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Surendra Laxmanrao Vaidya, Gadag v. Income Tax Officer, Ward-2, Gadag
Concise Analytical Summary of the Tribunal's Opinion (3 January 2020)
Factual and Procedural Background
The assessee, an employee of Karnataka Vikas Grameena Bank, filed an electronic return of income on 25 March 2013 declaring total income of Rs. 6,13,770 and disclosing long‑term capital gains of Rs. 2,02,95,269 as its share of compensation received under Section 28 of the Land Acquisition Act. The assessee claimed exemption under Section 10(37) of the Income Tax Act, 1961.
The return was processed under Section 143(1); subsequent notices under Sections 143(2) and 142(1) were issued and the authorised representative responded. The Assessing Officer (AO) found that the enhanced compensation included an interest component of Rs. 1,27,09,612. The AO treated part of the enhanced compensation (Rs. 75,85,659) as exempt under Section 10(37) but taxed the remaining amount (including the interest component) as income from other sources, allowing a 50% deduction under Section 57(iv). TDS credit of Rs. 12,70,961 was applied. The AO passed an assessment order under Section 143(3) dated 27 March 2014. The CIT(Appeals) affirmed the AO's decision. The assessee appealed to the Tribunal.
The appeal before the Tribunal was filed with a delay of 708 days. The assessee produced an affidavit and a medical certificate; the Tribunal, on verification and finding the explanation reasonable and without serious objection from the Departmental Representative, condoned the delay and admitted the appeal.
Legal Issues Presented
- Whether the interest awarded under Section 28 of the Land Acquisition Act constitutes part of the compensation (i.e., an accretion to compensation) and therefore falls within tax treatment applicable to compensation (including potential exemption under Section 10(37) or taxation under capital gains rules), rather than being taxable as "interest" under Section 56(2)(viii) as income from other sources.
- Whether the amendment to the Income Tax Act (introduction/substitution of Section 145A and insertion of clause (viii) in Section 56(2) with effect from 1 April 2010) changes the legal characterisation of interest under Section 28 of the Land Acquisition Act for assessment years to which that amendment applies.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The interest awarded under Section 28 of the Land Acquisition Act is not "interest" in the sense used in Section 56(2)(viii) of the Income Tax Act and should not be taxed as income from other sources.
- The assessee relied upon the Supreme Court decision in CIT v. Ghanshyam (HUF) and judicial decisions including the Gujarat High Court's decision in Movaliya Bhikhubhai Balabhai v. ITO (TDS) & Another, which held that interest under Section 28 forms part of compensation (an accretion) and is not interest chargeable under Section 56(2)(viii).
- The assessee sought allowance of exemption under Section 10(37) for the compensation including the interest component to the extent applicable.
Respondent's (Revenue's) Position
- The Departmental Representative relied on the order of the CIT(Appeals) (i.e., the Revenue defended the AO and CIT(A)'s treatment that taxed the interest component as income from other sources). No further detailed arguments of the Departmental Representative are recorded in the opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Ghanshyam (HUF) (Supreme Court) (Civil Appeal No.4401/2009 dated 16.07.2009) | Held that interest awarded under Section 28 of the Land Acquisition Act is part of the enhanced amount of compensation (an accretion to compensation) and is not "interest" in the sense used in certain income‑tax provisions. | The Tribunal relied on the Ghanshyam (HUF) ratio as authoritative for treating Section 28 interest as part of compensation and applied that principle to the facts of the present case. |
| Movaliya Bhikhubhai Balabhai v. ITO (TDS) & Another (Gujarat High Court) [2016] 70 taxmann.com 45 | Held that interest under Section 28 of the Land Acquisition Act is an accretion to compensation, taxable as part of compensation (under section 45(5) as applicable), and does not fall within the expression "interest" under Section 145A(b)/Section 56(2)(viii) for taxation as income from other sources. | The Tribunal followed the Gujarat High Court's reasoning, particularly its treatment of the interaction between the Ghanshyam (HUF) decision and later statutory amendments (Section 145A and clause (viii) of Section 56(2)). The Tribunal applied Movaliya to hold that the subject interest is not taxable as income from other sources. |
| ITO, Ward 1 v. Basavaraj M Kudarikannur (95 Taxman.com 106) — coordinate Bench decision | Applied the Ghanshyam (HUF) and Movaliya principles in a similar factual context (interest under Section 28 on acquisition of agricultural land) and held accordingly. | The Tribunal considered this coordinate Bench decision and found its facts and legal conclusion to be applicable; it followed the ratio in allowing the assessee's claim. |
| Smt. Rama Bai v. CIT [1990] 181 ITR 400 (SC) | Held that arrears of interest computed on delayed or enhanced compensation are taxable on accrual basis; this decision prompted later legislative amendment (substitution of Section 145A and amendment of Section 56(2)). | The Gujarat High Court (in Movaliya) considered Rama Bai in explaining why Section 145A and the amendment to Section 56(2) were enacted (to mitigate hardship). The Tribunal noted that Movaliya interpreted the amended provisions in light of Ghanshyam and Rama Bai; the Tribunal accepted that interpretation and applied it. |
Court's Reasoning and Analysis
The Tribunal first dealt with the procedural issue of delay and, after verifying the affidavit and medical certificate and hearing the parties, condoned the delay of 708 days and admitted the appeal.
The Tribunal identified the sole substantive issue as the chargeability of the interest awarded under Section 28 of the Land Acquisition Act. The assessee's authorised representative argued that such interest cannot be equated with the statutory concept of "interest" in Section 56(2)(viii) of the Income Tax Act (an amendment effective from 1 April 2009 / assessment year 2010‑11) and therefore should not be taxed as income from other sources.
The Tribunal examined the statutory provision in Section 28 of the Land Acquisition Act which allows the Court to direct payment of interest (in certain circumstances) on the enhanced compensation. It then considered precedent: the Supreme Court decision in Ghanshyam (HUF), the Gujarat High Court decision in Movaliya Bhikhubhai, and a coordinate Bench decision (ITO v. Basavaraj M Kudarikannur). The Movaliya judgment had addressed the interplay between Ghanshyam and the legislative amendments (Section 145A substitution and insertion of clause (viii) in Section 56(2)) and concluded that the amended provisions were not intended to alter the legal characterisation established in Ghanshyam—i.e., interest under Section 28 remains an accretion to compensation and does not fall within the expression "interest" for Section 145A/Section 56(2)(viii).
Relying on these authorities, the Tribunal concluded that the interest awarded under Section 28 is part of the compensation and, given the admitted facts (agricultural land, applicability of Section 10(37) conditions), the CIT(A) was correct in allowing exemption under Section 10(37) in respect of the interest component in question. The Tribunal therefore found no reason to interfere with the CIT(A)'s orders and directed the AO to delete the interest disallowance.
Holding and Implications
APPEAL ALLOWED
Direct effect on the parties:
- The Tribunal allowed the assessee's appeal and set aside the portion of the assessment that treated the interest under Section 28 as taxable under "income from other sources." The Tribunal directed the Assessing Officer to delete the disallowance relating to that interest and to allow the grounds of appeal of the assessee accordingly.
- The Tribunal accepted the view (followed from Ghanshyam (HUF) and Movaliya Bhikhubhai) that interest under Section 28 is an accretion to compensation; consequently, the AO's treatment and the related TDS/deduction view (as recorded in the assessment) were found to be incorrect in the circumstances of this case.
Broader implications:
The Tribunal expressly followed existing judicial precedent (Supreme Court and Gujarat High Court decisions, and a coordinate Bench decision). The opinion does not purport to set a new precedent but applies established ratios to the facts at hand.
Order pronounced in open court on 3 January 2020. Members: A.K. Garodia (Accountant Member) and Pavan Kumar Gadale (Judicial Member).
PER SHRI PAVAN KUMAR GADALE, J.M. : The assessee has filed an appeal against the order of Commissioner of Income Tax, Hubli passed under Section 143(3) and 250 of the Income Tax Act, 1961 ('the Act'). There was a delay of 708 days in filing the appeal before the Tribunal and the assessee has filed an Affidavit and Medical Certificate in support of delay in ITA No.1952/Bang/2017 filing the appeal. We on verification of Affidavit and the explanations envisaged by the learned Authorised Representative, are satisfied with the reasonable cause in delay in filing and the ld. DR has no serious objection. Accordingly, the delay is condoned and the appeal is admitted and heard.
2. The assessee has raised the following grounds of appeal : ITA No.1952/Bang/2017
3. The Brief facts of the case are that the assessee is an employee of Karnataka Vikas Grameena Bank and filed the Return of Income electronically on 25.3.2013 with total income of Rs.6,13,770. In the Return of Income filed, the assessee has disclosed Long Term Capital Gains of Rs.2,02,95,269 being th share of compensation received under Section 28 of the Land Acquisition Act and has claimed exemption under Section 10(37) of the Income Tax Act, 1961. The Return of Income was processed under Section 143(1) of the Act, subsequently the Notice under Section 143(2) and 142(1) of the Act along with Questionnaire were issued. In compliance the learned Authorised Representative appeared from time to time and filed the details. In the appellate proceedings, the assessee has furnished the documents in support of the th share of compensation received and the nature of agriculture land. On perusal of the facts, the Assessing Officer found that the assessee was awarded, enhanced compensation of land acquisition together with the interest and TDS was also deducted by Chief Accounts Officer, Bagalkot. The Assessing Officer found that the assessee has disclosed his share of enhanced compensation of Rs.2,02,95,269 and claimed exemption under Section 10(37) of the Act but the fact remains that the compensation includes interest component of Rs.1,27,09,612. The assessee has relied on the decision of Hon'ble Apex Court in the case of CIT Vs. Ghansham (HUF) in Civil Appeal No.4401/2009 dt.16.07.2009 further the ld. AR submitted that as per clause 28 of Land ITA No.1952/Bang/2017 Acquisition Act, 1894 compensation is part of enhanced value of land whereas the Assessing Officer has not disputed the fact that the lands are agriculture in nature. Hence considering the enhanced compensation on acquisition of agriculture land to the extent of Rs.75,85,659 is allowed as exempted under Section 10(37) of the Act. But in respect of remaining compensation which includes interest component of Rs.1,27,09,612, the Assessing Officer is of the opinion that it should be taxed under income from other sources and allow deduction to the entire 50% under Section 57(iv) of the Act. The Assessing Officer also observed that TDS Credit to the extent of th share as per Section 199 of the Act r.w. Rule 37(BA), has to be allowed Rs.12,70,961 and assessed the total income of Rs.69,68576 and passed the order under Section 143(3) dt.27.03.2014. Aggrieved by the order, the assessee filed an appeal with the CIT(Appeals) and whereas the CIT(Appeals) confirmed the action of the Assessing Officer and dismiss the assessee's appeal. Aggrieved by the order of CIT(Appeals), the assessee has filed an appeal before the Tribunal.
4. At the time of hearing, the learned Authorised Representative submitted that the CIT(Appeals) has erred in confirming the action of the Assessing Officer where the exemption under Section10(37) was denied to the assessee. As per the decision of Hon'ble Apex Court in the case of CIT Vs. Ghanshyam (SC) (supra) the interest under Section 28 of the Land Acquisition Act, 1894 is not covered ITA No.1952/Bang/2017 under the provisions of Section 56(2)(viii) of the Act. The learned Authorised Representative also relied on the judicial decisions and the decision of Hon'ble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai Vs. ITO (TDS) & Another 388 ITR 343 (Guj) where the Hon'ble High Court has specified that interest under Section 28 of Land Acquisition Act, 1894 is not interest referred to Section 56(2)(viii) of the Act and prayed for allowing the appeal. Contra, the learned Departmental Representative relied on the CIT(Appeals) order.
5. We heard the rival contentions and perused the material on record. The sole crux of the disputed issue is with respect to chargeability of interest awarded under Section 28 of the Land Acquisition Act. The learned Authorised Representative submitted that the interest under Section 28 of the Land Acquisition Act, 1984 cannot be considered/equated as interest as referred under Section 56(2)(viii) of IT Act which has been inserted w.e.f. 1.4.2009 effectively from Assessment Year 2010-11. We found the assessee has claimed exemption under Section 10(37) of the Act whereas as per Section 28 of Land Acquisition Act, the compensation to be awarded in excess of the sum awarded by the Land Acquisition Officer, the Court may direct the Land Acquisition Officer to pay interest @ 9% per annum from the date of compensation on land to the date of payment of such excess deposit in the Court. We found the co-ordinate Bench of the Tribunal dealt on the issue in the case of ITO, Ward 1 Vs. Basavaraj M Kudarikannur 95 Taxman.com 106 in ITA ITA No.1952/Bang/2017 Nos.1747 & 1750/Bang/2017 Dt.1.6.2008, where the Hon'ble Tribunal has observed at para11 to 14 as under :
11. We have heard the rival submissions of the ld. DR, who relied upon the order of the AO. We have considered the submissions of the ld. DR. It is not disputed by the AO that the land acquired was agricultural land and the conditions laid down u/s. 10(37)(i) to (iv) are applicable to the land which is in question which was compulsorily acquired. It is also not in dispute that the interest in question was interest awarded u/s. 28 of the Land Acquisition Act, 1894. In the given circumstances, we are of the view that the decision of the Honble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai (supra) will be applicable to the facts of the present case.
12. In Movaliya Bhikhubhai Balabhai v. Income-tax Officer-TDS-1-Surat [2016] 70 taxmann.com 45 (Gujarat), the Honble Gujarat High Court had to deal with the nature of the interest awarded u/s.28 of the Land Acquisition Act, 1894. The facts of the case before the Honble Gujarat High Court was that the petitioner's agricultural lands came to be acquired under the provisions of the Act of 1894 for the public purpose of the Ozat-2 Irrigation Scheme. The award passed by the Collector came to be challenged by the petitioner before the learned Principal Senior Civil Judge, Junagadh (hereinafter referred to as the "Reference Court"), who by an order dated 20th March, 2011 awarded additional compensation of Rs. 5,01,846/- in favour of the petitioner together with other statutory benefits. Pursuant to such award, the second respondent calculated the amount payable to the petitioner and in terms of the statement showing the amount of compensation to be deposited in the court, computed an amount of Rs. 20,74,157/- as payable to the petitioner by way of interest under section 28 of the Act of 1894. The petitioner made an application under section 197(1) of the Income Tax Act, 1961 (Act) for deciding the tax liability of interest and to issue a certificate as to NIL tax liability. The application was rejected on the ground that the interest amount on the delayed payment of compensation and enhanced value of compensation is taxable as per the provisions of section 57(iv) read with sections 56(2)(viii) and 145A(b) of the Act under the head income from other sources. Being aggrieved by such order, the Assessee filed writ petition before Honble Gujarat High Court. The question before the Court was whether interest awarded u/s.28 of the Act of 1894 is akin to compensation and chargeable to tax u/s.45(5) of the Act or under the head Income from other sources u/s.57(iv) read with Sec.56(2)(viii) and 145A(b) of the Act. The Honble Gujarat High Court held that interest under section 28 of the Act of 1894 is an accretion to compensation and forms part of the compensation and, therefore, exigible to tax under section 45(5) of the Act. In coming to the aforesaid conclusion, the Honble Gujarat High Court followed the decision of Honble Supreme Court in the case of Commissioner Of Income Tax, Faridabad v. Ghanshyam (Huf)) [2009] 182 Taxman 368, wherein it was held that interest under section 28 of the Act of 1894 is part of the amount of compensation whereas interest under section 34 thereof is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of the enhanced value of the land which is not the case in the matter of payment of interest under section 34. On the applicability of the provisions of Sec.57(iv) read with 56(2)(viii) and Sec.145A(b) of the Act, the Honble Gujarat High Court held, :-
Section 145A of the I.T. bears the heading "Method of accounting in certain cases". Section 145A(b) provides that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Clause (viii) of sub-section (2) of section 56 of the I.T. Act provides for income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A which is chargeable as income from other sources. The first ITA No.1952/Bang/2017 respondent Income Tax Officer seeks to tax the interest received by the petitioner under section 28 of the Act of 1894 as income from other sources under section 56(2)(viii) read with section 145A(b) of theIt was argued on behalf of the Revenue before the Honble Gujarat High Court that the decision of Honble Supreme Court in the case of Ghanshyam (HUF) was rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability cases pertaining to AY 2010-11 and afterwards. Such an argument was repelled by the Honble Gujarat High Court as follows:I.T. Act. In the opinion of this court, in the light of the law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra), the interest received under section 28 of the Act of 1894 would not fall within the ambit of the expression "interest" as envisaged under section 145A(b) of the I.T. Act, inasmuch as, the Supreme Court in the above decision has held that interest under section 28 of the Act of 1894 is not in the nature of interest but is an accretion to the compensation and, therefore, forms part of the compensation.
11. It has been vehemently contended on behalf of the first respondent that the above decision has been rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability to the facts of the present case. The scope and effect of the substitution (with effect from 1st April, 2010) of section 145A, as also amendment made in section 56(2) by Act 33 of 2009 have been elaborated in the following portion of the departmental circular No. 5/2010, dated 3.6.2010, as follows: "Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation.- 46.1 The existing provisions of Income Tax Act, 1961, provide that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources", shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further the Hon'ble Supreme Court in the case of Smt. Rama Bai v. CIT (1990) 84 CTR (SC) 164 : (1990)181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to the taxpayers. 46.2 With a view to mitigate the hardship, section 145A is amended to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it was received, irrespective of the method of accounting followed by the assessee. 46.3 Further, clause (viii) is inserted in sub-section (2) of the section 56 so as to provide that income by way of interest received on compensation or enhanced compensation referred to in clause (b) of section 145A shall be assessed as "income from other sources" in the year in which it is received. 46.4 Applicability. - This amendment has been made applicable with effect from 1st April, 2010, and it will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years." Thus, the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)'s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR 400/[1991] 54 Taxman 496 whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the ITA No.1952/Bang/2017 words "interest received on compensation or enhanced compensation" in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)'s case (supra).
13. The Honble Gujarat High Court finally concluded, as follows:
13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression "interest" as contemplated in section 145A of the I.T. Act. The first respondent - Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the I.T. Act to the petitioner for non- deduction of tax at source, inasmuch as, the petitioner is not liable to pay any tax under the head "income from other sources" on the interest paid to it under section 28 of the Act of 1894.14. The petitioner had earlier challenged the communication dated 9th February, 2015 whereby its application for a certificate under section 197 of the I.T. Act had been rejected, and subsequently, tax on the interest payable under section 28 of the Act of 1894 has already been deducted at source. Consequently, the challenge to the above communication has become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 forms part of the compensation and not interest, the second respondent was not justified in deducting tax at source under section 194A of the I.T. Act in respect of such amount. The petitioner is, therefore, entitled to refund of the amount wrongly deducted under section 194A of the I.T. Act.
14. In the light of the aforesaid decision of the Honble Gujarat High Court and in the light of the admitted factual position in the present case, we are of the view that the CIT(Appeals) is fully justified in allowing exemption u/s. 10(37) of the Act on the interest received by the assessee u/s. 28 of the Land Acquisition Act, 1894. We find no grounds to interfere with the impugned orders of the CIT(Appeals). We found the present case is similar to the facts of above case in respect of interest under Section 28 of Land Acquisition Act, 1894 and the co-ordinate Bench of Tribunal has considered the Hon'ble Apex Court decision in the case of CIT Vs. Ghanshyam (supra) and of Hon'ble Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai Vs. ITO (TDS) & Another (supra). We respectfully follow the judicial precedence and found that the facts are identical and apply the ratio of judicial decisions and direct the Assessing Officer to delete the interest disallowance and allow the grounds of appeal of the assessee. ITA No.1952/Bang/2017
6. In the result, the appeal of assessee is allowed. Order pronounced in the open court on 3rd Jan., 2020. Sd/- Sd/- (A.K. GARODIA) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 03.01.2020. *Reddy GP Copy to
1. The appellant
2. The Respondent
3. CIT (A)
4. Pr. CIT
5. DR, ITAT, Bangalore.
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