No TDS Required To Be Deducted On Enhanced Compensation Awarded By Court Under Land Acquisition Act: Delhi ITAT

The Assistant Commissioner of Income Tax (ACIT) conducted TDS survey/inspection, during which it was found that the Land Acquisition Office had failed to deducted tax at source under Section 194A of the Income Tax Act on the interest paid to farmers/land owners on enhanced compensation for a given assessment year. The Assessing Officer (AO) accordingly raised a demand for the relevant assessment year. The Assessee Land Acquisition Office filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)) against the order of the AO.

The Assessee submitted before the CIT(A) that the interest was paid on enhanced compensation under Section 28 of the Land Acquisition Act, and as per the judgment of the Supreme Court in the case of CIT, Faridabad versus Ghanshyam (2009), the interest paid by the Assessee was a part of the compensation itself. The Assessee averred that interest on enhanced compensation under Section 28 of the Land Acquisition Act is an accretion to the value and therefore, regarded as part of the compensation itself. The Assessee contended before the CIT(A) that provisions of Section 194LA of the Income Tax Act were applicable to the Assessee Land Acquisition Office, whereunder tax could not be deducted in respect of the compensation or enhanced compensation payable on compulsory acquisition of agriculture land. The CIT(A) however, dismissed the Assessee's appeal. The Land Acquisition Office filed an appeal before the ITAT against the order of the CIT(A).

Before the ITAT, the Assessee Land Acquisition Office raised an additional ground and submitted that interest on enhanced compensation under Section 28 of the Land Acquisition Act with respect to a capital asset, being an integral part of the consideration itself, is exempt from capital gains tax under Section 10(37) of the Income Tax Act. The Assessee contended that the interest received by the land owners on compulsory acquisition of its land under Section 28 of the Land Acquisition Act, is in the nature of compensation and not interest, therefore the same is not taxable under the head 'income from other sources' under Section 56 of the Income Tax Act, and thus the Assessee had no obligation to deduct TDS on the enhanced compensation.

The ITAT observed that an agricultural land situated in any area specified under Section 2(14)(iii)(a) or Section 2(14)(iii)(b) of the Income Tax Act falls outside the ambit of agricultural land and thus constitutes a 'capital asset' under Section 2(14) of the Income Tax Act. The ITAT held that compulsory acquisition of a 'capital asset' under any law is a 'transfer', therefore, any profit or gain arising from the transfer of such a capital asset attracts capital gains tax under Section 45 of the Income Tax Act. However, the ITAT added, capital gains arising from transfer of an agricultural land, situated in any area referred to in Section 2(14)(iii)(a) or Section 2(14)(iii)(b) of the Income Tax Act, by way of compulsory acquisition under any law is exempt from tax under Section 10(37) of the Income Tax Act.

The ITAT ruled that under Section 10(37) of the Income Tax Act any income by way of capital gains which is engrained in the receipt of compensation or enhanced compensation is exempt from tax in the hands of the recipient land owners.

The ITAT held that the interest received by the land owners on enhanced compensation awarded to them by the Court under Section 28 of the Land Acquisition Act is not in the nature of 'income from other sources' under Section 56 of the Income Tax Act, therefore, the Land Acquisition Office was not under any legal obligation to deduct TDS on the enhanced compensation under Section 194A of the Income Tax Act.

The ITAT thus allowed the appeal of the Assessee.

Case Title: Land Acquisition Office versus DCIT, (TDS) Gurgaon

Dated: 22.03.2022 (Delhi ITAT)

Representative for the Appellant: Jitender Wadhwa, CA

Representative for the Respondent: N.C. Swain, CIT DR

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