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Issues: Whether tax is deductible at source under Section 194LA of the Income-tax Act, 1961 from compensation payable under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 despite the exemption in Section 96 of that Act.
Analysis: Section 194LA operates as a mechanism for deduction of income-tax on compensation paid for compulsory acquisition, but its operation is confined by the underlying taxability of the sum. Section 190(1) indicates that deduction or collection at source is a mode of payment of tax on income. Section 96 of the 2013 Act expressly provides that no income-tax shall be levied on any award or agreement under that Act except in the situation covered by Section 46. The Court held that where compensation is exempt from levy of income-tax under Section 96, the collection machinery in Section 194LA cannot be invoked. Article 265 was held not to assist the revenue because the deduction is authorised by law only where the underlying levy survives. The CBDT circular was understood consistently with this position and not as preserving a contrary obligation to deduct tax at source.
Conclusion: Section 194LA of the Income-tax Act, 1961 is inapplicable to compensation paid under the 2013 Act in cases not covered by Section 46, and tax is not deductible at source from such compensation; the issue is decided in favour of the assessee.
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