Delhi ITAT rules interest on land acquisition compensation is not taxable separately when land is rural agricultural land

The Delhi bench of the Income Tax Appellate Tribunal has clarified that interest paid under section 28 of the Land Acquisition Act cannot be taxed separately as income when the land in question is classified as rural agricultural and outside the definition of a capital asset, marking a significant development in land acquisition tax jurisprudence.

The New Delhi bench of the Income Tax Appellate Tribunal has ruled that interest paid under section 28 of the Land Acquisition Act, 1894, cannot be carved out and taxed separately as income from other sources when the underlying land itself falls outside the definition of a capital asset. The decision came in the case of Akhilesh Bansal, who received enhanced compensation and interest after the compulsory acquisition of rural agricultural land by the Haryana Urban Development Authority.

Bansal argued that the land, bought in 2007, lay beyond the prescribed municipal limits and so did not qualify as a capital asset under section 2(14)(iii) of the Income Tax Act, 1961. On that basis, he said the compensation was exempt, including any amount linked to it under section 10(37). His counsel relied on the Supreme Court’s ruling in CIT v. Ghanshyam (HUF) and on a coordinate bench decision in Satender Kumar v. ITO to contend that section 28 interest is an inseparable part of the compensation itself.

The tax department opposed the claim, saying the acquisition was for urban development and that the authorities had correctly brought the enhanced compensation to tax under section 45(5) and the interest under the head income from other sources. But the tribunal, comprising S. Rifaur Rahman and Sunil Kumar Singh, rejected that approach. It held that the land was rural agricultural land situated beyond eight kilometres from the municipal limits and therefore not a capital asset. Once that was established, the bench said, the charging provisions failed at the threshold and section 45(5) could not apply.

The tribunal went on to say that the interest awarded under section 28 shared the same tax character as the compensation itself. Since the enhanced compensation was not taxable, the interest could not be treated as a separate taxable receipt either. The ruling adds to a line of Delhi bench decisions, including recent cases reported by tax publications, that have treated section 28 interest as part of the compensation package rather than as a standalone revenue item.