2013 (11) TMI 1651 - HC - Income Tax

Disbursement of tax deducted at source (for short TDS ) to the decree-holders - Held that - Perusal of relevant provisions of Land Acquisition Act and Income Tax Act and law laid down in aforesaid judgments, it is clear 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. Admittedly, in the instant case the land was agricultural land and enhanced compensation and interest was awarded under Section 28. Thus, in view of specific finding of Hon ble Supreme Court in Ghanshyam s case (2009 (7) TMI 12 - SUPREME COURT) that amount awarded under Section 28 of the Land Acquisition Act is accretion in value of land and interest therein forms part of compensation; income tax cannot be deducted at source since land acquired is agricultural land.

Issues Involved:
1. Delay in filing the revision petition.
2. Deduction of tax at source (TDS) on compensation awarded under the Land Acquisition Act, 1894.
3. Nature and taxability of interest awarded under Sections 23, 28, and 34 of the Land Acquisition Act.

Issue-wise Detailed Analysis:

1. Delay in Filing the Revision Petition:

For the reasons indicated in the CM, the same is allowed. Delay of 75 days in filing the revision petition is condoned.

2. Deduction of Tax at Source (TDS) on Compensation:

Instant revision petition has been filed under Section 115 of the Code of Civil Procedure for setting aside the order dated 27.09.2011 (Annexure P/4) passed by learned Additional District Judge, Jhajjar whereby direction has been issued to the petitioner to disburse the tax deducted at source (for short `TDS') to the decree-holders within one month.

Admittedly, the respondent No.1 is land owner. Compensation has been assessed as per the provisions of Land Acquisition Act, 1894 (hereinafter referred to as the "Act") and respondent No.1 was aggrieved against the TDS to be remitted by the Land Acquisition Collector to the Income Tax Department. The issue with regard to deduction of tax at source on the payment of interest on compensation awarded under Section 23 as well as under Section 28 of the Act is no more res integra.

As per provisions of Income Tax Act, 1961 explained in said circular, there is no tax liability in respect of compensation received in lieu of acquisition of rural agricultural land. In relation to urban agricultural land, there is exemption from tax liability after 01.04.2004 as per Section 10(37) of the Income Tax Act. In case the conditions for exemption are not fulfilled in respect of Urban Agricultural land then tax is liable to be paid on capital gain, however, it is not to be deducted at source. In that case also the land owners are entitled to benefit of Sections 54-B, 54-EC and 54-F to reduce tax liability.

The tax at source can be, thus, deducted from amount of compensation only in case of acquisition of non-agricultural land as per Section 194 LA of the Income Tax Act.

Perusal of relevant provisions of Land Acquisition Act and Income Tax Act and law laid down in aforesaid judgments, it is clear that no tax is to be deducted at source from compensation awarded in lieu of acquisition of agricultural land.

3. Nature and Taxability of Interest Awarded:

The provisions of Income Tax Act are, thus, clear regarding imposition of tax liability on amount of compensation received in lieu of acquisition of land. It is in this background that I have to determine whether tax is liable to be deducted at source from amount awarded under various provisions of Land Acquisition Act viz Sections 23, 23(1-A), 28 and 34 which are reproduced herein below:-

The issue of taxability of compensation awarded under these provisions of Land Acquisition Act arose before Hon'ble Supreme Court in Commissioner of Income Tax, Faridabad vs. Ghanshyam (2009) 8 SCC 412 in a different context however. In that case, Hon'ble Supreme Court has decided the question whether the amount of compensation and interest under Land Acquisition Act is taxable in year of receipt.

While dealing with this issue, Hon'ble Supreme Court considered the nature of amount awarded under various provisions of Land Acquisition Act to determine its taxability and observed as under:-

"49. As discussed hereinabove, Section 23(1A) provides for additional amount. It takes care of increase in the value at the rate of 12% per annum. Similarly, under Section 23(2) of the 1894 Act there is a provision for solatium which also represents part of enhanced compensation. Similarly, Section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under Section 23(1A) and solatium under Section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under Section 18 of the 1894 Act. It depends upon the claim, unlike interest under Section 34 which depends on undue delay in making the award.

50. It is true that "interest" is not compensation. It is equally true that Section 45(5) of the 1961 Act refers to compensation. But as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards "interest" both as an accretion in the value of the lands acquired and interest for undue delay. Interest under Section 28 unlike interest under Section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under Section 34 of the 1894 Act. So also additional amount under Section 23(1A) and solatium under Section 23(2) of the 1961 Act forms part of enhanced compensation under Section 45(5)(b) of the 1961 Act."

Relying on judgment in Ghanshyam's case (supra) a Division Bench of this Court in Commissioner of Wealth Tax vs. Nand Lal, Mohan Lal etc. (2010) 232 CTR (P&H) 185 and Commissioner of Wealth Tax vs. Parminder Singh,(2010) 232 CTR (P&H) 195 has held that additional amount under Section 23(1A) and solatium under Section 2392) form part of enhanced compensation. Nevertheless the Court held that it will not be assessible to wealth tax as after the acquisition of land by State the assessee did not remain owner thereof. He was only entitled to receive enhanced compensation, if any which does not fall within the preview of assets.

The issue involved in Ghanshyam's case (supra) also came up for consideration before the Division Bench of this Court in CIT Faridabad vs. Bir Singh (HUF) Ballabgarh, ITA No. 209 of 2004, decided on 27.10.2010, wherein following observations were made:-

"23. Under the scheme of the 1894 Act, interest under Section 34 is part of compensation while interest under Section 28 is not the interest which partakes the character of compensation and is treated differently. The interest component on enhanced compensation under Section 28 is taxable under Section 56 of the Act as 'income from other sources'.

24. The Apex Court in Ghanshyam (HUF)'s case (supra), considered this aspect as under:

".... The award of interest under Section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the Court awards excess amount. In such cases interest on that excess alone is payable. Section 28 empowers the Court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the Court includes the additional compensation awarded under Section 23(1-A) and the solatium under Section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the Court. Section 28 is applicable only in respect of the excess amount which is determined by the Court after a reference under Section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award for compensation. See: Ram Chand and Ors. etc. v. Union of India and Ors. (1994) 1 SCC 44. In the case of Shree Vijay Cotton & Oil Mills Ltd,. vs. State of Gujarat (1991) 1 SC 262, this Court has held that interest is different from compensation.

To sum up interest is different from compensation. However, interest paid on the excess amount under Section 28 of the 1894 Act depends upon a claim by the person whose land is acquired whereas interest under Section 34 is for delay in making payment. This vital difference needs to be kept in mind in deciding this matter. Interest under Section 28 is part of the amount of compensation whereas interest under Section 34 is only for delay in making payment after the compensation amount is determined. Interest under Section 28 is a part of enhanced value of the land which is not the case in the matter of payment of interest under Section 34."

25. The apex Court in the aforesaid decision has held that interest directed by the Collector is to be treated as part of compensation while the interest on the enhanced compensation directed by the Court is not. Even though there is little confusion in reference to the relevant sections but as per discussion, it is clear that interest directed by the Collector partakes the character of compensation and forms part thereof under Section 34 of the Act whereas the interest ordered by the Court falls under Section 28 of the Act."

Apparently there is some conflict between the two judgments as regards nature of interest awarded under Section 28 of the Land Acquisition Act. The spirit of both the judgments is however, same i.e. when interest is awarded for delay in payment it does not form part of compensation and is taxable as `income from other source' whereas interest awarded on enhanced amount of compensation is accretion of value of land and partakes character of compensation and is, thus, taxable as capital gain unless exempted.

The issue of deduction of tax at source from amount awarded under Section 28 in respect of acquisition of rural agricultural land came before same Division Bench in Sarti vs. HSIDC in CWP No. 9739 of 2011 and Rakesh Kumar & Others vs. Haryana State Industrial & Infrastructure Development Corporation Ltd. (HSIDC) & Ors, CWP No. 14935 of 2011, decided on 17.08.2011, which decided Bir Singh (HUF), Ballabgarh (supra). While observing that interest awarded was for delay in payment of compensation it was held that tax had rightly been deducted at source as it was observed that interest in that case would not form part of compensation and exemption in respect of compensation awarded in lieu of acquisition of agricultural land would not be applicable. Thereafter, a Co-ordinate Bench of this Court in Jagmal Singh and another vs. State of Haryana and another, Civil Revision No. 7740 of 2012, decided on 18.07.2013 - MANU/Ph/1134/2013, while considering all the aforesaid judgments observed as under:-

"It is clear from the observations of the Supreme Court that interest under Section 28 is, unlike under Section 34 of the 1894 Act, an accretion in value and regarded as part of the compensation itself which is not the case of interest under Section 34. With a clear statement of law obtaining through the Supreme Court. I would have no difficulty in saying that any component of compensation that goes towards the discharge of liability under Section 28 must be taken as part of the compensation to which Section 194 LA shall apply and that compensation being the value of agricultural land, then the exclusion as provided under the Section shall also be attracted. In this case, compensation assessed and the interest calculated are for acquiring agricultural land and the amount deposited represented the liability under Section 28. I have no doubt in my mind that there was no requirement for collecting TDS for this amount. I clarify that in terms of the judgment of the Supreme Court any liability which goes towards interest calculated under Section 34 would not obtain the benefit and if there is any deduction for TDS for such a component of interest, it shall be perfectly justified."

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.

Admittedly, in the instant case the land was agricultural land and enhanced compensation and interest was awarded under Section 28. Thus, in view of specific finding of Hon'ble Supreme Court in Ghanshyam's case (supra) that amount awarded under Section 28 of the Land Acquisition Act is accretion in value of land and interest therein forms part of compensation; income tax cannot be deducted at source since land acquired is agricultural land.

Conclusion:

In view of above, I do not find any illegality or perversity in the impugned order.

Dismissed.

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