Article Details

Interest on compensation on acquisition of land: Tax Complexity
TAX TALK-30.10.2017-THE HITAVADA
 
TAX TALK
 
CA. NARESH JAKHOTIA

Chartered Accountant

 
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

 
Query 1]
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 Vanjani-gopalvanj@gmail.com]
Opinion:

“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.
  1. 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.
    It may be noted that clause (b) is added to section 145A by the Finance Act-2009. Reason for adding the said clause is given in the Explanatory memorandum to FA-2009 which reads as under:
    The existing provisions of Income-tax Act 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 Rama Bai Vs. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to tax payers.
    With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be
    the income for the year in which it is received, irrespective of the method of accounting followed by the assessee.
    Further, it is proposed to insert clause (viii) in sub-section (2) of section 56 to provide that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as “income from other sources” in the year in which it is received. This amendment 
    will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 and subsequent assessment years.”

    In short, (b) clause is added to section 145A to provide that the interest on compulsory acquisition will be taxable in the year of receipt only and not on accrual/due basis every in different years.
     
  2. Section 56(2)(viii):
It provides that interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be taxable as “Income from other source”.
 
  1. Section 57(iv):
    It provides for allowability of 50% deduction against all income taxable u/s 56(2)(viii).
 
 
  1. The Apex Court in the case CIT vs Ghanshyam (HUF) (2009) 315 ITR 1 vide order dated 16th July 2009 in respect of interest income awarded to the assessee has given following obiter:
    i. Para 20 of order (Quoting Section 28 of Land Acquisition Act 1894)
“20. We also quote herein below Section 28 of the 1894 Act which reads as under:
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.
 
  1. In short, Apex court in the case of CIT vs Ghanshyam (HUF) has notably drawn following conclusions:

    (a) Interest u/s 28 and interest u/s 34 of the Land acquisition Act have different nature as pointed out in Para 33 of the order. Relevant part of para reads as under:
    It is true that "interest" is not compensation. It is equally true that s. 45(5) of the 1961 Act refers to compensation. But as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards "interest" both as an accretion in the value of the lands acquired and interest for undue delay. Interest under s. 28 unlike interest under s. 34 is an accretion to the value; hence it is a part of enhanced compensation or consideration which is not the case with interest under s. 34 of the 1894 Act”.

    (b) Interest under section 28 (i.e., interest on enhanced compensation) is to be treated as part of compensation itself and will be liable for taxation under the head “Income from Capital gain” u/s 45(5) of the Income Tax Act-1961.  

    (c) Interest u/s 34 (i.e., interest on compensation) is truly in the nature of interest income.
     
  2. Apex court judgment in CIT Vs. Ghanshyam (HUF) was rendered in favor of the revenue in an altogether different context at a time when section 56(2)(viii) & 145A(b) was not there in the statue book. It will not be wrong to say that section 56(2)(viii) & 145A(b) are specific provision governing taxability of interest on enhanced compensation whereas judgement in CIT vs Ghanshyam (HUF) was rendered when no such specific provision existed. To this extent, there are the chances of further litigation & arguments. The main distinguishing reason for controversy would be the conclusion drawn that the interest on enhanced compensation is covered by section 45(5) (i.e., under the head “Income from Capital Gain”) of the Income Tax Act-1961.
     
  3. Considering the overall legal perspective, in my opinion amendment done by the FA-2009 directly may not have an overriding effect over the judgment pronounced in CIT Vs Ghanshyam (HUF). The reason as mentioned in the explanatory memorandum to FA – 2009 is different & not superseding the ratio drawn in CIT Vs Ghanshyam (HUF). Amendment by FA-2009 has just changed the method of taxability of interest on compensation from year wise accrual to year of receipt. In absence of any further specific amendment/clarification, Interest u/s 28 on enhanced compensation can be treated as part of compensation itself as held in case of Ghanshyam (HUF) 315 ITR 1 & may be not be covered by section 56(2)(viii) of the Income Tax Act-1961.
 
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.comI]
 

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