taxability of interest under land acquisition act

[ketanvyas1975]

Supreme Court in case of Ghanshyam (HUF) - 315 ITR 1 held that interest under section 28 of land acquisition act is accretion to the value of compensation and hencec it is 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.

However, amendment made in section 145 and section 56 and 57 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.

Does it mean that the above Supreme Court judgment in the context of interest under section 28 is no longer valid and now the amendment will be the new mode of calculation?

If yes, what will be the position of interest which accured to aassessee befoe the amendment sdue to judgment of civil court but received after the said date?

We have some confusion and hence we request learned friends and respected seniors on this forum to clarify this issue.

[Ratankumargoel]

It is not logical to impose interest

[ketanvyas1975]

can anybody throw light on this issue? we shall be thankful for the guidance

[camanojgupta]

The Circular Explaining the Amendment made by the Finance(No.2) Act 2009 stated as under
"46. Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation
46.1 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 v. CIT (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 the sub-section (2) of the section 56 so as to provide that income by way of interest received on compensation or on 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.
The reason behind insertion is to tax intt on receipt basis irrespective of period to which it relates. Therefore intt will b taxed on receipt basis.
CA MANOJ GUPTA
JODHPUR
09828510543

[ketanvyas1975]

thank you Manojji for your prompt response. I understand that the said amendment has changed the method of taxability of interest on enhanced compensation from yearwise accrual to year of receipt. However, my question is what will be the colour of interest u/s 28 on such enhanced compensation? will it be a part of compensatiom as held by Supreme Court in case of Ghanshyam (HUF) 315 ITR 1 ? or it will be an interest simplicitor to be dealt with under section 145A, 56 & 57 as per the said amendment. In both the cases, the taxability will differ. Please give your valuable views on this question. Thank you in anticipation.

[ketanvyas1975]

can anyboday please guide me in the matter?

[bpagrawal]

Taxability of interest under land acquisition act
1.1 In the case of compulsory acquisition of property, in most cases, at the initial stage, compensation is awarded [original compensation], which is received by the person whose property is acquired [owner]. In most such cases, there is always a dispute with regard to the quantum of compensation originally awarded and the disputes remain in litigation for a long time. In a large number of such cases, by and large, the owners succeed and secure additional compensation from the Courts [Enhanced Compensation]. Generally, in most such cases, the State continues to litigate the quantum of Enhanced Compensation till the Apex Court and the issues get finally resolved after a very long time. In most cases, once the Enhanced Compensation is determined/approved by the Courts [say, the High Court], the amount of such Enhanced Compensation is deposited with the Courts and the owners are permitted to withdraw the same against some security [say, bank guarantee], or even without any security, notwithstanding the fact that the disputes remain pending before the higher courts [say, Apex Court]. In most such cases, the dispute was with regard to the year of taxability of the Enhanced Compensation when such disputed compensation was received by the owner on furnishing security as the amount received is liable to be repaid, if, the higher court decides the issue against the owner [fully or partly].
-http://www.lawweb.in/2013/07/taxability-of-interest-under-land.html

[ketanvyas1975]

as i understand from the above is that the issue is still wide open for interpretation. Isn't it?

[pawansingla]

I feel that we are trying to read too much between the lines. Any interest earned on compensation is taxable in the year of recipt and 50% deduction is avilable.Even if interest accrues prior to the amendment.

[scgupta]

The question raised by Sh Ketan Vyas is an important question. The amendments were made w.e.f. 1-4-2010 only to tax the interest in the year of receipt. These amendments were brought in to overcome the difficulties created by the decision of Supreme Court in the case of Rama Bai vs CIT, 181 ITR 400(SC) wherein it was held that interest is taxable in different years on accrual basis.

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. 

So, in my view, amendments made w.e.f. 01-04-2010 do not change the legal position regarding interest u/s 28 i.e. interest u/s 28 is to be treated as part of compensation.