The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest awarded under Section 28 of the Land Acquisition Act, 1894 forms an integral part of the enhanced compensation paid for compulsorily acquired agricultural land and cannot be separately taxed as “Income from Other Sources.”

The bench of Anikesh Banerjee (Judicial Member) and Ratna Dasgupta (Accountant Member) deleted an addition of ₹14.26 lakh made by the Income Tax Department after treating 50% of the interest received by the taxpayer as taxable under Section 56(2)(viii), read with Section 57(iv), of the Income Tax Act, 1961. The interest under Section 28 represents an accretion to the value of the acquired land. Its tax treatment must, therefore, follow the taxability of the compensation to which it is attached.

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“Where the underlying compensation is not chargeable to tax because the acquired land is not a capital asset, the interest awarded under Section 28 cannot be separately assessed under the head ‘Income from Other Sources’,” the Tribunal observed while following earlier coordinate Bench decisions.

The appeal arose from reassessment proceedings concerning Assessment Year 2020–21.

Based on information received through the Risk Management Strategy, the Assessing Officer found that the taxpayer had received aggregate interest income of ₹34.83 lakh during the relevant financial year. A notice under Section 148 of the Income Tax Act was accordingly issued on March 28, 2024.

In response to the reassessment notice, the taxpayer filed a return of income on June 28, 2024, declaring a total income of ₹4.44 lakh.

During the proceedings, the Assessing Officer examined Form 26AS and found that the taxpayer had received ₹28,53,487 from the Deputy Collector and Land Acquisition Officer. Tax amounting to ₹2,85,349 had been deducted from this payment under Section 194A of the Income Tax Act.

The taxpayer explained that the amount represented interest awarded under Section 28 of the Land Acquisition Act in connection with the compulsory acquisition of agricultural land.

It was contended that interest granted under Section 28 was not an independent interest receipt. Instead, it constituted an integral component of the enhanced compensation payable for the acquired land.

On that basis, the taxpayer argued that the amount could not be separately taxed as income from other sources.

The Assessing Officer rejected the explanation and applied Section 56(2)(viii) of the Income Tax Act. After granting the statutory deduction of 50% under Section 57(iv), the officer assessed the remaining sum of ₹14,26,743 as “Income from Other Sources.”

The reassessment was completed under Section 147, read with Section 144B, on January 24, 2025.

The National Faceless Appeal Centre subsequently upheld the addition through an order passed under Section 250 on August 19, 2025, prompting the taxpayer to approach the ITAT.

Before the Tribunal, the taxpayer’s counsel relied upon the Delhi ITAT’s ruling in Akhilesh Bansal v. ITO. In that case, the Delhi Bench had held that interest awarded under Section 28 of the Land Acquisition Act was part of the compensation and consequently fell outside the scope of Section 56 of the Income Tax Act.

The Delhi Bench had followed its earlier decision in Satender Kumar v. ITO, which, after considering the Supreme Court’s ruling in CIT v. Ghanshyam (HUF) and the amendments introduced by the Finance (No. 2) Act, 2009, held that Section 28 interest was not an independent receipt.

It was regarded as an accretion to the value of the acquired land and an integral component of the enhanced compensation.

The taxpayer submitted that the same principle applied in the present case because the amount of ₹28.53 lakh was admittedly received as interest under Section 28 in relation to the compulsory acquisition of agricultural land.

The Income Tax Department supported the orders passed by the lower authorities. However, the departmental representative could not produce any contrary judgment or point out any material factual distinction from the decisions relied upon by the taxpayer.

After examining the record, the Tribunal noted that there was no dispute about the nature of the payment. The amount of ₹28,53,487 had been received as interest under Section 28 of the Land Acquisition Act in connection with the compulsory acquisition of agricultural land.

The ITAT accepted the principle laid down in Akhilesh Bansal that Section 28 interest is an accretion to the value of the acquired property and forms part of the enhanced compensation.

According to the Tribunal, once such interest is recognised as part and parcel of the compensation, its taxability must necessarily follow the tax treatment of the underlying compensation.

The interest cannot be artificially separated from the compensation and subjected to tax under a different head merely because the payment has been described as interest or because tax was deducted under Section 194A.

The Tribunal further noted that the Revenue had neither cited a contrary judicial decision nor demonstrated any factual difference warranting a departure from the coordinate Bench ruling.

“Therefore, respectfully following the ratio laid down in Akhilesh Bansal, we hold that the interest received by the assessee under Section 28 of the Land Acquisition Act forms part of the enhanced compensation and cannot be separately brought to tax under Section 56(2)(viii) read with Section 57(iv) of the Act,” the ITAT held.

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