Interest on Enhanced Compensation Taxable as IFOS

Case Details: Baljinder Singh vs. Principal Commissioner of Income-tax - [2026] 183 taxmann.com 572 (Chandigarh-Trib.)

Judiciary and Counsel Details

Laliet Kumar, Judicial Member & Krinwant Sahay, Accountant Member
Parikshit Aggarwal, C.A. for the Appellant.
Manav Bansal, CIT for the Respondent.

Facts of the Case

The assessee, an individual, filed its return of income for the relevant assessment year. The case was selected for scrutiny under the faceless regime. During the assessment, the assessee claimed exemption in respect of interest on enhanced compensation arising from the acquisition of agricultural land. The Assessing Officer (AO) accepted the assessee’s claim and completed the assessment.

On examination of the assessment records, the Principal Commissioner noticed that the AO failed to apply the provisions of section 56(2)(viii), read with section 145B(1) and section 57(iv). Accordingly, a show cause notice under section 263 was issued proposing to revise the assessment order. The matter reached the Chandigarh Tribunal.

ITAT Held

The Tribunal held that the AO didn’t discuss the issue of the taxability of interest on enhanced compensation. The assessment order does not refer to section 56(2)(viii) or section 57(iv), nor does it examine the effect of the amendments introduced by the Finance (No. 2) Act, 2009. The order is also completely silent on the judicial precedents governing the issue. Mere calling for information and placing it on record does not constitute an inquiry under the law. What is required is a conscious examination of the issue, the application of the relevant statutory provisions, and the formation of a reasoned view. The absence of any such exercise clearly shows a lack of proper enquiry and non-application of mind on the part of the AO.

The Finance (No. 2) Act, 2009, with effect from 01-04-2010, inserted section 56(2)(viii), which specifically provides that income by way of interest received on compensation or enhanced compensation shall be chargeable to tax. The legislative intent behind this amendment is explicit and leaves no scope for ambiguity. Once the statute clearly mandates taxability of such interest, the AO was duty-bound to apply the said provision.

Failure to do so renders the assessment order erroneous in law. This amendment was brought in to settle the controversy relating to the taxability of interest on compensation, irrespective of the nomenclature or the provision under which such interest is awarded. Once the statute itself deems such interest to be taxable as ‘Income from other sources’, the AO had no discretion to treat it as exempt unless supported by a binding authority holding otherwise.

Therefore, the order was erroneous and prejudicial to the revenue’s interests under section 263. Such interest, taxable as “Income from other sources”, was also not eligible for exemption under section 10(37). The PCIT’s assumption of jurisdiction was upheld.

List of Cases Reviewed

Puneet Singh v. CIT [2019] 110 taxmann.com 116/415 ITR 215 (Punjab & Haryana)
Mahender Pal Narang v. CBDT, New Delhi [2020] 120 taxmann.com 400/423 ITR 13/275 Taxman 222 (Punjab & Haryana) (para 74)
Manjet Singh (HUF) Karta Manjeet Singh v. UOI [2016] 65 taxmann.com 160/237 Taxman 116 (Punjab & Haryana) (para 112) followed
RKKR Foundation v. NFAC, Delhi [2021] 127 taxmann.com 352/282 Taxman 76 (Delhi) (para 77)
Movaliya Bhikhubhai Balabhai v. ITO [2016] 70 taxmann.com 45/388 ITR 343 (Gujarat) (para 88)
CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 89) distinguished

List of Cases Referred to

Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) (para 2)
CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167/[2010] 189 Taxman 436 (Delhi) (para 8)
CIT v. Chet Ram (HUF) [2017] 86 taxmann.com 103/251 Taxman 4/[2018] 400 ITR 23 (SC) (para 8)
CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 8)
ITO v. D.G. Housing Projects Ltd. [2012] 20 taxmann.com 587/343 ITR 329/[2013] 212 Taxman 132 (Delhi) (para 8)
CIT v. Ghanshyam (HUF) [2009] 315 ITR 1/182 Taxman 368 (SC) (para 8)
Mahender Pal Narang v. CBDT, New Delhi [2020] 120 taxmann.com 400/423 ITR 13/275 Taxman 222 (Punjab & Haryana) (para 11)
Manjet Singh (HUF) Karta Manjeet Singh v. UOI [2016] 65 taxmann.com 160/237 Taxman 116 (Punjab & Haryana) (para 11)
Movaliya Bhikhubhai Balabhai v. ITO [2016] 70 taxmann.com 45/388 ITR 343 (Gujarat) (para 17)
RKKR Foundation v. NFAC, Delhi [2021] 127 taxmann.com 352/282 Taxman 76 (Delhi) (para 19)
Satbir v. ITO [IT Appeal Nos. 1413 to 1415 (CHD.) of 2016, dated 9-7-2018] (para 21)
Pawan Kumar v. Pr. CIT [2024] 159 taxmann.com 61/206 ITD 53 (Delhi – Trib.) (para 22)
ITO v. Prabhayya Basayya Saraganachariaryaha Badshah [IT Appeal No. 858/Banglore/2018, dated 13.03.2019] (para 23)
Puneet Singh v. CIT [2019] 110 taxmann.com 116/415 ITR 215 (Punjab & Haryana) (para 74)
GPL-RKTCPL JV v. National Faceless Assessment Centre, Delhi [2022] 145 taxmann.com 156/[2023] 453 ITR 384/291 Taxman 409 (Delhi) (para 85)
Movaliya Bhikhubhai Balabhai v. ITO (TDS) [2016] 70 taxmann.com 45/388 ITR 343 (Gujarat) (para 88).