Land acquisition compensation exempt from income tax, and TDS under section 194LA does not apply where section 96 exemption operates.

Compensation for compulsory acquisition under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 is stated to be exempt from income tax under section 96, except where the award or agreement falls under section 46. The text further explains that, because the exemption applies, section 194LA does not permit deduction of tax at source from such compensation, and the second proviso makes that position express. It also notes that amounts wrongly deducted were directed to be refunded, with interest where applicable.

---

---

Issues: (i) Whether compensation payable for acquisition of land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 is exempt from income tax; (ii) whether deduction of tax at source is permissible from such compensation at the time of payment.

Issue (i): Whether compensation payable for acquisition of land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 is exempt from income tax.

Analysis: Section 96 of the 2013 Act exempts any award or agreement made under that Act from income tax, except awards or agreements under section 46. A CBDT circular clarified that compensation received for compulsory acquisition under the 2013 Act, including compensation for non-agricultural land, is not taxable under the Income-tax Act, 1961. The subsequent insertion of the second proviso to section 194LA made the exemption express and unambiguous.

Conclusion: The compensation is not liable to income tax.

Issue (ii): Whether deduction of tax at source is permissible from such compensation at the time of payment.

Analysis: Section 194LA of the Income-tax Act, 1961 requires deduction of tax at source on compensation for compulsory acquisition, but the second proviso excludes payments made in respect of awards or agreements exempted from income tax under section 96 of the 2013 Act. On that basis, no TDS can be deducted from compensation payable under the 2013 Act. Where TDS had already been deducted and deposited, the amount was directed to be refunded with interest, and where the wrong deduction was made at the acquiring authority level, refund was directed from that authority.

Conclusion: Deduction of tax at source was impermissible, and refund of deducted amounts was directed.

Final Conclusion: Compensation awarded under the 2013 land acquisition statute was held to be outside income tax and outside TDS deduction, and the petitions were disposed of with directions for refund of the amounts wrongly deducted.

Ratio Decidendi: Compensation awarded under the 2013 land acquisition statute is exempt from income tax, and once that exemption applies, the corresponding TDS obligation under section 194LA does not operate by virtue of its express proviso.

---