ITAT Rules Interest on Enhanced Land Compensation Exempt from Tax

Anirudh Jain - Kolkata Bureau Sep 14, 2026 1,400 Views

The Income Tax Appellate Tribunal Rajkot bench ruled that interest awarded under Section 28 of the Land Acquisition Act for enhanced agricultural land compensation qualifies for tax exemption under Section 10(37). The tribunal held such interest is an accretion to the land’s capital value, protecting farmers from excessive tax liabilities.

RAJKOT — In a major relief for landowners facing compulsory government acquisition, the Income Tax Appellate Tribunal (ITAT) Rajkot Bench has ruled that interest received on enhanced compensation for agricultural land is treated as an integral part of the compensation itself and can be exempt from income tax. The tribunal clarified that interest awarded under Section 28 of the Land Acquisition Act represents an accretion to the value of the acquired land rather than standalone revenue interest, thereby qualifying for capital gains exemption under Section 10(37) of the Income Tax Act. This ruling clarifies tax treatment for farmers and landowners involved in protracted land-acquisition litigation with state authorities.

Section 28 vs Section 34: The Decisive Legal Distinction

The ruling in Kishorbhai Nathabhai Makani vs. Income Tax Officer for assessment year 2016–17 turned on distinguishing between two statutory forms of interest under the Land Acquisition Act, 1894:

Section 28 Interest: Awarded by a court when it determines that the collector originally under-assessed the property. It is directly tied to the enhanced compensation amount and deemed an accretion to the capital value of the acquired parcel.
Section 34 Interest: Payable solely due to administrative delays in disbursing the assessed compensation after possession has been taken. This interest represents simple damages for delay and is taxable as "income from other sources" under Section 56(2)(viii).

The assessee held a 25 percent share in ancestral agricultural land compulsorily acquired by the state, receiving ₹2.69 crore in enhanced compensation, which included ₹1.89 crore awarded as Section 28 interest.

While the Assessing Officer initially accepted the exemption, the Principal Commissioner of Income Tax intervened under Section 263, claiming that the interest component ought to have been taxed under Section 56(2)(viii) after allowing a standard 50 percent deduction under Section 57(iv).

The ITAT rejected the tax department’s revision, holding that Section 28 interest shares the character of the underlying compensation and cannot be separated into a taxable revenue stream.

Judicial Precedents and the Protection Against Double Taxation

In reaching its verdict, the ITAT Rajkot Bench placed reliance on the landmark Supreme Court decision in CIT vs. Ghanshyam (HUF) and the jurisdictional Gujarat High Court ruling in Movaliya Bhikhubhai Balabhai vs. ITO. Both rulings established that interest awarded on enhanced compensation forms an intrinsic part of the full value of consideration received on compulsory transfer.

The tribunal also addressed the Revenue's reliance on conflicting judgments, such as the Punjab and Haryana High Court's ruling in Manjeet Singh (HUF). The ITAT held that authorities operating under Gujarat's jurisdiction are bound by the Gujarat High Court’s interpretation.

The bench noted that the compensation and related interest had already been assessed in the hands of a co-owner. Attempting to assess the same interest again on another co-owner would lead to double taxation.

Impact on Landowners, Farmers, and Tax Litigation

Compulsory land acquisition for highways, industrial corridors, and public infrastructure often leads to lengthy court proceedings before enhanced compensation is disbursed.

Because Section 28 interest frequently constitutes more than half of the total court-awarded sum after years of adjudication, treating it as taxable revenue exposes farmers to heavy tax liabilities and tax deducted at source (TDS) disputes.

This decision confirms that landowners receiving enhanced compensation for rural agricultural land do not forfeit their complete capital gains exemption under Section 10(37) simply because a portion of the court award is labeled as interest under Section 28.

Official Sources

The legal findings and statutory applications were recorded in the official judicial order delivered by the Income Tax Appellate Tribunal (ITAT). Statutory provisions governing agricultural land exemptions and revisionary jurisdiction were cited under the Income Tax Department portal and provisions of the Ministry of Law and Justice.

Quotes

"Interest awarded under Section 28 of the Land Acquisition Act has the character of compensation and does not fall within the meaning of interest covered by the relevant taxing provisions of the Income Tax Act," the Income Tax Appellate Tribunal bench noted, citing binding jurisdictional precedent.

According to tax officials, assessing officers cannot use Section 263 to reopen completed assessments when the original assessing officer took a legally plausible view backed by higher judicial precedent.

Why It Matters

The decision limits the tax department's ability to issue retrospective adjustment notices against agricultural landowners whose parcels are taken over for public projects. By protecting Section 28 interest under the umbrella of capital compensation, it prevents agrarian landholders from losing substantial portions of their court-mandated restitution to income tax deductions.

Key Facts at a Glance

Tribunal Verdict: ITAT Rajkot confirmed Section 28 interest on enhanced land compensation is eligible for Section 10(37) tax exemption.
Statutory Distinction: Section 28 interest is treated as compensation for capital value accretion, unlike Section 34 interest, which covers payment delay.
Disputed Sum: The case involved ₹1.89 crore received as interest out of ₹2.69 crore total enhanced compensation.
No Double Taxation: The tribunal held that taxing the same compensation on multiple co-owners violates basic assessment rules.

Frequently Asked Questions

Is all interest received from land acquisition exempt from tax?

No. Interest awarded under Section 28 of the Land Acquisition Act for enhanced land value can qualify for exemption on agricultural land, whereas interest under Section 34 for delayed disbursement remains taxable.

Which section of the Income Tax Act exempts agricultural land compensation?

Section 10(37) of the Income Tax Act exempts capital gains arising from the compulsory acquisition of specified urban or rural agricultural land.

Can the Income Tax Department reopen an assessment if the officer allowed this exemption?

The ITAT ruled that where an assessing officer adopts a legally plausible view supported by High Court precedent, supervisory commissioners cannot use Section 263 merely to impose a different tax interpretation.

Source: Income Tax Appellate Tribunal (ITAT), Income Tax Department, and the Ministry of Law and Justice.