Income Tax | Amount Received As Compensation For Compulsory Acquisition Of Landed Property Is Income Under 'Capital Gains': Kerala High Court

The Division Bench of Justices A.K. Jayasankaran Nambiar and Easwaran S. stated 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 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. 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 I.T. Act will not be attracted in such cases.”

In this case, assessee had received compensation as fixed by the Land Acquisition Officer [LAO] for the agricultural lands acquired from them by the State.

Immediately thereafter, the assessee 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 assessee 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) whereby the said income would stand excluded from the total income for the purposes of assessment under the I.T. Act. The assessee filed an appeal before the Appellate Tribunal.

The Tribunal held that after the amendment of Section 56 (2) of the I.T. 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 said amounts will not get the benefit of Section 10 (37) of the I.T. Act.

The bench opined that “the 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. 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 for the purposes of the I.T. Act.”

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, added the bench.

In view of the above, the bench allowed the appeal.

Case Title: Anvar Ali Poolakkodan v. The Income Tax Officer

Citation: 2025 LiveLaw (Ker) 242

Case Number: I.T.A.NO.32 OF 2023

Counsel for Petitioner/ Assessee: Anil D. Nair, Aaditya Nair and Telma Raju

Counsel for Respondent/ Department: P.G. Jayashankar and Keerthivas Giri

Click Here To Read/Download The Order