Core Issue:-Whether interest received on enhanced compensation for compulsory acquisition of agricultural land under section 28 of the Land Acquisition Act, 1894 is:

exempt under section 10(37) of the Income-tax Act, 1961 as part of compensation, or taxable as “Income from Other Sources” under section 56(2)(viii) read with sections 145B(1) and 57(iv), post amendment w.e.f. 01.04.2010,and whether failure of the Assessing Officer to examine this issue justified revision under section 263.

Statutory Provisions Involved

Section 263 – Revision of erroneous and prejudicial assessment

Section 56(2)(viii) – Taxability of interest on compensation / enhanced compensation

Section 145B(1) – Year of taxability of interest on compensation

Section 57(iv) – Standard deduction @ 50% of such interest

Section 10(37) – Exemption of capital gains on compulsory acquisition of agricultural land

Section 28 & 34, Land Acquisition Act, 1894 – Interest on enhanced compensation vs delay in payment

Facts of the Case:The assessee received ₹82,88,672 as interest under section 28 of the Land Acquisition Act on enhanced compensation for compulsory acquisition of agricultural land.

The return was filed in response to notice u/s 148, claiming the interest as exempt u/s 10(37).

The Assessing Officer (AO) accepted the claim without examining:

   applicability of sections 56(2)(viii), 145B(1), 57(iv); or

   eligibility conditions under section 10(37).

   The PCIT, Faridabad, invoked section 263, holding the reassessment order to be erroneous and prejudicial to the interest of Revenue due to lack of inquiry.

Findings and Decision

Assessing Officer (AO):-Accepted the exemption claim of interest under section 10(37).

Conducted no inquiry on statutory amendments effective from 01.04.2010.

Failed to examine binding High Court precedents.

PCIT (Revision u/s 263)Held that:

Interest under section 28 is distinct from compensation.

Section 10(37) applies only to capital gains, not to interest.

AO’s order suffered from lack of inquiry, attracting Explanation 2 to section 263.

Directed recomputation of income under section 56(2)(viii) with deduction u/s 57(iv).

ITAT Delhi – Final Findings

The issue is no longer res integra.

Post-2010 amendment:All interest on compensation or enhanced compensation, including u/s 28 of the Land Acquisition Act, is taxable as Income from Other Sources.

Section 10(37) covers compensation only, not interest.

Reliance on Ghanshyam (HUF) is misplaced for post-2010 years.Failure of AO to apply amended law and binding jurisdictional High Court judgments clearly justified revision u/s 263.

Gist of Judicial Precedents Discussed

1. Sham Lal Narula (Dr.) v. CIT

(1964) 53 ITR 151 (SC)

Outcome: Interest awarded under sections 28 and 34 of the Land Acquisition Act is a revenue receipt and taxable.

2. T.N.K. Govindaraju Chetty v. CIT

(1967) 66 ITR 465 (SC)

Outcome: Interest on delayed payment of compensation is taxable income.

3. Bikram Singh v. Land Acquisition Collector

(1997) 10 SCC 243 (SC)

Outcome: Interest on enhanced compensation is revenue in nature and liable to tax.

4. Rama Bai v. CIT

(1990) 181 ITR 400 (SC)

Outcome: Interest on enhanced compensation accrues year to year and is taxable accordingly.

5. K.S. Krishna Rao v. CIT

(1991) 181 ITR 408 (SC)

Outcome: Interest on compensation is income chargeable to tax.

6. CIT v. Ghanshyam Dass (HUF)

(2009) 315 ITR 1 (SC)

Outcome: Interest u/s 28 of the Land Acquisition Act treated as part of compensation for capital gains under section 45(5) (pre-2010 law).

7. Puneet Singh v. CIT

(2019) 415 ITR 215 (P&H)

Outcome: Interest on compensation/enhanced compensation taxable as income from other sources with 50% deduction u/s 57(iv).

8. Mahender Pal Narang v. CIT

(2021) 415 ITR 13 (P&H)

Outcome: Interest on enhanced compensation taxable as income from other sources in year of receipt.

9. PCIT v. Inderjit Singh Sodhi (HUF)

(2024) 423 ITR 13 (Delhi)

Outcome: Interest on compensation/enhanced compensation taxable u/s 56(2)(viii); Ghanshyam (HUF) held inapplicable post-2010.

10. Veena Shah v. ITO

ITA No. 1222/Del/2023 (ITAT Delhi)

Outcome: Interest on enhanced compensation taxable as income from other sources; section 10(37) not applicable.

11. Bhim Singh v. ITO

ITA No. 255/Del/2024 (ITAT Delhi)

Outcome: Interest u/s 28 of Land Acquisition Act taxable u/s 56(2)(viii) post-2010 amendment.

12. Shri Jagpal v. PCIT, Faridabad

ITA No. 2092/Del/2024 (ITAT Delhi), order dated 16.01.2026

Outcome: Revision u/s 263 upheld; interest on enhanced compensation held taxable as income from other sources.

Final Outcome:Revision under section 263 upheld.

Interest of ₹82,88,672 received u/s 28 of the Land Acquisition Act:

Taxable as Income from Other Sources u/s 56(2)(viii),

Taxable on receipt basis u/s 145B(1),

Eligible only for 50% deduction u/s 57(iv).

Exemption u/s 10(37) denied.

Assessee’s appeal dismissed.

Key Takeaway for Practitioners

-For A.Y. 2010-11 onwards, interest on enhanced compensation, even for agricultural land acquired compulsorily, cannot be sheltered under section 10(37). Failure of the AO to apply sections 56(2)(viii), 145B and 57(iv) squarely attracts revision u/s 263.

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