Afarmer from Rewari, Haryana, has won a landmark battle before the Delhi Income Tax Appellate Tribunal, securing a ruling that could benefit thousands of landowners across India who received interest on enhanced land acquisition compensation. The tribunal, in Ramavtar v. Income Tax Officer, Ward-1(3), Rewari (ITA No. 140/Del/2026), ruled squarely in favour of the assessee, holding that interest under Section 28 of the Land Acquisition Act, 1894, cannot be stripped of its character as enhanced compensation and taxed as “income from other sources.”
The case arose from reassessment proceedings under Sections 147 read with 144 of the Income Tax Act, 1961, for Assessment Year 2020–21. The assessee had received interest of Rs. 3,97,56,460 on enhanced compensation from the Haryana Urban Development Authority (HUDA) following the compulsory acquisition of his agricultural land. Tax was deducted at source at 10%, amounting to Rs. 39,75,646. The assessee treated this interest as exempt from tax under Section 10(37), consistent with longstanding Supreme Court jurisprudence holding it to be part of enhanced compensation.
“Interest under Section 28 is an accretion to the value of land, hence it is a part of enhanced compensation – unlike interest under Section 34, which is merely for delay in payment.” (Hon’ble Supreme Court — CIT vs. Ghanshyam HUF (2009) 315 ITR 1)
The Crux: Two Kinds of Interest, Two Very Different Fates
Understanding the controversy requires appreciating a crucial distinction that runs through the Land Acquisition Act, 1894 — and which the Supreme Court itself drew with precision in CIT vs. Ghanshyam HUF (2009) 315 ITR 1 (SC). The Act contemplates two separate streams of interest payable to a dispossessed landowner, and the law treats them very differently.
Section 28 Interest
Awarded by the court when it enhances the compensation amount. It accrues on the excess amount determined by the court and is considered an accretion to the value of the land itself – a recognition that the original award undervalued the property. The Supreme Court in Ghanshyam HUF confirmed this is part of enhanced compensation, not standalone interest income.
Section 34 Interest
Payable for the delay in making payment after the compensation amount is determined and possession is taken. It is a compensatory amount for the time-value of money withheld – classic interest on a debt. The Supreme Court has consistently held Section 34 interest is “income from other sources,” taxable accordingly without any exemption under Section 10(37).
The tax department’s case rested on a Punjab & Haryana High Court ruling in Mahender Pal Narang vs. CBDT (2020) 423 ITR 13 (P&H), which held that after the Finance (No.2) Act, 2009 inserted Sections 56(2)(viii), 57(iv), 145A and 145B into the statute, all interest received on compensation or enhanced compensation must be assessed as “income from other sources” – not as capital gains, and certainly not as exempt compensation under Section 10(37). The Revenue also pointed to the dismissal of the Special Leave Petition against that High Court ruling by the Supreme Court in 2021, arguing this cemented the position.
A Precedent That Changed Everything — But Wasn’t Cited Below
The pivot point in the tribunal’s reasoning was a Supreme Court judgment that the Punjab & Haryana High Court apparently never had the opportunity to consider. In Union of India vs. Hari Singh (2018) 91 taxmann.com 20 (SC), the Supreme Court expressly affirmed both its own ruling in Ghanshyam HUF and the Gujarat High Court’s decision in MovaliyaBhikhabhaiBalabhai vs. ITO TDS (2016) 388 ITR 343 — both of which treated Section 28 interest as part of enhanced compensation, exempt in the hands of individuals and HUFs receiving it on account of compulsory acquisition of agricultural land.
Impact of Finance Act, 2009 – Introduction of Section 56(2)(viii)
The Revenue’s argument in many such cases is based on the amendment introduced by Finance (No. 2) Act, 2009. Section 56(2)(viii) was inserted to tax interest received on compensation or enhanced compensation under the head “Income from Other Sources.” Correspondingly, Section 145A and Section 57(iv) were also amended.
The department argues that after this amendment, interest on compensation must be taxed separately irrespective of its character under the Land Acquisition Act.
Reliance is often placed on the Punjab & Haryana High Court ruling in:Mahender Pal Narang v. CBDT, In that case, the High Court held that interest on enhanced compensation is taxable under Section 56(2)(viii) following the statutory amendment.
However, the debate continues because the amendment does not explicitly override the character distinction drawn by the Supreme Court in Ghanshyam (HUF).
Section 10(37) – Exemption on Compulsory Acquisition of Agricultural Land
Section 10(37) provides exemption in respect of capital gains arising from compulsory acquisition of agricultural land situated in specified urban areas, subject to conditions:
- The land must be agricultural.
- It must have been used for agricultural purposes.
- It must be compulsorily acquired.
- Compensation must be received after 1 April 2004.
If interest under Section 28 forms part of compensation, and if the primary compensation is exempt under Section 10(37), then logically the enhanced component may also qualify for exemption.
This was the position taken by the assessee.
Invocation of Section 263 – Was It Justified?
Section 263 empowers the Principal Commissioner to revise an order if:
- The order is erroneous, and
- It is prejudicial to the interests of the Revenue.
Both conditions must exist simultaneously.
The department argued that the AO failed to apply the amended provisions of Section 56 and therefore the assessment order was erroneous.
However, the assessee contended:
- The AO had specifically issued notices under Section 142(1).
- Detailed submissions were filed.
- Judicial precedents were considered.
- The AO consciously adopted one of the possible legal views.
Therefore, it was not a case of lack of inquiry.
The Tribunal relied on the landmark Supreme Court ruling in:Malabar Industrial Co. Ltd. v. CIT
The Supreme Court clearly held that:
Where two views are possible and the AO adopts one of them, the order cannot be treated as erroneous merely because the Commissioner prefers another view.
The tribunal found this revisionary exercise itself unsustainable on multiple grounds. First, the AO had not acted in ignorance; he made specific inquiry about the Section 28 interest receipt, received documentary evidence and legal submissions, and consciously accepted the assessee’s position. The Punjab & Haryana High Court itself has held in CIT vs. Sohana Woollen Mills (2008) 296 ITR 238 (P&H) that a mere audit objection cannot lead to an inference that the AO’s order is erroneous or prejudicial to Revenue’s interests. Second, even if the issue were debatable — which the tribunal held it clearly was, given that the position rested on a Supreme Court ruling — the PCIT cannot assume revisionary jurisdiction merely because one view was possible. The Delhi High Court in CIT vs. Hindustan Coca Cola Beverages Pvt. Ltd. (2011) 331 ITR 192 (Del.) settled this principle authoritatively: where two views are possible and the AO accepts one, revision under Section 263 does not lie.
Final Order of the Tribunal
“The order of the learned PCIT is not sustainable. Accordingly, we allow the appeal of the assessee and quash the impugned order of the learned PCIT.”
Significance for Landowners and Practitioners
This ruling carries significant practical weight. Across Haryana, Punjab, Rajasthan and other states where large-scale land acquisition has taken place — particularly by state government authorities and development bodies — thousands of farmers and individual landowners have received enhanced compensation with Section 28 interest, often running into crores.
The ruling reinforces three important principles:
First, the distinction between Section 28 and Section 34 interest remains relevant even after the 2009 amendment.
Second, exemption under Section 10(37) may extend to enhanced compensation, depending on facts.
Third, revision under Section 263 cannot be used simply because the department disagrees with the AO’s interpretation.
This protects taxpayers from unnecessary reopening of settled assessments.
Final Words
The ITAT Delhi decision in Ramavtar vs ITO provides important relief and clarity for taxpayers receiving enhanced land acquisition compensation. It reiterates that when the Assessing Officer has taken a legally sustainable view after proper inquiry, revisionary powers under Section 263 cannot be exercised arbitrarily.
For individuals dealing with compulsory acquisition cases, the tax impact can be substantial because compensation amounts and interest components are often significant. Misclassification may result in large tax liabilities or prolonged litigation.
Therefore, careful evaluation of:
- Nature of interest
- Applicability of Section 10(37)
- Jurisdictional High Court rulings
- Documentation of agricultural usage is essential before filing the return.
In complex land acquisition cases, professional advisory support can help structure the position defensibly and reduce exposure to revision or reassessment proceedings.
If you are handling similar matters or advising clients on enhanced compensation taxation, a case-specific review is strongly recommended to align compliance with prevailing judicial principles while mitigating litigation risk.
Legal Disclaimer:
This blog is published for general informational and educational purposes only. It does not constitute legal or tax advice. Readers should consult a qualified chartered accountant or tax advocate for advice specific to their circumstances. Case outcomes may vary based on individual facts. All case citations are as referenced in the tribunal’s order dated 10 February 2026.
