|Interest on compensation on acquisition of land: Tax Complexity|
TAX TALK-30.10.2017-THE HITAVADA
CA. NARESH JAKHOTIA
Section 145A(b) provides that 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. It is not at all dependant on the method of accounting followed by the assessee.
Interest on compensation on acquisition of land: Tax Complexity
My query is taxability of interest received under Land Acquisition Act. I own a land at Mouja-Chinchbhuwan on Amravati road, Nagpur. While widening the high way, my agricultural land admeasuring 0.1853 H.R. was acquired by National Highway Authority of India (NHAI). The amount of compensation awarded to me was Rs. 29,741/- only. I filed a case under Arbitration. The case went in my favour and the Arbitrator awarded me higher compensation of Rs. 8,44,968/-. In addition to this, I received Rs. 84,496/- being 10% of compensation for loss of easement rights and Rs. 7,06,148/- as interest @ 9% for the period from the date of award in Feb. 2008 to the date of judgment in April 2016. I received the entire enhanced amount in F.Y. 2016-17. Now, I have to file the tax return & the question is whether the amount of interest received, on which TDS of 10.33 % is deducted by Land Acquisition officer, is taxable or not?
In this regard, I would like to refer to a judgment of Hon’ble Supreme Court. The Supreme Court in case of Ghanshyam (HUF) - (2009) 315 ITR 1 held that interest under section 28 of Land Acquisition Act is accretion to the value of compensation and hence it is the part and parcel of compensation. Thus, taxability of interest u/s 28 will be same as compensation. Both together will fall under the head capital gains.
Later, however, amendments have been made in I. Tax Act. Section 145 which prescribe that interest on such enhanced compensation will be taxable under the head income from other source in the year of receipt with a deduction of 50% under section 57. On the other hand, in case of Ghanshyam HUF, the Apex Court held that interest u/s 28 was not the interest but part of compensation to be included for computation of capital gains and for taxation u/s 45(5) of Income tax Act. As per that decision, only interest u/s 34 is the interest.
Please advise whether it will be correct to interpret that amendments made w.e.f. 01-04-2010 do not change the legal position regarding interest u/s 28 i.e., and interest u/s 28 is to be treated as part of compensation and not interest and the amount so received must fall under the head capital gains. [Gopal Vanjanifirstname.lastname@example.org]
“Tax Complexity itself is a kind of tax” - Max Baucus
There is a lot of chaos about taxability of the interest income on compensation or enhanced compensation received against compulsory acquisition of land.
Before replying to specific issues raised in the query, let us first have a look at the overall legal provision.
Section 28 – Collector may be directed to pay interest on excess compensation. – If the sum which, in the opinion of the court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court.”
ii. Para 21 of order (Quoting Section 34 of Land Acquisition Act 1894)
Section 34 – Payment of interest.-When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited.
Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of compensation or part thereof which has not been paid or deposited before the date of such expiry.”
iii. Para 24 of order (Expression of View by Hob’ble Apex Court on these interests)
24. To sum up, interest is different from compensation. However, interest paid on the excess amount under Section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under Section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest u/s 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
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