Decoding Income Tax on Compensation from Compulsory acquisition

Section 96 mandates that no income-tax shall be levied on any award made under the Act except under Section 46. Section 46 deals with the purchase of land by a person other than a specified person through private negotiations. The benefit of Section 96 is not available when a land is purchased through private negotiations by a person other than a specified person under Section 46(1).

Therefore, in cases other than those covered by Section 46 of the 2013 Land Acquisition Act, the levy of income-tax is barred by Section 96 and as a consequence, the deduction or collection under Section 194LA of the Income Tax Act, 1961, is impermissible.

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (for short ‘RFCTLARR Act) was introduced in September 2013 and commenced from 1^st January, 2014.

Section 96 of RFCTLARR Act mandates that no income-tax shall be levied on any award or agreement made under the Act except under Section 46.

Section 46 of RFCTLARR Act deals with the purchase of land by a person other than a specified person through private negotiations.

For the purpose of this section; “specified persons” includes any person other than-

(i) appropriate Government;

(ii) Government company;

(iii) association of persons or trust 01. society as registered under the Societies Registration Act 1860, wholly or partially aided by the appropriate Government or controlled by the appropriate Government.

This explains that tax shall not levied on any awards or agreement made under RFCTLARR Act, 2013 upon acquisition by entities within in the meaning of “specified person” and no deduction u/s 194LA under Income Tax Act, 1963 will be applicable. This have been clearly clarified by CBDT whereby Central Board of Direct Taxes(CBDT) issued a Circular bearing No.36/2016, dated 25.10.2016, clarifying that the compensation received under an award exempted from the levy of income tax under Section 96 of the 2013 Act shall not be taxable, even if there is no specific provision for exemption under the Income Tax Act,1961. The Circular also says “As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax under the RFCTLARR Act, the exemption provided under Section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide Section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961”

Please note that the benefit of Section 96 is not available when a land is purchased through private negotiations by a person other than a specified person under Section 46(1).

Section 105 & 106 of RFCTLARR Act, 2013

According to section 105(1) of RFCTLARR Act, 2013 the provisions of this Act shall not apply to the enactments relating to land acquisition specified in the Fourth Schedule. List of enactments regulating land acquisition and rehabilitation and resettlement are as follows;

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Removal of difficulties) Order, 2015

Sec. 105(3) states that Central Govt. shall by notification within 1 year from the date of commencement of this Act, direct that any of the provisions of the new act relating to determination of compensation in accordance with the First Schedule of the new act and resettlement as specified in Sch. II and III being beneficial to affected families shall apply.

Accordingly, Ministry of Rural Development of the Central Govt. has issued order dt. 28-8-2015 in exercise of powers under section 113(1) of the new act and published in The Gazette of India, Regd. No. D.L. 33004/99, Extraordinary Part-II-Section3-Subsection-(ii) No. 1834, order no. S.O. 2368(E) dt. 28-8-2015.

Relevant para provides that –

“The provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, relating to the determination of compensation in accordance with the First Schedule, rehabilitation and resettlement in accordance with the Second Schedule and infrastructure amenities in accordance with the Third Schedule shall apply to all cases of land acquisition under the enactments specified in Fourth Schedule to the said Act.”

Concluding remarks:

The order dt. 28-8-2015 has cleared the clouds and has made the new act applicable to all the cases under all the laws mentioned in Schedule IV of that act including the National Highway Act, 1956. This means for all the pending cases which are decided or are going to be decided will also get the benefit of compensation at the rates specified in the new RFCTLARR Act. The order has in effect nullified the Schedule IV of the said act, making all the compensations for acquisition of land subject to the new law.

Consequently, this also means that the exemption given by circular no. 36 of 2016 to the capital gain on compensation for acquisition of non-agricultural lands under all those Acts is also extended without any ambiguity, subject to fulfilment of conditions.

PS: However, the order is not applicable to the cases in which compensation has reached finality.

Reference:

1. CBDT Circular No 36/2016

https://taxguru.in/income-tax/tax-compensation-received-land-owners-rfctlarr-act-2013.html

2. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Removal of difficulties) Order, 2015

https://dolr.gov.in/sites/default/files/RFCTLARR%20%28Removal%20of%20Difficulties%29%20Order%2C%202015.pdf

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Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out.