ITAT Holds Section 263 Revision Invalid on Taxability of Interest Under Section 28 of Land Acquisition Act:

The assessee’s land was compulsorily acquired by the Haryana Urban Development Authority (HUDA), against which he received interest of Rs. 1,94,53,200 on enhanced compensation. Tax Deducted at Source (TDS) of Rs. 19,45,320 was also deducted from the amount received. While completing the assessment for Assessment Year 2018-19, the  AO, through an order dated 12 January 2021 under Section 143(3), read with Sections 143(3A) and 143(3B) of the Income Tax Act, 1961, accepted the assessee’s returned income without making an addition towards the interest received.

Subsequently, the PCIT initiated proceedings under Section 263 of the Act, arguing that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue. The PCIT observed that, under the amended provisions of Sections 56(2)(viii), 57(iv) and 145A of the Act, interest received on compensation or enhanced compensation was taxable in the year of receipt, with a deduction of 50% allowable under Section 57(iv). Aggrieved by the revisionary order, the assessee preferred an appeal. 

The Tribunal considered the Revenue’s reliance on the amended provisions of Sections 56(2)(viii), 57(iv) and 145A of the Income Tax Act, as well as the decision of the Punjab and Haryana High Court in Mahender Pal Narang Vs CBDT Case. The Tribunal observed that the amendments introduced by the Finance (No. 2) Act, 2009, with effect from 1 April 2010, provided for the taxation of interest on compensation or enhanced compensation in the year of receipt, with a deduction of 50% under Section 57(iv). 

The Tribunal ultimately allowed the assessee’s appeal and held that the PCIT’s order passed under Section 263 of the Income Tax Act, 1961, was not sustainable in law.