Safiya Malik

The High Court of Kerala, Division Bench comprising of Justice Dr. A.K. Jayasankaran Nambiar and Justice Easwaran S., delivered a judgment addressing the classification of interest received on delayed compensation for compulsory acquisition of agricultural land. The Court stated that such interest payments shall be treated as capital gains and not as income from other sources. Consequently, these amounts are entitled to exemption under Section 10(37) of the Income Tax Act, 1961.

The appeals under consideration, I.T.A. No. 32 of 2023 and I.T.A. No. 60 of 2024, pertained to the classification of interest received on delayed payments of enhanced compensation for compulsory acquisition of agricultural lands under the Land Acquisition Act, 1894. The appellants in the respective cases were Shri Anvar Ali Poolakkodan and Shri Abdul Azeez Poolakkodan, residents of Randathani P.O., Malappuram District.

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The Revenue was represented by the Income Tax Officer, Ward-1, Tirur. The appellants contested orders of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, regarding the treatment of interest income received on such delayed compensation.

In I.T.A. No. 32 of 2023, the Tribunal had remanded the issue to the Assessing Officer, distinguishing between interest received at the rate of 9% per annum and 15% per annum. It held that interest at 9% would qualify for exclusion under Section 10(37), while interest at 15% would be taxable as "Income from other sources" under Section 56(2)(viii).

In I.T.A. No. 60 of 2024, the Tribunal dismissed an appeal against an order passed under Section 154, wherein the Assessing Officer treated the interest income as taxable under the head "Income from other sources," denying rectification relief to the assessee.

Both appellants had received compensation for the acquisition of their agricultural lands by the State. The Reference Court had enhanced the compensation under Section 28 of the Land Acquisition Act and awarded interest on such enhancement. The appellants declared the amounts received as capital gains and claimed exemption under Section 10(37).

The Revenue argued that interest received under the Land Acquisition Act on delayed compensation should be assessed as "Income from other sources" in line with Section 56(2)(viii), especially after its amendment effective from 01.04.2010.

The Division Bench, after hearing submissions from Senior Counsel Anil D. Nair (for the appellants) and Standing Counsel P.G. Jayashankar (for the Revenue), undertook a detailed examination of the statutory provisions under the Income Tax Act, including Sections 2(28A), 10(37), 45(5), 56(2)(viii), 57(iv), and 145B.

The Court noted: "On a conjoint reading of the above statutory provisions, 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."

Further, the Court observed: "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."

On the contentious issue of interest classification, the Court recorded: "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."

Citing constitutional principles, the Bench stated: "We cannot lose sight of the fact that compensation amounts paid to a person towards compulsory acquisition of his property traces its roots to the constitutional obligation to pay such compensation under Article 300A of the Constitution."

Referring to precedents such as Sundar v. Union of India (2001) 7 SCC 211 and Dharnidhar Mishra (D) v. State of Bihar (2024) 10 SCC 605, the Court reinforced the position that statutory interest is integrally linked to compensation.

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The Court concluded: "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."

The Court allowed both appeals and answered the questions of law raised in favour of the assessees and against the Revenue. It set aside the ITAT's classification of interest income as "Income from other sources" and directed that such interest be treated as part of capital gains, entitled to the exemption under Section 10(37).

Advocates Representing the Parties:

For the Appellants: Anil D. Nair (Senior Advocate), Aaditya Nair, Binisha Baby, Saritha K.S.

For the Respondent: P.G. Jayashankar (Standing Counsel), Keerthivas Giri

Case Title: Shri Anvar Ali Poolakkodan v. The Income Tax Officer, Ward-1, Tirur & Abdul Azeez Poolakkodan v. The Income Tax Officer, Ward-1, Tirur

Neutral Citation: 2025: KER:31055

Case Numbers: I.T.A. No. 32 of 2023 and I.T.A. No. 60 of 2024

Bench: Justice Dr. A.K. Jayasankaran Nambiar, Justice Easwaran S.

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