TDS deductible on compensation paid for acquisition of immovable property at the time of payment

ORDINARY ORIGINAL CIVIL JURISDICTION

WRIT PETITION NO. 879 OF 2011

CORAM : J.P. DEVADHAR &A.A. SAYED, JJ.

JUDGEMENT RESERVED ON: 27TH JULY, 2011

JUDGEMENT PRONOUNCED: 1^ST AUGUST, 2011

JUDGMENT (PER J.P. DEVADHAR, J.)

1. The petitioners are aggrieved by the action on the part of the respondents in deducting tax at source while paying the amount of compensation on acquisition of the land belonging to the petitioners. The petitioners have also challenged the constitutional validity of Section 194LA of the Income Tax Act, 1961.

2. As regards the deduction of tax at source is concerned, the argument of the petitioners is that under Section 12(2) of the Land Acquisition Act, the compensation was payable to the petitioners immediately after the Award dated 30^th May 1995. It is contended that 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 of the Act, because the said Section 194LA was not on the statute book on the date of the Award i.e. 30^th May 1995 and that the said Section was inserted subsequently by Finance (No.2) Act, 2004 with effect from 1^st October 2004. There is no merit in the above contention because, the question of deducting tax at source arises at the time of making payment. In the present case, compensation was paid on 28^th April 2010 and on that day, Section 194LA was on the statute book and, therefore, tax had to be deducted while making the payment of compensation. For the delay in paying the compensation, the petitioners have been paid interest and, therefore, the fact that the compensation has been paid belatedly, cannot be a ground to hold that the compensation with interest has to be paid without deducting tax at source. Hence, the argument of the petitioners that the respondents ought not to have deducted tax at source while paying the compensation cannot be accepted.

3. As regards the constitutional validity of Section 194LA is concerned, the only argument advanced on behalf of the petitioners is that, under the erstwhile Section 194L, tax was to be deducted at source on the income component of the compensation whereas under Section 194LA, tax is required to be deducted at source on the entire amount of compensation which includes the cost of the land. It is contended that the cost of the land does not involve any income element and, therefore, Section 194LA which mandates deduction of tax at source on the entire amount of consideration including the cost of the land must be held to be unconstitutional.

4. We see no merit in the above contention. The Apex Court in the case of Associated Cement Company Limited V/s. Commissioner of Income Tax reported in 201 ITR 435 (SC) was called upon to consider similar provisions contained in Section 194C of the Act under which a person responsible to make payment to a contractor is required to deduct tax at source before making the payment. On consideration of various aspects of the matter, the Apex Court held thus:‑

“ …The words in the subsection “on income comprised therein” appearing immediately after the words “deduct an amount equal to two per cent of such sum as income tax” from their purport, cannot be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account or paid to him in pursuance of the contract. Moreover, the concluding part of the subsection requiring deduction of an amount equal to two per cent of such sum as income ­tax, by use of the words “on income comprised therein” makes it obvious that the amount equal to two per cent of the sum required to be deducted is a deduction at source. Indeed, it is neither  possible nor permissible for the payer to determine what part of the  amount paid by him to the contractor constitutes the income of the  latter. It is not also possible to think that Parliament could have  intended to cast such impossible burden upon the payer nor could it be  attributed with the intention of enacting such an impractical and  unworkable provision. Hence, on the express language employed in the sub­section, it is impossible to hold that the amount of two per cent required to be deducted by the payer out of the sum credited to the account of or paid to the contractor has to be confined to his income component out of that sum. There is also nothing in the language of the subsection which permits exclusion of an amount paid on behalf of the organization to the contractor according to clause 13 of the terms and conditions of the contract in reimbursement of the amount paid by him to workers, from the sum envisaged therein, as was suggested on behalf of the appellant.”

(emphasis supplied)

5. The object of Section 194LA as per the CBDT Circular No.5 of 2005 dated 15^th July 2005 {276 ITR (st) 151} is to curb the tendency of evading taxes by not reporting the income comprised in the compensation received on acquisition of immovable property. Section 194LA does not  determine the tax liability of the person receiving the amount of compensation but it merely requires the person paying the compensation to deduct certain percentage of the sum payable as compensation towards the tax liability of the recipient that would be determined in the assessment proceedings.

6. Therefore, the argument that Section 194LA purports to impose tax on the cost of the land acquired under the Land Acquisition Act is without any merit. Consequently, the challenge to the constitutional validity of Section 194LA must fail.

7. Accordingly, the petition is dismissed with no order as to costs.