Interest on compensation and enhanced compensation is an accretion to the compensation itself and so covered under the head Capital Gains: Kerala HC
The Kerala High Court in the case of Anvar Ali Poolakkodan v. The Income Tax Officer has addressed a long-standing ambiguity regarding whether interest received on delayed or enhanced compensation on account of compulsory acquisition of land under the Land Acquisition Act (LAA) is to be treated as “Income from Other Sources” or as part of Capital Gains.
The case involved an assessee who had received enhanced compensation along with interest on delay payment as well as for interest on enhanced compensation for agricultural land acquired by the State. While the assessee shown the compensation and both the interest awarded by the Court under Section 28 of the LAA as income under the head “Capital Gains” and claimed exemption under Section 10(37), the Income Tax Appellate Tribunal has held that interest part on delay payment is tax as capital gain and interest on enhanced compensation should be tax under income from other source by relying on the amended provisions of Section 56(2) effective from 01.04.2010, held making it ineligible for exemption under Section 10(37).
However, the Kerala High Court disagreed with this interpretation and ruled that the interest received due to enhanced or delay compensation under Section 28 of the LAA must be viewed as an accretion to the compensation itself. Therefore, such interest retains the character of the compensation and is accordingly to be taxed under the head “Capital Gains.” Furthermore, the Court held that this interest does not fall within the definition of “interest” under Section 2(28A) of the Income Tax Act and hence, the provisions of Section 56 would not apply.
The copy of the order is as under:
