Kerala High Court: Interest Received On Compensation For Compulsory Acquisition Of Agricultural Land Classified As ‘Capital Gains’ Under Income Tax Act
The Kerala High Court allowed an appeal that challenged the ITAT's decision regarding the head of income for interest on compensation paid for agricultural lands acquired by the State.
The Kerala High Court has clarified that interest amounts received on the delayed payment of compensation for compulsory acquisition of agricultural land is classified as ‘Capital Gains’ under the Income Tax Act.
The Court allowed an Appeals against the Orders of the Income Tax Appellate Tribunal (ITAT) that remanded the issue of taxability of such interest to the Assessing Officer with a direction that while the interest amounts received @ 9% p.a would qualify for exclusion from total income under Section 10 (37) of the Income Tax Act (IT Act), the interest amounts received @ 15% p.a would be assessable as ‘Income from other sources’ under Section 56 (2)(viii) of the IT Act.
A Division Bench of Justice AK Jayasankaran Nambiar and Justice Easwaran S held that “interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as “Capital Gains’ for the purposes of the I.T. Act. Consequently, the interest amounts will also get the benefit of Section 10 (37) of the I.T. Act if the land compulsorily acquired is agricultural land.”
Senior Advocate Anil D. Nair appeared for the Appellant, while Standing Counsel P.G. Jayashankar represented the Respondent.
Brief Facts
The Assessees in both Appeals had received compensation for agricultural lands acquired by the State. Disputes arose over the classification of interest received on enhanced compensation awarded by the Reference Court under the Land Acquisition Act (LAA). The ITAT had previously held that while the compensation is classified as ‘Capital Gains’, the interest is classified as ‘Income from other sources’.
Court’s Reasoning
The High Court held that “it is clear that amounts received by an assessee as compensation or enhanced compensation for compulsory acquisition of his landed property would be treated as income under the head of ‘Capital Gains’ for the purposes of the I.T. Act.”
“If the said compensation amounts are received in relation to agricultural property, then by virtue of the provisions of Section 10 (37) of the I.T. Act, the amounts would stand excluded from the total income of the assessee for the purposes of the I.T. Act,” the Bench clarified.
The Court explained, “Going by the nature of the payment of interest under the LAA, we are inclined to hold that the payment of interest on delayed payment of compensation to an assessee, be it under Section 28 or Section 34 of the LAA, would partake the character of the principal compensation itself since it is essentially paid to compensate the assessee for the loss he suffered on account of not having the use of the principal compensation amount at the time when it fell due.”
The Bench stated that the interest amount would also be eligible for the exemption under Section 10(37) of the IT Act if the acquired land is agricultural land. The Court further clarified that Section 56 of the IT Act does not apply in such cases, as the interest is not considered separate from the compensation.
Consequently, the Court ordered, “The upshot of the above discussions is that these appeals are allowed by answering the questions of law raised therein in favour of the assessee and against the revenue.”
Accordingly, the High Court allowed the Appeal.
Cause Title: Anvar Ali Poolakkodan v. The Income Tax Officer (Neutral Citation: 2025:KER:31055)
Appearance:
Appellant: Senior Advocate Anil D. Nair; Advocates Aaditya Nair And Telma Raju
Respondent: Standing Counsel P.G. Jayashankar; Advocate Keerthivas Giri
