The Tribunal split my client's land acquisition interest into 9 per cent as capital gains and 15 per cent as income from other sources. Is that right?
The Kerala High Court says no. It held that interest amounts received in respect of delayed payment of compensation under the Land Acquisition Act are treated as accruals to the principal compensation amount and are classified as capital gains, so that where the land compulsorily acquired is agricultural land the interest also gets the benefit of s.10(37). Because such interest is not interest as defined in s.2(28A), s.56 is not attracted at all.
Decided by the High Court (Dr. A.K. Jayasankaran Nambiar J and Easwaran S. J) on 2025-04-11, reported as I.T.A. No.32 of 2023 and I.T.A. No.60 of 2024 (Kerala High Court); neutral citation 2025:KER:31055. It bears on section 10(37), section 56(2)(viii), section 2(28A), section 145B, section 154 of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
This is the taxpayer's answer to the Delhi and Punjab and Haryana line that treats all such interest as income from other sources under s.56(2)(viii) with the timing fixed by s.145B(1). The court did not say s.56(2)(viii) is a dead letter — it said the reference in that clause to compensation or enhanced compensation need not be read as made in connection with compulsory acquisition of property, and that its applicability depends on whether, on the facts, the interest can be treated as different in nature from the principal compensation. So the argument is one of characterisation on the facts, not a blanket immunity. Where the land is agricultural the stakes are the whole of the interest, because s.10(37) then carries it out of total income altogether. The court also rejected the Tribunal's attempt to split the interest by rate, treating interest at 9 per cent as capital gains and interest at 15 per cent as income from other sources.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Both assessees had received compensation fixed by the Land Acquisition Officer for agricultural lands compulsorily acquired from them by the State. They approached the Reference Court under the Land Acquisition Act 1894 seeking enhancement, and the Reference Court granted enhanced compensation together with interest on the enhanced compensation under s.28 of that Act. They returned the enhanced compensation and the interest as income under the head capital gains and claimed the benefit of s.10(37), which would exclude it from total income. In I.T.A. No.32 of 2023 the Tribunal, by order of 30 March 2023, remanded the taxability of the interest to the Assessing Officer with a direction that interest received at 9 per cent per annum would qualify for exclusion under s.10(37) while interest received at 15 per cent per annum would be assessable as income from other sources under s.56(2)(viii). In I.T.A. No.60 of 2024 the Tribunal, by order of 19 April 2024, dismissed an appeal against an order under s.154 refusing rectification, and took the view that after the amendment of s.56(2) with effect from 1 April 2010 all interest received for delayed payment of compensation under the Land Acquisition Act is classifiable only as income from other sources and gets no benefit under s.10(37).
Both appeals were allowed, the questions of law being answered in favour of the assessees and against the Revenue. Interest amounts received by an assessee in respect of delayed payment of compensation under the Land Acquisition Act are to be treated as accruals to the principal compensation amount and classified as capital gains for the purposes of the Act; consequently the interest also gets the benefit of s.10(37) if the land compulsorily acquired is agricultural land; and since such interest is not in the nature of interest as defined under s.2(28A), the provisions of s.56 are not attracted (para 10).
The court held that, going by the nature of the payment of interest under the Land Acquisition Act, interest on delayed payment of compensation, whether under s.28 or s.34 of that Act, partakes of the character of the principal compensation itself, since it is essentially paid to compensate the assessee for the loss he suffered on account of not having the use of the principal compensation amount at the time when it fell due; and it added that compensation paid for compulsory acquisition traces its roots to the constitutional obligation to pay compensation under Article 300A (para 9). On the statutory provisions it held that compensation or enhanced compensation for compulsory acquisition is income under the head capital gains, that where the property is agricultural s.10(37) excludes it from total income, and that whether interest under s.28 or s.34 of the Land Acquisition Act qualifies as interest for the purposes of the Act, going by the definition in s.2(28A), is debatable (para 8). Concluding, it held that the reference in s.56(2)(viii) to compensation or enhanced compensation need not be seen as made in connection with compulsory acquisition of property, and that the applicability of s.56(2)(viii) depends on whether, in the particular factual situation, the interest amount can be treated as different in nature from the principal compensation amount (para 10).
In the light of the discussion above, we hold that interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as "Capital Gains' for the purposes of the I.T. Act.
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Handle my notice → Ask a CA on WhatsAppThe Kerala High Court says no. It held that interest amounts received in respect of delayed payment of compensation under the Land Acquisition Act are treated as accruals to the principal compensation amount and are classified as capital gains, so that where the land compulsorily acquired is agricultural land the interest also gets the benefit of s.10(37). Because such interest is not interest as defined in s.2(28A), s.56 is not attracted at all. This was decided by the High Court (Dr. A.K. Jayasankaran Nambiar J and Easwaran S. J) and bears on section 10(37), section 56(2)(viii), section 2(28A), section 145B, section 154 of the Income Tax Act 1961. It is reported as I.T.A. No.32 of 2023 and I.T.A. No.60 of 2024 (Kerala High Court); neutral citation 2025:KER:31055. This is the taxpayer's answer to the Delhi and Punjab and Haryana line that treats all such interest as income from other sources under s.56(2)(viii) with the timing fixed by s.145B(1). The court did not say s.56(2)(viii) is a dead letter — it said the reference in that clause to compensation or enhanced compensation need not be read as made in connection with compulsory acquisition of property, and that its applicability depends on whether, on the facts, the interest can be treated as different in nature from the principal compensation. So the argument is one of characterisation on the facts, not a blanket immunity. Where the land is agricultural the stakes are the whole of the interest, because s.10(37) then carries it out of total income altogether. The court also rejected the Tribunal's attempt to split the interest by rate, treating interest at 9 per cent as capital gains and interest at 15 per cent as income from other sources. If it applies to you, the first step is this: Establish the character of the interest first: was it awarded by the Reference Court on the enhanced compensation under s.28 of the Land Acquisition Act, so that it compensates for the loss of use of compensation that fell due, or is it independent of the principal?
Both assessees had received compensation fixed by the Land Acquisition Officer for agricultural lands compulsorily acquired from them by the State. They approached the Reference Court under the Land Acquisition Act 1894 seeking enhancement, and the Reference Court granted enhanced compensation together with interest on the enhanced compensation under s.28 of that Act. They returned the enhanced compensation and the interest as income under the head capital gains and claimed the benefit of s.10(37), which would exclude it from total income. In I.T.A. No.32 of 2023 the Tribunal, by order of 30 March 2023, remanded the taxability of the interest to the Assessing Officer with a direction that interest received at 9 per cent per annum would qualify for exclusion under s.10(37) while interest received at 15 per cent per annum would be assessable as income from other sources under s.56(2)(viii). In I.T.A. No.60 of 2024 the Tribunal, by order of 19 April 2024, dismissed an appeal against an order under s.154 refusing rectification, and took the view that after the amendment of s.56(2) with effect from 1 April 2010 all interest received for delayed payment of compensation under the Land Acquisition Act is classifiable only as income from other sources and gets no benefit under s.10(37). The matter was decided on 2025-04-11 by the High Court (Dr. A.K. Jayasankaran Nambiar J and Easwaran S. J). On those facts the High Court held as follows. Both appeals were allowed, the questions of law being answered in favour of the assessees and against the Revenue. Interest amounts received by an assessee in respect of delayed payment of compensation under the Land Acquisition Act are to be treated as accruals to the principal compensation amount and classified as capital gains for the purposes of the Act; consequently the interest also gets the benefit of s.10(37) if the land compulsorily acquired is agricultural land; and since such interest is not in the nature of interest as defined under s.2(28A), the provisions of s.56 are not attracted (para 10).
The court held that, going by the nature of the payment of interest under the Land Acquisition Act, interest on delayed payment of compensation, whether under s.28 or s.34 of that Act, partakes of the character of the principal compensation itself, since it is essentially paid to compensate the assessee for the loss he suffered on account of not having the use of the principal compensation amount at the time when it fell due; and it added that compensation paid for compulsory acquisition traces its roots to the constitutional obligation to pay compensation under Article 300A (para 9). On the statutory provisions it held that compensation or enhanced compensation for compulsory acquisition is income under the head capital gains, that where the property is agricultural s.10(37) excludes it from total income, and that whether interest under s.28 or s.34 of the Land Acquisition Act qualifies as interest for the purposes of the Act, going by the definition in s.2(28A), is debatable (para 8). Concluding, it held that the reference in s.56(2)(viii) to compensation or enhanced compensation need not be seen as made in connection with compulsory acquisition of property, and that the applicability of s.56(2)(viii) depends on whether, in the particular factual situation, the interest amount can be treated as different in nature from the principal compensation amount (para 10). In the words reproduced by the source cited on this page: "In the light of the discussion above, we hold that interest amounts received by an assessee in respect of delayed payment of compensation under the LAA will be treated as accruals to the principal compensation amount and be classified as "Capital Gains' for the purposes of the I.T. Act."
It was decided by the High Court on 2025-04-11 and is reported as I.T.A. No.32 of 2023 and I.T.A. No.60 of 2024 (Kerala High Court); neutral citation 2025:KER:31055. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 10(37), section 56(2)(viii), section 2(28A), section 145B, section 154, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were allowed, the questions of law being answered in favour of the assessees and against the Revenue. Interest amounts received by an assessee in respect of delayed payment of compensation under the Land Acquisition Act are to be treated as accruals to the principal compensation amount and classified as capital gains for the purposes of the Act; consequently the interest also gets the benefit of s.10(37) if the land compulsorily acquired is agricultural land; and since such interest is not in the nature of interest as defined under s.2(28A), the provisions of s.56 are not attracted (para 10). It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 10(37), section 56(2)(viii), section 2(28A), section 145B, section 154 of the Income Tax Act 1961, and was decided by Dr. A.K. Jayasankaran Nambiar J and Easwaran S. J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the acquired land is agricultural, plead s.10(37) over the whole receipt including interest, on the footing that the interest is an accrual to the principal. Resist any splitting of the interest by the rate at which it was awarded; this court set aside exactly that approach. Meet the s.2(28A) point head on — the argument is that the amount is not interest as the Act defines it, which is why s.56 does not engage; do not concede the characterisation and then argue only about the head. Expect the department to rely on PCIT v Inderjit Singh Sodhi (HUF) (Delhi High Court, 8 April 2024) and on Sham Lal Narula and Bikram Singh; be ready to say which High Court binds the assessment.
High Courts differ on this point. This decision is directly contrary to the Delhi High Court's decision in PCIT v. Inderjit Singh Sodhi (HUF), ITA 769/2023, decided 8 April 2024, which holds that interest on compensation and enhanced compensation is chargeable as income from other sources on a conjoint reading of s.56(2)(viii) and s.145B, and contrary also to the Punjab and Haryana High Court's decision in Puneet Singh as reproduced in that judgment. Whether a special leave petition has been filed against this Kerala decision is not established here, and no Supreme Court decision resolving the conflict is recorded. Treat the position as one on which High Courts differ: the answer for your client turns first on which High Court's view binds the assessing officer and the Tribunal in your jurisdiction, and then on whether the land was agricultural land compulsorily acquired, because it is that fact which lets the Kerala view carry the interest into s.10(37) rather than merely into the capital gains head. Where the jurisdictional High Court has not spoken, both lines will be cited and the entry should be used for the reasoning — that interest on delayed payment of compensation is an accrual to the compensation and not interest as defined in s.2(28A) — rather than as settled law. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment runs to 10 numbered paragraphs and has appendices. It is a common judgment in two appeals, I.T.A. No.32 of 2023 (Anvar Ali Poolakkodan, against ITAT Cochin order of 30 March 2023 in I.T.A. No.614/COCH/2022) and I.T.A. No.60 of 2024 (Abdul Azeez Poolakkodan, against ITAT Cochin order of 19 April 2024 in I.T.A. No.1006/COCH/2022). I.T.A. No.32 of 2023 concerns AY 2015-16 on the face of the appendix, which lists an assessment order dated 22 May 2019 'for the year 2015-16'; the assessment year in I.T.A. No.60 of 2024 is not stated. IMPORTANT: in the ten paragraphs the court decides the question by reference to s.10(37), s.56(2)(viii) and s.2(28A), and s.145B is not named anywhere in the judgment. Section 145B is nonetheless listed in the sections field because s.145B(1) is the timing provision that pairs with s.56(2)(viii) and a practitioner researching s.145B needs this decision; the entry does not assert that the court construed s.145B. Para 7 says the discussion 'must be preceded by an examination of the relevant statutory provisions' and para 8 begins 'On a conjoint reading of the above statutory provisions'. The block of provisions set out between those two paragraphs is not reproduced here, so this entry does not say which provisions were extracted at that point, and an argument that turns on the precise extract should be built from the judgment itself. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were allowed, the questions of law being answered in favour of the assessees and against the Revenue. Interest amounts received by an assessee in respect of delayed payment of compensation under the Land Acquisition Act are to be treated as accruals to the principal compensation amount and classified as capital gains for the purposes of the Act; consequently the interest also gets the benefit of s.10(37) if the land compulsorily acquired is agricultural land; and since such interest is not in the nature of interest as defined under s.2(28A), the provisions of s.56 are not attracted (para 10).
TaxSphere, “Anvar Ali Poolakkodan v ITO — interest on delayed compensation is an accrual to compensation, taxable as capital gains and covered by s.10(37)”, https://taxnotice.vittsphere.com/caselaw/case/anvar-ali-poolakkodan-v-ito-interest-on-compensation-is-capital-gains/ (validity last checked 2026-09-08)
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