Tax deduction on land acquisition compensation applies on actual payment, and Section 194LA was upheld as a valid withholding provision.

Tax deduction at source under Section 194LA attaches when compensation for acquired land is actually paid, not when the award is passed. Because the compensation was paid after the provision came into force, deduction at source was required, and delay in payment did not change the obligation. Section 194LA was also upheld as constitutionally valid because it operates only as a withholding mechanism, does not determine the recipient's final tax liability, and does not require the payer to separate the taxable component from the compensation before deduction.

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Issues: (i) Whether tax was required to be deducted at source under Section 194LA of the Income-tax Act, 1961 when compensation for acquired land was paid after the section came into force though the award predated it; (ii) Whether Section 194LA of the Income-tax Act, 1961 is unconstitutional for requiring deduction on the entire compensation amount including the land cost.

Issue (i): Whether tax was required to be deducted at source under Section 194LA of the Income-tax Act, 1961 when compensation for acquired land was paid after the section came into force though the award predated it.

Analysis: The obligation to deduct tax at source arises at the time of payment, not at the date of the award. Since the compensation was actually paid after Section 194LA had become operative, the payer was bound to make the statutory deduction. Delay in payment did not alter the character of the payment or exempt the recipient from deduction at source, particularly where interest had been awarded for the delay.

Conclusion: The challenge to deduction of tax at source failed and the deduction was held to be lawful.

Issue (ii): Whether Section 194LA of the Income-tax Act, 1961 is unconstitutional for requiring deduction on the entire compensation amount including the land cost.

Analysis: Section 194LA only obliges the payer to deduct a prescribed percentage from the sum payable as compensation; it does not determine the ultimate tax liability of the recipient. The provision was treated as a collection mechanism intended to prevent evasion and to secure tax on the income element embedded in compensation. The Court relied on the principle that a payer is not required to dissect the payment and isolate the taxable component before deduction at source.

Conclusion: Section 194LA was upheld as constitutionally valid.

Final Conclusion: The petitioners' challenge to the tax deduction and to the validity of Section 194LA was rejected, and the writ petition failed.

Ratio Decidendi: Where a statute requires deduction at source on payment of compensation, the obligation is triggered by the actual payment and the provision is valid if it operates as a withholding mechanism without finally determining the recipient's tax liability.

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