Interest received on enhanced compensation is Income from other sources as per section 56(2)(viii) of the Income Tax Act, 1961. Further 50% deduction can be claimed under section 57(iv) of the said Act from the Assessment year 2010-11.
Enhanced Compensation 45(5)
Enhanced compensation received by assessee during pendency of dispute before Court cannot be deemed to be his income for purpose of computation of capital gain in year of receipt, in terms of provisions of sec. 45(5). [Hari Kishan v. Presiding Officer (2008) 172 Taxman 219 (P & H)]
Taxability of interest on enhanced compensation
Interest on enhanced compensation is taxable on accrual basis but only if it is undisputed. [ITO vs. Amarlal (2007) 14 SOT 239 (Del-Trib)]
Interest received on delayed payment of compensation is determined and taxable under the head income from other sources on year to year basis. [CIT v Ghanshyam (HUF) (2009) 315 ITR 1 (SC)].
Interest on enhanced compensation is not taxable on lumpsum basis under mercantile system, however spread over on annual basis over the period starting from the date of compulsory acquisition to the date on which court makes an order for enhanced compensation. [Rama Bai V CT (1990) 181 ITR 400 (SC), see also CIT vs Hardwari Lal, HUF  312 ITR 0151 (P&H)].
Where assessee follows cash system of accounting, interest on enhanced compensation on acquisition of land shall be taxable in year of receipt. [CIT v Smt Burfi [201 1] 331 ITR 001 (P&H)
Date of transfer
If property acquired under Requisitioning and Acquisition of Immovable Property Act, 1952 – Date of publication of the notification for acquisition would be the date of Transfer. [G.M. Omer Khan v CIT (1992) 196 ITR 269 (SC) see also Omar khan (G.M.) v Addl CIT (1992) 195 ITR 269 (SC)]
If property acquired under Land Acquisition Act, 1894 (The Central Act) or any other state Act – Date of transfer would be the date of actual possession by declaring it to do so. [CIT v Shaggy Abdulla (Smt) (2000) 108 Taxman 249 (Ker)]
In case of emergency acquisition, effective date of transfer is the date of taking possession under section 17 of the Land Acquisition Act, 1894 and not the date of award of compensation. [BC Gupta & Sons Ltd. v CIT (1996) 221 ITR 53 (Gau.) also see Alexander George V CIT (2003) 128 Taxman 851 (Ker)]
Other related issues
The Supreme Court in the case of CIT V Hindustan Housing and Land Development Trust (1986) 161 ITR 524 has held that :
- Where additional compensation awarded to the assessee has been made subject matter of appeal by the Government then such amount shall be taxable as capital gain only.
- In the year in which additional compensation is received.
- In the year in which the dispute is finally settled. Whichever is later.
[New friends Co-operative House Building Society Ltd. v CIT (2010) 327 ITR 0039 (P&H) also see CIT vs. Ghanshyam (HUF)  315 ITR 0001 (SC), Chandi Ram v CIT  312 ITR 0139, Anil Kumar Forma (HUF) V. CIT  289 ITR 0245 (Mad), G.M. Omar Khan V. Addl CIT (1992) 196 ITR 269 (SC)].
If any amount is received after stay of the award, in pursuance of any interim order, as a payment subject to the final result, it will not be an amount received as ‘enhanced compensation’ contemplated u/s 45(5)(b), but only an interim payment received subject to final decision. [CCIT & Anr v. Smt. Shantavva (2004) 267 ITR 67 (Karn).]
Solatium awarded by competent authority constitutes part of consideration for compulsory acquisition. [CIT v. Smt. Subaida Beevi (1986) 160 ITR 557 (Ker) see also Vadilal Soda Ice Factory v CIT (1971) 80 ITR 711 (Guj), K.C. Mahajan (1998) 234 ITR 235 (P&H).
Expenses for realization of enhanced consideration is allowable in terms of S. 48(1). [Chakiri Ashok Kumar v ITO (2002) 80 ITD 410 (Hyd).].
The compensation due to injurious effect on the unacquired portion is also taken in to account, the amount awarded for such compensation shall also be a part of the full consideration price for computing the capital gain for the portion acquired. [P. Mahalakshmi and Others v CIT (2002) 255 ITR 647 (SC)].
As Per Section 57, of the Income Tax Act, 1961-
The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:—
(i) in the case of dividends, [other than dividends referred to in section 115O,] [or interest on securities], any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend [or interest] on behalf of the assessee ;
(ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2 which is chargeable to income-tax under the head Income from other sources, deductions, so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section 36 ;
(ii) in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and [sub-sections (1) and (2) of section 32 and subject to the provisions of [section 38] ;
(iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or [fifteen] thousand rupees, whichever is less.
- For the purposes of this clause, family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;
(iv) in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section.