Taxability of Interest on Compensation or Enhanced Compensation Under Section 56(2)(viii)

Here’s a detailed analysis of the taxability of interest on compensation or enhanced compensation under Section 56(2)(viii) of the Income Tax Act, 1961:

1. Scope of Section 56(2)(viii)

• Applies to: Interest received on compensation or enhanced compensationawarded under laws like the Land Acquisition Act, 1894.
• Taxable as: “Income from Other Sources”(not capital gains), effective post-2010 amendments.

2. Key Judicial Interpretations

• Pre-2010 Position:
  • Interest under Section 28of the Land Acquisition Act was treated as capital gains (accretion to compensation) per CIT vs. Ghanshyam (HUF).
• Post-2010 Amendment:
  • Finance (No. 2) Act, 2009 overruledGhanshyam by inserting Section 56(2)(viii), mandating taxation as “Income from Other Sources”.
  • Delhi High Courtin PCIT vs. Inderjit Singh Sodhi upheld this amendment, clarifying that interest is now taxable separately from compensation.

3. Tax Treatment

• Taxable Amount: 50% of interest receivedis deductible under Section 57(iv), with the balance taxed at slab rates.
  • Example: ₹5 lakh interest → ₹2.5 lakh taxable after 50% deduction.
• TDS: Applicable under Section 194A if interest exceeds ₹50,000/year.

4. Exemptions & Controversies

• Agricultural Land: Compensation for compulsory acquisition of agricultural land may be exempt under Section 10(37).
• Conflicting Rulings:
  • Gujarat High Court(Movaliya Bhikhubhai) held interest under Section 28 remains capital gains.
  • Delhi/Punjab & Haryana HCstreat it as “Income from Other Sources” post-amendment.

5. Compliance & Reporting

• Disclosure: Report under Schedule OSin ITR.
• Documentation: Maintain award copies, interest certificates, and valuation reports.

Note: The 50% deduction is not available under the new tax regime