The Kerala High Court has ruled that compensation and enhanced compensation received for the compulsory acquisition of land will be treated as income under the Capital Gains category as per the Income Tax Act.
A Division Bench comprising Justices A.K. Jayasankaran Nambiar and Easwaran S. further clarified that interest amounts awarded due to delayed payment under the Land Acquisition Act (LAA) are to be treated as part of the principal compensation. Therefore, they will also be classified under capital gains.
However, the court noted an important exemption: If the acquired property is agricultural land, the compensation—along with any accrued interest—will be exempt from total income under Section 10(37) of the Income Tax Act.
The ruling came in response to a case where an assessee, after receiving compensation for acquired agricultural land, claimed exemption under the said section. The case reached the High Court for clarification on whether such income and interest could be taxed.
This judgment sets a precedent for the taxation of land acquisition-related payments, emphasizing that while such income is taxable as capital gains, agricultural landowners are entitled to significant exemptions under existing tax laws.
