2011 (8) TMI 10 - HC - Income Tax

constitutional validity of Section 194LA - if the amount of compensation was paid immediately after the Award then there would have been no question of deducting tax at source under Section 194LA - The object of Section 194LA as per the CBDT Circular No.5 of 2005 dated 15th July 2005 is to curb the tendency of evading taxes by not reporting the income comprised in the compensation received on acquisition of immovable property - the argument that Section 194LA purports to imposetax on the cost of the land acquired under the Land Acquisition Act is without any merit - the petition is dismissed

Summary

Issues:
1. Deduction of tax at source on compensation for land acquisition.
2. Constitutional validity of Section 194LA of the Income Tax Act, 1961.

Analysis:

Issue 1: Deduction of tax at source on compensation for land acquisition
The petitioners contested the deduction of tax at source by the respondents while paying compensation for the acquired land. They argued that since the compensation was due immediately after the Award in 1995, before Section 194LA was inserted in 2004, tax deduction was not applicable. However, the court held that tax deduction is determined at the time of payment, not when the compensation became due. As the compensation was paid in 2010 when Section 194LA was in effect, tax deduction was justified. The court also noted that the petitioners were compensated for the delay with interest, reinforcing the validity of tax deduction at the time of payment.

Issue 2: Constitutional validity of Section 194LA
The petitioners challenged the constitutional validity of Section 194LA, arguing that it mandates tax deduction on the entire compensation amount, including the cost of the land, which they claimed lacks any income element. The court referenced a Supreme Court case related to a similar provision in Section 194C, emphasizing that the deduction at source is not based on the income component but is a statutory requirement. The court further highlighted that the purpose of Section 194LA is to prevent tax evasion on compensation income from property acquisition. It clarified that Section 194LA does not determine the recipient's tax liability but obligates the payer to deduct tax to ensure tax compliance during assessment. Ultimately, the court dismissed the challenge to the constitutional validity of Section 194LA, affirming its legality and purpose in preventing tax evasion.

In conclusion, the court dismissed the petition, upholding the deduction of tax at source on compensation for land acquisition and affirming the constitutional validity of Section 194LA of the Income Tax Act, 1961.