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Case Law

ITAT New Delhi: Interest on Enhanced Land Acquisition Compensation Is Not Taxable as “Income from Other Sources” Where the Underlying Land Is Not a Capital Asset

Published 18 Aug 2026· Updated 18 Aug 2026· 4 min read

Executive Summary: The New Delhi bench of the Income Tax Appellate Tribunal, in Akhilesh Bansal v. ITO (ITA No. 2394/DEL/2026, 2026 TAXSCAN (ITAT) 1244, decided 27 July 2026), has held that interest of ₹2,23,78,473 awarded under Section 28 of the Land Acquisition Act, 1894 on compulsorily acquired rural agricultural land — land held to fall outside the definition of “capital asset” under Section 2(14)(iii) of the Income-tax Act, 1961 — cannot be separately taxed as “Income from Other Sources.” Accountant Member S. Rifaur Rahman and Judicial Member Sunil Kumar Singh held that since the land itself was not a capital asset, the enhanced compensation of ₹2,15,77,773 was also not taxable, and that the Section 28 interest, being an integral component of that compensation, followed the same tax-free treatment.

Background / Facts

The assessee, Akhilesh Bansal, received enhanced compensation and Section 28 interest on rural agricultural land compulsorily acquired by the Haryana Urban Development Authority (HUDA), purchased in 2007 and claimed to lie beyond the prescribed municipal limits — and therefore outside the definition of “capital asset” under Section 2(14)(iii). The Assessing Officer rejected this claim, taxing the enhanced compensation under Section 45(5) and the interest separately under “Income from Other Sources”; the CIT(A) upheld the AO’s order. On appeal, the assessee’s counsel argued that once the land itself was not a capital asset, neither the enhanced compensation (per Section 10(37)) nor the Section 28 interest — which forms an integral part of the compensation itself, per the Supreme Court’s ruling in CIT v. Ghanshyam (HUF) and the Tribunal’s own earlier ruling in Satender Kumar v. ITO — could be brought to tax.

The Tribunal’s Reasoning

The Tribunal found that the land acquired was rural agricultural land situated beyond the prescribed eight-kilometre aerial distance from municipal limits, and therefore did not constitute a “capital asset” within the meaning of Section 2(14)(iii). Once the underlying asset falls outside the definition of “capital asset,” the Tribunal held, the charging provisions of Chapter IV fail at the threshold and Section 45(5) has no application to the enhanced compensation. Applying the ratio in Satender Kumar v. ITO and the Supreme Court’s holding in CIT v. Ghanshyam (HUF) that Section 28 interest is an integral component of compensation rather than a separate income stream, the Tribunal held that since the enhanced compensation itself was not taxable, the Section 28 interest — being part of that same compensation — was equally not taxable as “Income from Other Sources.”

Why It Matters

Compulsory land acquisition compensation disputes are a recurring fact pattern for CA practices advising landowning clients, particularly where urban development authorities acquire land that was agricultural at the time of purchase. This ruling reinforces a settled but frequently mis-applied principle: the character of the underlying land — specifically, whether it meets the “capital asset” definition under Section 2(14)(iii) — is the threshold question that determines the tax treatment of both the compensation and the Section 28 interest together, not two separate questions to be analysed independently.

Key Takeaways

  • Interest awarded under Section 28 of the Land Acquisition Act, 1894 is treated as an integral part of the compensation itself, not a separate income stream — following CIT v. Ghanshyam (HUF) (Supreme Court) and Satender Kumar v. ITO (ITAT).
  • Where the underlying land does not meet the “capital asset” definition under Section 2(14)(iii), both the enhanced compensation and the Section 28 interest escape taxation together.
  • The threshold question in any land acquisition compensation matter is the capital-asset characterisation of the land.
  • The distance-from-municipal-limits test under Section 2(14)(iii) requires specific factual evidence (survey/revenue records, distance certification).
  • The ruling continues a consistent Tribunal line on this point.

Practical Implications

Firms advising clients with land acquisition compensation matters should make the Section 2(14)(iii) capital-asset characterisation the first analytical step, gathering survey/revenue records and distance-from-municipal-limits documentation as a priority. Where the land qualifies as rural agricultural land outside the capital-asset definition, both the compensation (per Section 10(37)) and the Section 28 interest should be claimed as exempt together, citing Ghanshyam (HUF), Satender Kumar, and now Akhilesh Bansal.

Action Checklist

  • For any client with compulsory land acquisition compensation, first establish whether the underlying land meets the “capital asset” definition under Section 2(14)(iii).
  • Assemble survey/revenue records and any available distance certification to support the rural-agricultural-land classification where applicable.
  • Where the land is not a capital asset, claim both the enhanced compensation (Section 10(37)) and the Section 28 interest as exempt together.
  • If the AO seeks to tax the Section 28 interest separately, cite Ghanshyam (HUF), Satender Kumar v. ITO, and Akhilesh Bansal v. ITO.

Relevant Sections / Rules / Case Citation

  • Section 2(14)(iii), Income-tax Act, 1961 (definition of “capital asset”)
  • Section 10(37), Income-tax Act, 1961
  • Section 28, Land Acquisition Act, 1894
  • Section 45(5), Income-tax Act, 1961
  • Followed: CIT v. Ghanshyam (HUF) (Supreme Court); Satender Kumar v. ITO (ITAT)
  • ITAT New Delhi: Akhilesh Bansal v. ITO, ITA No. 2394/DEL/2026, 2026 TAXSCAN (ITAT) 1244, decided 27 July 2026

FAQs

Q: Is interest received on land acquisition compensation always tax-free?
A: No — only where the underlying land does not meet the “capital asset” definition under Section 2(14)(iii), or where another specific exemption applies.

Q: What evidence is needed to show land is “rural agricultural land” outside Section 2(14)(iii)?
A: Typically, revenue/survey records establishing the land’s agricultural classification, and evidence of its distance from the prescribed municipal limits.

Prepared by Finoscape Editorial Team — contact@finoscape.com. This article is for general informational purposes and does not constitute tax advice. The capital-asset characterisation of any specific parcel of land should be independently verified with survey/revenue records and a qualified professional before relying on this analysis.

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