Interest on Enhanced Compensation Taxable as IFOS | ITAT

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interest on enhanced compensation

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.

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied