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Interest Awarded Under Section 28 of Land Acquisition Act--Whether Eligible for Exemption Under Section 10(37)

CA. Manoj Gupta

Section 10(37) provides for exemption to gains arising on compulsory acquisition of agricultural land. A question arises as to whether interest awarded under section 28 of the Land Acquisition Act, 1894 forms part of compensation and thus, exempt under section 10(37). The judiciary is divided on the issue. The learned author summarises the legal position obtained as of now.

1. Capital Gain on compulsory acquisition of urban Agricultural Land

In terms of section 10(37), In the case of an assessee, being an individual or a Hindu individual family, any income chargeable under the head "Capital gains" arising from the transfer of agricultural land, shall be exempted, where :--

1. Such land is situate in any area referred to in, item (a) or item (b) of sub-clause (iii) of clause (14) of section 2

2. Such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual, or a parent of his

3. Such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India

4. Such income has arisen from the compensation or consideration for such transfer received by such assesses on or after the 1-4-2004.

It may be noted in this connection that exemption is available only if compulsory acquisition has taken place on or after 1-4-2004. Exemption is also available if acquisition has taken place before 1-4-2004 but compensation has been received on or after 1-4-2004. For the purposes of this clause, the expression, "compensation or consideration" includes the compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority.'

2. Nature of interest received under section 28 of Land Acquisition Act, 1894

Supreme Court in the case of Dr. Shamlal Narula v. CIT, (1964) 53 ITR 151 (SC), had held that the interest awarded under section 28 of the Act, just like under section 34 thereof, cannot be a compensation or damages for the loss of the right to retain possession but only compensation payable by the State for keeping back the amount payable to the owner.

The principle of Dr. Shamlal Narulas case (supra) had subsequently been applied by three Judges Bench of the Apex Court in a later decision in T.N.K. Govindaraju Chetty v. CIT (1967) 66 ITR 465 (SC).

Another three Judges Bench of the Apex Court in Bikram Singh v. Land Acquisition Collector, (1997) 224 ITR 551 (SC) following Dr. Shamlal Narulas case (supra) and taking into consideration definition of interest in section 2(28A) of the Act had recorded that interest under section 28 of the 1894 Act was a revenue receipt and is taxable.

The Supreme Court in the case of CIT v. Ghanshyam (HUF) 2009 TaxPub(DT) 1897 (SC) : (2009) 315 ITR 1 (SC) has held that the interest is different from compensation. However, interest paid on the excess amount under section 28 of the 1894 Act depends upon a claim by the person whose land is acquired, whereas interest under section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under section 28 is part of the amount of compensation, whereas interest under section 34 is only