The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has ruled in favour of a taxpayer in a dispute over the tax treatment of interest received on enhanced compensation for compulsory acquisition of agricultural land. According to reports from Mint, the tribunal held that interest awarded under Section 28 of the Land Acquisition Act forms part of the compensation and is eligible for exemption under Section 10(37) of the Income Tax Act. The ruling came in the case of Kishorbhai Nathabhai Makani for assessment year 2016-17, where the assessee had challenged an order of the National Faceless Appeal Centre (NFAC) that had upheld the tax treatment of the interest component as taxable income.
In the case before the tribunal, the assessee had received a 25% share of enhanced compensation amounting to ₹2.69 crore for the compulsory acquisition of ancestral agricultural land. As reported by Mint, this amount included ₹1.89 crore as interest awarded under Section 28 of the Land Acquisition Act. The assessing officer had examined the transaction and concluded that the Section 28 interest was part of the full value of consideration received for compulsory acquisition of the agricultural land. The matter was subsequently taken up under Section 263 by the Principal Commissioner of Income Tax, but the tribunal found that the assessing officer had made necessary inquiries and adopted a legally plausible view.
The tribunal relied on its earlier decision in the case of Mansukhbhai Kanjibhai Sakariya, as well as the Gujarat High Court's ruling in Movaliya Bhikhubhai Balabhai vs ITO. According to Mint, the Gujarat High Court had held that interest awarded under Section 28 of the Land Acquisition Act has the character of compensation and does not fall within the meaning of 'interest' covered by the relevant provisions of the Income Tax Act. The distinction between Section 28 and Section 34 interest was central to the tribunal's reasoning, with judicial precedents establishing that Section 28 interest is linked to the enhanced amount of compensation determined by the court. The tribunal noted that the original compensation, enhanced compensation and related interest had already been subjected to taxation in the hands of one of the co-owners, and taxing the same amounts again would amount to double taxation.
The tribunal noted that the original compensation, enhanced compensation and related interest had already been subjected to taxation in the hands of one of the co-owners. As reported by Mint, taxing the same amounts again in the hands of another co-owner would therefore amount to double taxation. The tribunal rejected the Revenue's reliance on a contrary ruling of the Punjab and Haryana High Court in Manjeet Singh (HUF), observing that the ruling was not from the jurisdictional High Court and therefore did not have binding force on authorities operating under the Gujarat High Court's jurisdiction.
The Rajkot Bench ultimately held that interest in the nature of compensation for compulsory acquisition of agricultural land is eligible for exemption under Section 10(37). According to Mint, it deleted the addition made by the assessing officer and allowed the assessee's appeal. The tribunal referred to the doctrine of stare decisis and the principle that lower courts and quasi-judicial authorities are bound by decisions of the High Court exercising jurisdiction over them. It held that where the assessing officer has adopted a legally plausible view supported by judicial precedent, the Commissioner cannot use Section 263 merely to substitute another possible view.
