The Kerala High Court has held that amount received as compensation for compulsory acquisition of landed property is income under capital gains.
The bench of Justice A.K.Jayasankaran Nambiar and Justice Easwaran S. has observed that 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 Income Tax Act. Consequently, the interest amounts will also get the benefit of Section 10 (37) of the Income Tax Act if the land compulsorily acquired is agricultural land. Further, since the interest amounts so received are not in the nature of interest as defined under Section 2 (28A), the provisions of Section 56 of the Income Tax Act will not be attracted.
The appellant/assessees received compensation as fixed by the Land Acquisition Officer (LAO) for the agricultural lands acquired from them by the State. Immediately thereafter, they had approached the Reference court under the Land Acquisition Act, 1894 (LAA) seeking enhancement of the compensation awarded to them by the LAO.
The Reference Court granted them enhanced compensation and also directed interest to be paid on the enhanced compensation in accordance with Section 28 of the LAA.
While the assessees returned the income received by way of enhanced compensation and interest as income under the head of ‘Capital Gains’, they also claimed the benefit of Section 10 (37) by which the said income would stand excluded from the total income for the purposes of assessment under the Income Tax Act.
In the orders of the Appellate Tribunal in these appeals, the Tribunal has taken the stand that while the compensation and enhanced compensation amounts received by the assessees would merit classification as ‘Capital Gains’ for the purposes of assessment under the Income Tax Act, the interest amounts paid to the assessees for the delayed payment of compensation or enhanced compensation would merit classification only as ‘Income from other sources’ and therefore would not get the benefit of Section 10 (37) of the Income Tax Act.
In fact, the order makes a distinction between interest received @ 9% and interest received @ 15% and states that while the former would be classifiable as ‘Capital Gains’ and obtain the benefit under Section 10 (37) of the Income Tax Act, the latter would not.
The order however takes the view that, after the amendment of Section 56 (2) of the Income Tax Act w.e.f 01.04.2010, all interest amounts received for delayed payment of compensation under the LAA will merit classification only as ‘Income from other sources’ and hence the amounts will not get the benefit of Section 10 (37) of the Income Tax Act.
Case Details
Case Title: Anvar Ali Poolakkodan Versus The Income Tax Officer
Case No.: I.T.A.NO.32 OF 2023
Date: 11/04/2025
Counsel For Petitioner: Anil D. Nair
Counsel For Respondent: P.G. Jayashankar
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