In a landmark ruling, the Kerala High Court has clarified that any compensation or enhanced compensation received by an assessee for the compulsory acquisition of landed property will be treated as income under the head ‘Capital Gains’ under the Income Tax Act, 1961.
The ruling was delivered by a Division Bench comprising Justice A.K. Jayasankaran Nambiar and Justice Easwaran S. in the case titled Anvar Ali Poolakkodan v. The Income Tax Officer (I.T.A. No. 32 of 2023).
Key Observations of the Court
The Court noted that interest amounts received due to delayed payment of compensation under the Land Acquisition Act, 1894 (LAA) should be considered accruals to the principal compensation. As such, these interest amounts will also fall under the ‘Capital Gains’ category for tax purposes.
Section 10(37) Relief for Agricultural Land
The Court emphasized that if the land acquired is agricultural land, the compensation and any associated interest payments will qualify for exemption under Section 10(37) of the Income Tax Act. This means that such income shall be excluded from the total taxable income of the assessee.
Dismissal of Section 56(2) Application
The Income Tax Appellate Tribunal had earlier ruled that after the amendment to Section 56(2) effective from April 1, 2010, all interest received on delayed compensation should be taxed as ‘Income from Other Sources’, making them ineligible for Section 10(37) benefits.
However, the High Court disagreed, ruling that interest received under Section 28 of the LAA is not in the nature of interest as defined under Section 2(28A) of the Income Tax Act. Therefore, the provisions of Section 56 do not apply, and the entire amount—including interest—is to be treated as part of the capital gains.
Background of the Case
The assessee had initially received compensation for agricultural land acquired by the State through a Land Acquisition Officer (LAO). Not satisfied with the amount, the assessee moved the Reference Court seeking enhancement. The Reference Court granted enhanced compensation and also awarded interest under Section 28 of the LAA.
The assessee filed returns by categorizing this income as Capital Gains and claimed an exemption under Section 10(37). The Tribunal denied the claim, which led to the High Court appeal.
Final Verdict
The Kerala High Court allowed the appeal, stating:
“The compensation or enhanced compensation received from compulsory acquisition of landed property, including the interest on delayed payment, is to be classified under ‘Capital Gains’. If related to agricultural land, it qualifies for exemption under Section 10(37).”
Implications of the Judgment
This decision provides significant clarity and relief to taxpayers, particularly farmers and landowners, whose lands are acquired by the government. It ensures that interest on delayed compensation will not be unfairly taxed under ‘Other Sources’ and reinforces the protective scope of Section 10(37).
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