2013 (12) TMI 1527 - HC - Income Tax

Deduction of tax at source on the payment of interest on compensation awarded - Held that - No tax is to be deducted at source from compensation awarded in lieu of acquisition of agricultural land. In respect of interest it has to be seen whether interest is a part of compensation. If answer is in affirmative then tax cannot be deducted at source. If, however, it is for delay in making payment it does not form part of compensation and tax may be deducted at source. In view of specific finding of Hon ble Supreme Court in Ghanshyam s case (2009 (7) TMI 12 - SUPREME COURT ) amount awarded under Section 28 of the Land Acquisition Act is accretion in value of land and interest thereon forms part of compensation; income tax cannot be deducted at source when land acquired is agricultural land. Admittedly, in the instant case the land was agricultural land and enhanced compensation and interest was awarded under Section 28 of the Act.

Summary

Issues:
Deduction of tax at source on compensation awarded under Land Acquisition Act, applicability of tax liability based on type of land, interpretation of provisions of Income Tax Act, taxability of interest awarded under different sections of Land Acquisition Act, conflict in judgments regarding tax deduction on interest, applicability of tax deduction at source from compensation for agricultural land.

Analysis:
The judgment addresses three revision petitions against orders directing the petitioner to deposit compensation including Tax Deducted at Source (TDS) in court or decree-holders' account. The issue revolves around the deduction of tax at source on interest and compensation awarded under the Land Acquisition Act. The petitioner argued that tax was rightly deducted based on previous judgments. The court analyzed the tax liability on compensation for rural and urban agricultural land as per the Income Tax Act and clarified that tax at source is only applicable for non-agricultural land under Section 194 LA.

The court referred to the Supreme Court's decision on the taxability of compensation and interest under different sections of the Land Acquisition Act. It highlighted the distinction between interest for delay in payment and interest on enhanced compensation. The judgment discussed conflicting views on the nature of interest awarded under Section 28, emphasizing that interest forming part of compensation is not taxable at source. Previous judgments were cited to support this interpretation, stating that interest under Section 28 is an accretion in value and part of compensation for agricultural land.

The court cited various judgments to support its conclusion that tax should not be deducted at source from compensation awarded for agricultural land under Section 28 of the Act. It emphasized that interest forming part of compensation is not subject to tax deduction, aligning with the Supreme Court's decision. The court found no illegality in the impugned order and dismissed all three civil revisions based on the precedent set in previous cases regarding tax deduction on compensation for agricultural land.

In conclusion, the judgment clarifies the tax liability on compensation and interest under the Land Acquisition Act, specifically focusing on deductions for agricultural land. It provides a detailed analysis of relevant provisions of the Income Tax Act and previous judgments to establish the non-applicability of tax deduction at source for compensation awarded in lieu of acquisition of agricultural land under Section 28 of the Act.