21 on 29.08.2020, declaring income of Rs. 6,35,470 and excluding the interest as exempt under Section 10(37).
- The return was processed under Section 143(1)(a) on 28.06.2021.
- The case was selected for e-assessment under the e-assessment scheme, 2019.
- The Assessing Officer (AO) issued notices under Section 143(2) on 22.09.2019 and Section 142(1) on 23.11.2020.
- The appellant submitted detailed documentation and legal submissions citing CIT v. Ghanshyam HUF (2009) 315 ITR 1 (SC) to establish that interest under Section 28 is part of enhanced compensation.
- The AO accepted the explanation and passed the assessment order dated 22.01.2021 without additions.
- An audit objection was raised by the ITO (Audit), Hissar, on 15.01.2021, citing Mahender Pal Narang v. CBDT (2020) 423 ITR 13 (P&H) and suggesting the interest was taxable.
- The CIT(A) relied solely on this audit objection and the P&H High Court decision to invoke Section 263.
Procedural History
- 21.03.2016: Appellant received enhanced compensation including interest under Section 28 of the Land Acquisition Act.
- 29.08.2020: Return for AY 2020-21 filed.
- 28.06.2021: Return processed under Section 143(1)(a).
- 22.09.2019: Notice under Section 143(2) issued.
- 23.11.2020: Notice under Section 142(1) issued.
- 22.01.2021: Assessment order passed by AO accepting exemption under Section 10(37).
- 15.01.2021: Audit objection raised by ITO (Audit), Hissar.
- 05.12.2025: CIT(A)/NFAC order passed under Section 263, setting aside AO’s order.
- 06.04.2026: ITAT Delhi heard the appeal and pronounced order.
The Parties' Positions
For the Appellant
The appellant argued that interest under Section 28 is not a separate income but an accretion to the value of the land, forming part of enhanced compensation. He relied on the Supreme Court’s decision in CIT v. Ghanshyam HUF (2009) 315 ITR 1 (SC), which held that such interest is not a revenue receipt but a capital receipt. He further contended that the insertion of Sections 56(2)(viii), 57(iv), and 145A by the Finance Act, 2009, was intended to override Rama Bai v. CIT (1990) 181 ITR 400 (SC) on accrual basis taxation, not to overrule Ghanshyam HUF. He cited Union of India v. Harisingh (2018) 91 taxmann.com 20 (SC), where the Supreme Court affirmed Ghanshyam HUF, and noted that the Revenue had withdrawn its SLP in that case, rendering the law settled.
For the Respondent
The Revenue relied on Mahender Pal Narang v. CBDT (2020) 423 ITR 13 (P&H), which held that interest under Section 28 is taxable as income from other sources. It argued that the P&H High Court’s decision was binding and that the Supreme Court’s dismissal of the SLP against it amounted to affirmation. It further contended that the amendments to Sections 56(2)(viii) and 145A were intended to tax such interest as revenue receipt, irrespective of the nature of the underlying compensation.
Relief Sought
The appellant sought quashing of the CIT(A)’s order dated 05.12.2025, restoration of the AO’s order dated 22.01.2021, and confirmation that the interest of Rs. 3,97,56,460 received under Section 28 of the Land Acquisition Act is exempt under Section 10(37) of the Income-tax Act.
The Legal Issue
Whether interest received under Section 28 of the Land Acquisition Act, 1894, forms part of enhanced compensation and is exempt under Section 10(37) of the Income-tax Act, 1961, or whether it constitutes taxable income from other sources under Section 56(1)(a) read with Sections 57(iv) and 145A(b).
Arguments Presented
For the Appellant
The appellant relied on CIT v. Ghanshyam HUF (2009) 315 ITR 1 (SC), which distinguished interest under Section 28 from interest under Section 34. The former is an accretion to the value of the land and forms part of the consideration for compulsory acquisition, while the latter is compensation for delay in payment. The appellant emphasized that the Supreme Court reaffirmed this distinction in Union of India v. Harisingh (2018) 91 taxmann.com 20 (SC), and that the Revenue had withdrawn its SLP in that case, indicating acceptance of the law. He further argued that the Finance Act, 2009 amendments were aimed at resolving the Rama Bai issue on accrual basis, not at overruling Ghanshyam HUF. He cited Pawan Kumar v. PCIT (2024) 159 taxmann.com 61 (Del.-Trib.) and CIT v. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del.) to show that an AO’s failure to elaborate reasons does not render an order erroneous.
For the Respondent
The Revenue relied on Mahender Pal Narang v. CBDT (2020) 423 ITR 13 (P&H), which held that interest under Section 28 is taxable as income from other sources. It argued that the Supreme Court’s dismissal of the SLP against this decision amounted to affirmation, making it binding. It contended that Sections 56(2)(viii) and 145A were enacted to tax such interest irrespective of its origin, and that the AO’s failure to apply these provisions rendered the assessment erroneous and prejudicial to revenue interests under Section 263.
The Court's Analysis
The Tribunal carefully examined the distinction between interest under Section 28 and Section 34 of the Land Acquisition Act, 1894. It noted that the Supreme Court in CIT v. Ghanshyam HUF had held that interest under Section 28 is not a separate income but an accretion to the value of the land, thereby forming part of the enhanced compensation. This view was reaffirmed in Union of India v. Harisingh (2018) 91 taxmann.com 20 (SC), where the Supreme Court explicitly upheld the Ghanshyam HUF principle.
"Interest under Section 28 is paid on the excess amount awarded by the court as compensation for the enhanced value of the land, whereas interest under Section 34 is paid for delay in payment after possession is taken. The former is part of the capital receipt; the latter is a revenue receipt."
The Tribunal rejected the Revenue’s reliance on Mahender Pal Narang, noting that the P&H High Court had not considered Harisingh at the time of its decision. It emphasized that the dismissal of an SLP without reasons does not constitute a binding precedent, as held in V.M. Salgaocar & Bros Pvt. Ltd. v. CIT (2021) 243 ITR 383 (SC). The Tribunal further observed that the Finance Act, 2009 amendments were introduced to address the Rama Bai issue on accrual basis taxation and were never intended to override the Ghanshyam HUF ruling on the nature of the receipt.
The Tribunal also held that the CIT(A) had erred in invoking Section 263 on the basis of an audit objection alone. It cited CIT v. Sohanawoolen Mills (2008) 296 ITR 238 (P&H) and CIT v. Hindustan Coca-Cola Beverages (2011) 331 ITR 192 (Del.) to affirm that mere audit objections cannot justify revisionary jurisdiction unless the order is demonstrably erroneous or prejudicial. The AO’s order, based on a well-established Supreme Court precedent, could not be termed erroneous merely because another view was possible.
The Verdict
The appeal is allowed. The order of the CIT(A)/NFAC dated 05.12.2025 is set aside. The assessment order of the AO dated 22.01.2021 is restored. The interest of Rs. 3,97,56,460 received under Section 28 of the Land Acquisition Act, 1894, is held exempt under Section 10(37) of the Income-tax Act, 1961. The Revenue is directed to refund the TDS of Rs. 39,75,646 deducted on such interest, within 8 weeks from the date of this order.
What This Means For Similar Cases
Interest Under Section 28 Is Not Taxable as Other Income
- Practitioners must now argue that interest under Section 28 of the Land Acquisition Act is a capital receipt and exempt under Section 10(37), regardless of the Finance Act, 2009 amendments.
- Any attempt to tax such interest under Section 56(2)(viii) must be resisted on the ground that it contradicts the Supreme Court’s binding precedent in Ghanshyam HUF and Harisingh.
- The burden shifts to the Revenue to prove that the interest is not part of enhanced compensation, not to the assessee to prove it is.
Revisionary Powers Under Section 263 Cannot Be Triggered by Audit Objections
- Audit objections alone are insufficient to invoke Section 263; there must be a demonstrable error or prejudice.
- Assessing Officers are entitled to rely on Supreme Court precedents without elaborating extensively in their orders.
- Tribunals and High Courts will not uphold revisionary orders based on conflicting judgments unless the AO’s order is clearly contrary to binding law.
Clarification on Legislative Intent of Finance Act, 2009
- The insertion of Sections 56(2)(viii) and 145A was aimed at taxing interest on arrears of compensation on a receipt basis, not at converting capital receipts into revenue receipts.
- The legislative intent was to override Rama Bai, not Ghanshyam HUF.
- Taxpayers may now confidently claim exemption under Section 10(37) for interest received under Section 28, even if received after 01.04.2010.
