Section 28 Interest Land Compensation ITAT 2026 - ₹14.26L Addition Deleted

By EaseValue Tax Team, Chartered Accountants Published 05 Sep 2026 6 min read

What Happened?

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has delivered a favourable ruling in September 2026 regarding the taxability of interest received under Section 28 of the Land Acquisition Act, 1894 on enhanced compensation awarded for land acquisition. The tribunal held that such interest forms an integral part of the enhanced compensation and is not a separate income source chargeable under Sections 56(2)(viii) or 57(iv) of the Income Tax Act 2025. As a result, the tribunal deleted an addition of ₹14.26 lakh made by the Assessing Officer (AO).

This ruling provides critical tax relief for landowners and organizations that have received enhanced land compensation through courts or the Land Acquisition Authority, ensuring they are not doubly taxed on the same economic benefit.

Background & Legal Context

The Land Acquisition Act Scenario: When the government acquires land for public purposes, the Land Acquisition Act, 1894 governs the compensation process. Initially, the Collector awards compensation based on market value. However, if a landowner is dissatisfied, they can appeal to the court, which may award enhanced compensation. Additionally, under Section 28 of the Land Acquisition Act, the court or Collector awards interest on the enhanced compensation amount from the date of possession to the date of award.

The Tax Dispute: The Income Tax Act 2025 treats capital gains and certain other receipts differently. Historically, Assessing Officers have attempted to classify Section 28 interest as:

Income under Section 56(2)(viii) — Other income not covered elsewhere
Income under Section 57(iv) — Taxable income from undisclosed sources or deemed income

This classification meant taxpayers were being taxed on the interest separately, even though the enhanced compensation (of which interest is a part) may already have been taxed as capital gains under Section 45 of the Income Tax Act 2025.

The ITAT's Legal Reasoning: The tribunal examined the nature of Section 28 interest carefully. It held that:

Section 28 interest is not independent income; it is statutory interest payable on delayed compensation
The interest and enhanced compensation together form a single economic transaction — the sale of land
Since the enhanced compensation itself is capital in nature and attracts capital gains tax under Section 45, the interest component should be treated similarly
Classifying it under Sections 56(2)(viii) or 57(iv) would amount to double taxation of the same economic event

The tribunal relied on the principle that interest on capital receipt remains capital in nature and should be taxed as part of the capital gain, not as separate income.

What Does This Mean for You?

For Landowners and Claimants: If you have received enhanced compensation for land acquisition along with Section 28 interest, you can now argue before the Income Tax Department that this interest is not taxable as separate income. Instead, it should be treated as part of the capital gains on land.

Tax Impact Illustration:

Suppose you received:

Initial compensation: ₹50 lakh
Enhanced compensation (awarded by court): ₹60 lakh
Section 28 interest (on enhanced amount): ₹14.26 lakh

Before this ruling: The AO would tax the ₹14.26 lakh as "other income" under Section 56(2)(viii), resulting in immediate tax at your slab rate (possibly 30% or higher).

After this ruling: The ₹14.26 lakh interest is part of the enhanced compensation. Combined compensation = ₹74.26 lakh. This entire amount attracts capital gains tax under Section 45, with the benefit of indexation if applicable (for non-agricultural land held beyond 2 years under Section 48 of the Income Tax Act 2025).

For Corporates and Institutional Landholders: Organizations that have surrendered land for highways, railways, or other infrastructure projects can now claim that interest received on enhanced compensation should be treated as capital receipt, reducing their overall tax liability.

For Assessment Years 2025-26 and 2026-27: This ruling is immediately applicable. If you have been assessed and an addition made under Sections 56(2)(viii) or 57(iv) for Section 28 interest, you have grounds to file an appeal.

What Should You Do Now?

If You Have Already Been Assessed:

Step 1: Obtain a copy of your assessment order and identify if any addition has been made for Section 28 interest received on land acquisition compensation
Step 2: If yes, collect all documents: land acquisition notice, court order awarding enhanced compensation, and evidence of Section 28 interest received
Step 3: File an appeal before the ITAT citing this September 2026 ruling. The tribunal's decision provides strong judicial precedent
Step 4: Your CA should prepare the appeal memo highlighting the principle of non-double taxation of capital receipts

If You Are Currently Under Assessment:

Proactively furnish this ruling to your Assessing Officer during the assessment proceedings
Request that Section 28 interest be not separately taxed and that it be merged with the enhanced compensation for capital gains computation
Provide detailed explanation along with the ITAT judgment

If You Expect to Receive Section 28 Interest in Future:

Maintain separate records of the interest component of any land compensation received
When filing your Income Tax Return (ITR) for the relevant assessment year, disclose it as part of capital gains, not as "other income"
Ensure your CA is aware of this ruling to avoid any misclassification

Documentation to Maintain:

Land Acquisition Collector's Award notification
Court Order (if any) awarding enhanced compensation
Payment receipt showing Section 28 interest separately or calculation thereof
Correspondence with the Land Acquisition Authority
Original cost of acquisition and date of possession (for indexation benefit calculation)

Key Takeaways

Section 28 Interest is Capital: Interest received under Section 28 of the Land Acquisition Act on enhanced compensation is capital in nature and should not be taxed as "other income" under Sections 56(2)(viii) or 57(iv) of the Income Tax Act 2025
No Double Taxation: The ITAT's September 2026 ruling prevents double taxation of the same economic event — landowners get relief by treating interest as part of the capital gain computation
Applicable to AY 2025-26 and Beyond: This ruling is immediately applicable to all current and future assessments where such interest is disputed
Appeal Strategy: Taxpayers already assessed with an addition on Section 28 interest should file ITAT appeals citing this judgment for relief
Tax Planning Benefit: Depending on your land holding period and cost, the capital gains treatment may result in lower tax liability compared to taxing the interest at your income slab rate

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602

#Section 28 Interest #Land Acquisition #ITAT Ruling 2026 #Capital Gains #Section 56(2)(viii) #Enhanced Compensation

EaseValue Tax Team

Chartered Accountants

Written and reviewed by EaseValue's income-tax litigation team. We represent individuals and businesses in scrutiny, reassessment, and appeal proceedings before the AO, CIT(A), NFAC and ITAT.

Disclaimer: This article is general information on Indian income-tax law, current as of the date shown, and is not legal or tax advice. Statutory provisions, deadlines and forms change — including under the Income-tax Act, 2025 (effective April 2026). Always confirm the position for your facts with a qualified professional before acting.

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