2021 (12) TMI 407 - HC - Income Tax

TDS u/s 194LA - compensation paid to the land owners which was arrived at based on negotiated settlements - acquisition of land initiated under Section 11 of the Land Acquisition Act, 1894 - Whether tax is liable to be deducted at source for amounts paid as compensation arrived at under negotiated settlements during acquisition of property? - HELD THAT - Acquisition of property becomes compulsory in nature whenever and wherever property is obtained by the government, pursuant to proceedings initiated for land acquisition under the relevant land acquisition laws. Negotiated settlements arrived at with government or governmental bodies for transfer of property, after proceedings for acquisition have been initiated remain in the realm of compulsory acquisition. The decision to part with the property, which is the subject matter of a negotiated settlement, does not originate from any exercise of a free mind of the owner of the property. It stems from the compulsion imposed by proceedings for acquisition. The transfer of property remains in the nature of compulsory acquisition. Once the proceedings for acquisition are initiated under law, whatever be the nature of payment, whether as compensation for acquisition or as consideration for a negotiated settlement, the character of the acquisition remains compulsory in nature and hence Section 194LA of the Act will apply. The judgement in Balakrishnans case 2017 (3) TMI 745 - SUPREME COURT clearly covers situations of this nature. In the above circumstances, the judgment of the learned Single Judge is liable to be set aside. We do so, in all these appeals. After the impugned judgment there was no stay of operation of the judgment and the compensation or consideration as the case may be would have been paid without deducting the TDS. We clarify that in cases where TDS was deducted before payment of consideration, the same is liable to be made over to the Income Tax Department. In cases where the consideration was paid without deduction of tax as per the judgment, it is needless to state that the judgment had worked itself out. Appeal dismissed.

Summary

Issues:
1. Whether tax is liable to be deducted at source for amounts paid as compensation under negotiated settlements during property acquisition.

Analysis:
The judgment pertains to a batch of writ appeals concerning the deduction of tax at source for compensation paid under negotiated settlements during property acquisition. The learned Single Judge initially ruled that tax cannot be deducted under Section 194LA of the Income Tax Act for compensation based on negotiated settlements. The case involved land acquisition for the Kochi Metro Rail Project, where settlements were reached with landowners through the District Level Purchase Committee. The writ petition argued that since the lands were purchased based on negotiations, not compulsory acquisition, Section 194LA did not apply, citing relevant case law.

The learned Single Judge upheld the writ petitioners' claim, restraining revenue officials from deducting tax at source under Section 194LA for the compensation paid. However, the appellant contended that the Supreme Court's decision in Balakrishnan v. Union of India supported their position. The court noted that Section 194LA, introduced in 2004, mandates a 10% deduction for compensation paid in compulsory acquisition of immovable property, excluding agricultural land, emphasizing the term "compulsory acquisition."

The court further explained that negotiated settlements post-initiation of acquisition proceedings still fall under compulsory acquisition, as the property transfer is compelled by the acquisition process. The court referenced the Supreme Court's ruling in Balakrishnan's case, which clarified that even if compensation amounts are agreed upon, the acquisition remains compulsory. The court overturned the Single Judge's decision based on this interpretation and the overruling of prior case law by the Supreme Court.

The court highlighted that once acquisition proceedings begin, regardless of payment nature (compensation or consideration for settlement), the acquisition's compulsory nature persists, warranting the application of Section 194LA. The judgment clarified that TDS should have been deducted and remitted to the Income Tax Department where applicable, post the judgment's implementation.

In conclusion, the court set aside the Single Judge's judgment, emphasizing the compulsory nature of acquisition even in negotiated settlements. The court clarified the TDS obligations based on the judgment's applicability status, disposing of the appeals with these observations.