Interest received on enhanced compensation under The National Highways Act 1956 – Taxable?
INTRODUCTION:
- In view of S. 3A of the National Highways Act, 1956 [‘NHA’] where the Central Government is satisfied that for a public purpose any land is required for the building, maintenance, management or operation of a national highway or part thereof, it may, by notification in the Official Gazette, declare its intention to acquire such land.
- On the publication of the declaration under sub-section (1) of S. 3D of NHA 1956, the land shall vest absolutely in the Central Government free from all encumbrances.
- Acquisition of lands under The National Highways Act, 1956 as above results in to award of monetory compensation from the competent Authority under the Act under S. 3G(1) of the NHA 1956.
- If the amount determined by the competent authority under section 3G(1) is not acceptable to parties concerned, the amount shall, on an application by the parties, be determined by the arbitrator to be appointed by the Central Government. [S. 3G(5)]
- In view of S. 3H(5), where the amount determined under section 3G(5) by the arbitrator is in excess of the amount determined by the competent authority, the arbitrator may award interest at nine per cent per annum on such excess amount from the date of taking possession under section 3D till the date of the actual deposit thereof.
- As far as the compensation received for acquisition of agricultural lands is concerned, the same is capital receipt exempt from tax u/s 10(37) of the Income Tax Act.
Taxability of interest on enhanced compensation received u/s 3H(5) of The National Highways Act:
Sub-section (5) of Section 3(H) of The NHA 1956 reads as under:
(5) Where the amount determined u/s 3G by the arbitrator is in excess of the amount determined by the competent authority, the arbitrator may award interest at nine per cent per annum on such excess amount from the date of taking possession under section 3D till the date of actual deposit thereof.
Thus, the interest received u/s 3H(5) of The National Highways Act, 1956 is, in sum and substance, exactly in the nature of interest receivable u/s 28 of The Land Acquisition Act 1894, which reads as follows:
Section 28 of the 1894 Act reads as under :-
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.“
Interest under section 28 of the Land Acquisition Act, 1894 is awarded by the discretionary power of the Court for accretion in the value of the lands, hence, it is part of enhanced compensation or consideration and that receipt is capital in nature. There are contra-decisions of the Courts with regard to taxability of interest awarded on enhanced compensation under section 28 of the Land Acquisition Act, 1894 which was resolved by the landmark judgment of the Hon’ble Supreme Court in the case of CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 which was as under :
“Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount of compensation, which is determined by the Court. Interest on excess compensation under section 28 of Land Acquisition Act form part of enhanced compensation therefore is taxable under the head ‘Capital gains’…..”
….. Sec. 28 of the 1894 Act applies only in respect of the excess amount determined by the Court after reference under s. 18 of the 1894 Act. It depends upon the claim, unlike interest under s. 34 which depends on undue delay in making the award. 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.
Latest Judicial rulings:
Even though changes were made in section 145A and sec 56(2) w.e.f 1st June 2010 so as to tax interest on compensation or enhanced compensation as income from other sources under section 56(2) in the year of receipt, the Courts held that interest awarded to Land Owners under section 28 of the land Acquisition Act, 1894 on enhanced compensation is a part of Compensation and is Capital Receipt taxable under the head Capital Gain.
Himachal Pradesh High Court in the case of CIT v. Joginder Singh [2013] 37 taxmann.com 43/217 Taxman 208:
The Hon’ble Himachal Pradesh High Court relying upon the decision of the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra) held as under:
“Interest awarded to land owner under section 28 of the Land Acquisition Act, 1894 on enhanced compensation is to be treated as part of compensation and not as interest, and hence, such interest is liable to be taxed in the year of receipt under section 45(5) as Capital Gain on transfer of Capital Asset in the case of Compulsory Acquisition.
Supreme Court in the case of CIT v. Govindbhai Mamaiya [2014] 52 taxmann.com 270/[2015] 229 Taxman 138/[2014] 367 ITR 498
The Hon’ble Supreme Court relying upon its earlier decision in the case of Ghanshyam (HUF) (supra) held as under :
The interest earned under Section 28, which is on enhanced compensation, is treated as a accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to tax in the year of receipt under section 45(5) under the head Capital Gain.
Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO [2016] 70 taxmann.com 45/388 ITR 343:
The Hon’ble Gujrat High Court relying upon the decision of the Hon’ble Supreme Court in the case of Ghanshyam (HUF) (supra), in the case of Govindbhai Mamaiya (supra) held as under :
Interest paid on compensation/enhanced compensation under section 28 of the Land Acquisition Act, 1894 forms part of compensation and not interest as contemplated under section 145A and same interest is not taxable under the head Income from Other Sources under section 56. Interest earned under section 28 of the Land Acquisition Act, 1894 being part of compensation treated as Capital Receipt and taxable under section 45(5) under the head Capital Gain and compensation to individual land owners being exempted under section 10(37) where land transferred was agricultural land, hence, deduction of tax under section 194A is not applicable on payment of interest under section 28 of the Land Acquisition Act, 1894.
Supreme Court in the case of UOI v. Hari Singh [2018] 91 taxmann.com 20
The Hon’ble Supreme Court reiterates its observation in the case of Ghanshyam (HUF) (supra), held that interest on compensation or enhanced compensation paid to land owners under section 28 of the Land Acquisition Act, 1894 forms part of compensation and shall be treated as tax free under section 10(37) in the case of agricultural land where the land owners are individuals.
Recently, Hon’ble ITAT, Pune reiterated the above position in Dnyanoba S. Jadhav vs. ITO (2018) 90 taxmann.com 285 (PUNE):
Interest awarded under section 28 of Land Acquisition Act is in nature of solatium and an integral part of compensation and receipt of same is a capital receipt whereas, interest awarded under section 34 of said act is on account of delayed payment of compensation and is revenue receipt exigible to tax.
Conclusion:
Therefore, in authors opinion, interest on enhanced compensation received by the assessee u/s 3(H)(5) of the National Highways Act, 1956 is integral part of compensation itself and not interest taxable under the head other sources, as clarified by the Hon’ble Supreme Court as above.
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