Income Tax on Compulsory Acquisition

The process of land acquisition in India is governed by various laws such as the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act)1, National Highways Authority of India Act, 1988 (NHAI Act)2, Railways Act, 19893, Electricity Act, 20034, etc. which empower the Government to compulsorily acquire land for public purposes. Each of these enactments establish specific procedures and guidelines for land acquisition, contributing to a complex legal landscape governing the critical aspect of infrastructure development and public welfare.

The RFCTLARR Act is the principal legislation for land acquisition and it provides detailed methodology for determination of compensation. Understanding the interplay between the RFCTLARR Act and other laws governing land acquisition is essential for navigating the legal intricacies surrounding compensation, taxation, and exemptions in such cases.

Income tax on land acquisition

“Compulsory acquisition” is included in the definition of “transfer” under Section 2(47) of the Income Tax Act, 19615. Any profit or gain arising from the “transfer” of capital asset is leviable to income tax under the head capital gains.6 Section 45(5) provides the manner and the previous year in which the tax on capital gains arising from compulsory acquisition will be payable. It basically provides that:

(a) Compensation awarded in the first instance shall be chargeable as income of the previous year in which such compensation or part thereof was first received.

(b) Enhanced compensation is chargeable as income of the previous year in which such amount is received by the assessee. However, enhanced compensation received in pursuance of interim order shall be chargeable as income of the previous year in which the final order is made.

(c) In case compensation is reduced, the assessed capital gain of that year shall be recomputed by taking the compensation so reduced to be the full value of the consideration.

Thus, generally, income tax is leviable on the transfer of capital asset by way of compulsory acquisition.7

Section 96 of the RFCTLARR Act — Income tax exemption on compulsory acquisition

The RFCTLARR Act is the law providing for compulsory acquisition of land and for payment of compensation thereof. It repealed and replaced the Land Acquisition Act, 18948.

Under the erstwhile Land Acquisition Act, 1894, there was no provision for exemption of income tax on compensation received in lieu of compulsory acquisition.9

However, Section 96 of the RFCTLARR Act10, provides exemption from income tax and stamp duty on compulsory acquisition made under the Act for public purposes. The relevant section reads as under:

96. Exemption from income tax, stamp duty and fees. — No income tax or stamp duty shall be levied on any award or agreement made under this Act, except under Section 4611, and no person claiming under any such award or agreement shall be liable to pay any fee for a copy of the same.

The Kerala High Court12, has also affirmed the position that no income tax is payable on compensation received in lieu of compulsory acquisition under the RFCTLARR Act. Further, the Central Board of Direct Taxes (CBDT) has also clarified that no income tax is payable on such compensation received.13

Applicability of Section 96 of the RFCTLARR Act to acquisitions made under the NHAI Act or other statutes specified under the Fourth Schedule

Section 105(1) of the RFCTLARR Act14, states that provisions of the Act shall not apply to enactments relating to land acquisition specified in Fourth Schedule (such as the NHAI Act, Railways Act, Electricity Act, etc.). However, this is subject to the provisions of sub-section (3). The relevant extract of sub-section (3) of Section 105 (as amended by the Removal of Difficulties Order, 201515) reads as under:

(3) The provisions of 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 the Fourth Schedule to the said Act.

The above sub-section states that the provisions of the RFCTLARR Act “relating to the determination of compensation” in accordance with the First Schedule shall apply to all cases of land acquisition under the enactments specified in the Fourth Schedule to the said Act.

Thus, the core question is whether Section 96 is a provision relating to determination of compensation and thus applicable to other statutes mentioned in the Fourth Schedule of the RFCTLARR Act.

The Income Tax Appellate Tribunal (ITAT), Chandigarh16 has held that in view of amended Section 105(3), the exemption under Section 96 will apply even to the land acquisitions made under the NHAI Act.

However, ITAT, Raipur17 has taken a divergent view holding that Section 105(1) makes all provisions of the Act inapplicable to the land acquisitions made under the enactments specified in the Fourth Schedule to the Act. While Section 105(3) only makes the First Schedule, Second Schedule and Third Schedule applicable to the land acquisitions made under the enactments specified in the Fourth Schedule to the Act. By virtue of the said section, the provisions of Section 96 are not made applicable to land acquisitions made under the enactments specified in the Fourth Schedule to the Act. For this, the ITAT, Raipur has relied on Office Memorandum dated 6-6-2019 issued by the CBDT.

Thus, it is held that exemption under Section 96 of the RFCTLARR Act is not applicable to land acquisitions under the NHAI Act, which is an enactment specified under Fourth Schedule of the RFCTLARR Act.

Discrimination of compulsory acquisition made for public purposes is violative of Article 14 of the Constitution

A discrimination by way of granting exemption to compulsory acquisition made under one Act while levying tax on compulsory acquisition made under another Act, when both acquisitions are for public purposes, will be violative of Article 14 of the Constitution18.

In P. Vajravelu Mudaliar v. Collector (LA)19, the Supreme Court noted that the land acquired under the Land Acquisition Act, 1894 received higher compensation than a land acquired under the Land Acquisition (Tamil Nadu Amendment) Act, 196120, where compensation payable was much lesser. The court thus took the view that the Amendment Act resulted in discrimination between persons whose lands were acquired for a housing scheme and those lands acquired for other public purpose. Such a classification had no reasonable nexus to the object sought to be achieved. Thus, the Amendment Act was held to be violative of Article 14.

A seven-Judge Bench of the Supreme Court in Nagpur Improvement Trust v. Vithal Rao21, struck down the provisions of the Nagpur Improvement Trust, 1936 on the ground that compensation payable on acquisitions under the said Act did not provide for payment of solatium of 15% which was provided under the Land Acquisition Act, 1894. The Court held that under both the Acts, acquisition is for public purposes. To a person whose land is being acquired, it does not matter that the land is acquired under one Act or the other. Thus, such distinction is violative of Article 14 which provides equal protection to person equally situated.

The above decision has been followed by the Supreme Court in Maharashtra SRTC v. State of Maharashtra22, wherein the Court held that the amendments made to the Land Acquisition Act, 1894 granting additional monetary benefit will apply to acquisitions made under the Maharashtra Regional and Town Planning Act, 1966 (MRTP Act)23. The Court held that for assessment of compensation, there can be no valid classification on the basis of the authority acquiring the land.

In State of Kerala v. T.M. Peter24, the issue related was that no solatium was payable under the Town Planning Act, while the same was payable under the Land Acquisition Act. The Supreme Court following P. Vajravelu Mudaliar case25, and inter alia, held that the differential nature of the public purpose does not furnish a rational ground to pay more compensation for one owner and less for another. On facts, the Court held that there was no valid discrimination in the Town Planning Act vis-à-vis the Land Acquisition Act warranting a classification in the matter of denial of solatium. Therefore, to the extent the Town Planning Act excluded the operation of the Land Acquisition Act vis-à-vis the payment of solatium was held to be unconstitutional.

It has, therefore, been authoritatively settled by the Supreme Court that classification is not permissible for compensation purposes so long as the acquisition is for public purpose.

Decisions which seemingly take contrary view but are not applicable

In Girnar Traders (3) v. State of Maharashtra26, the Constitution Bench of the Supreme Court made distinction between acquisitions made under the Land Acquisition Act, 1894 and the Monopolies and Restrictive Trade Practices Act (MRTP Act), 196927, in respect of the provisions relating to lapsing of reservation. The distinction was made on the basis that the machinery provided under both the Acts for acquisition is different and lapsing provisions of one Act cannot be mechanically applied to another Act. But, the court clarified that provisions relating to payment of compensation have to be dealt with differently than the provisions relating to time-frame and lapsing of reservations. It held that provisions relating to payment of compensation under the Land Acquisition Act, 1894 can be extended to the MRTP Act.

Further, in Prakash Amichand Shah v. State of Gujarat28, the Supreme Court specifically dealt with the issue of compensation (additional solatium of 15%) under the Bombay Town Planning Act, 1954. In this case, the Court held that there is no discrimination if the benefit of solatium is not extended to acquisitions made under the Bombay Town Planning Act. However, the basis of the decision was that acquisition under the Bombay Town Planning Act is for an avowed object of town planning and the person from whom the land was expropriated gets a package deal in that he may be allotted other lands in the final town planning scheme, apart from the monetary compensation that is payable.

Thus, this decision cannot be relied to discriminate for the purpose of income tax exemptions on acquisition made under different Acts for public purposes. In any case, the classification made under the above decision will have no reasonable nexus with the object of granting exemption to compulsory acquisition for public purposes.

Further, the above decision has been explained and distinguished by the Supreme Court in Union of India v. Tarsem Singh29, wherein, it was again held that non-grant of solatium and interest to lands acquired under the National Highways Act, 195630, which is available if lands are acquired under the Land Acquisition Act, is bad in law and violative of Article 14 of the Constitution of India.

How the provisions of the RFCTLARR Act can be interpreted so that they are not violative of Article 14 of the Constitution

It is settled that taxing statutes are not immune from protection granted under Article 14 of the Constitution. The Supreme Court has even extended exemptions under taxing statutes when arbitrary discrimination was made between two items in same category without any reasonable basis.31

Thus, Section 96 of the RFCTLARR Act has to be interpreted in a manner so that it also applies to a case where land is acquired for public purposes under the provisions of some other Act but the compensation is determined under the provisions of the RFCTLARR Act. This can be done by reading the provisions of Section 105(3) purposively without doing any violence to the language of the provision in the following ways:

  1. Section 105(3) is not a provision which merely makes the First Schedule applicable as it is to the cases of land acquisition under the enactments specified in the Fourth Schedule.

  2. It rather makes the provision of the RFCTLARR Act relating to “determination of compensation” (in accordance with First Schedule) to the cases of land acquisition under the enactments specified in the Fourth Schedule.

  3. The First Schedule of the RFCTLARR Act provides the components which shall constitute “the minimum compensation package to be given to those whose land is acquired”.

  4. “Compensation” is something given or received as an equivalent for services, debt, loss, injury or suffering32, which makes the injured person whole.33

  5. Section 96 is certainly a provision having an impact on the amount of the compensation to be finally received for the loss of land acquired.

  6. If Section 96 is not made applicable to the statutes specified in Fourth Schedule, then the amount determined under the First Schedule will not be the minimum compensation.

  7. Thus, either Section 96 has to be made applicable to land acquisitions under the enactments specified under the Fourth Schedule or the compensation determined under the First Schedule will have to be increased with the tax amount to make it the minimum compensation.

Any other interpretation will be violative of Article 14 of the Constitution as it will lead to artificial discrimination between acquisitions made under different Acts even if such acquisitions are for public purposes.

Conclusion

The discrepancy between the exemption granted under the RFCTLARR Act and its applicability to acquisitions made under other statutes like the NHAI Act arises due to exemptions being provided in a statute distinct from the one creating the levy i.e. the Income Tax Act.

This incongruity is not unique and finds parallels in other areas of taxation law. For instance, exemptions to customs duty/export duty/cesses/surcharges provided under other statutes like the Special Economic Zones Act, 2005 (SEZ Act)34, which also lead to various disputes and litigation.

The separation of exemption provisions from the taxation statute can create ambiguity regarding their universal applicability, highlighting the need for clarity and harmonisation within the legal framework to ensure fairness and coherence in taxation policies.

In conclusion, though the applicability of Section 96 to acquisitions under enactments like the NHAI Act, specified in the Fourth Schedule of the RFCTLARR Act, is contentious, a purposive interpretation is crucial to align taxing provisions with constitutional principles, ensuring equitable treatment for all acquisitions made for public purposes, regardless of the enacting statute.


*Advocate. Author can be reached at: jain.somesh@outlook.com.

1. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.

2. National Highways Authority of India Act, 1988.

3. Railways Act, 1989.

4. Electricity Act, 2003.

5. Income Tax Act, 1961, S. 2(47).

6. Income Tax Act, 1961, S. 45(1).

7. However, there are two exceptions, namely, rural agricultural land [which is excluded from the definition of “capital asset” under S. 2(14)(iii)] and urban agricultural land used for agricultural purposes for two years immediately preceding the date of acquisition and transferred by individual or HUF as per S. 10(37).

8. Land Acquisition Act, 1894.

9. Though, Land Acquisition Act, 1894, S. 51 provided exemption from payment of stamp duty.

10. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, S. 96.

11. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, S. 46.

12. Madaparambil Varkey Varghese v. CIT, 2019 SCC OnLine Ker 24068.

13. Ministry of Finance, Department of Revenue, Government of India, Central Board of Direct Taxes, Circular No. 36 of 2016 dated 25-10-2016.

14. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, S. 105(1).

15. Ministry of Rural Development, Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (Removal of Difficulties) Order, 2015 (28-08-2015).

16. Baljit Kaur v. CIT, 2022 SCC OnLine ITAT 1344 and Satish Kumar v. CIT, (2023) 104 ITR (Trib) 694.

17. Heritage Buildcon (P) Ltd. v. CIT, 2023 SCC OnLine ITAT 1285.

18. Constitution of India, Art. 14.

19. 1964 SCC OnLine SC 22.

20. Land Acquisition (Tamil Nadu Amendment) Act, 1961.

21. (1973) 1 SCC 500.

22. (2003) 4 SCC 200.

23. Maharashtra Regional and Town Planning Act, 1966.

24. (1980) 3 SCC 554.

25. 1964 SCC OnLine SC 22.

26. (2011) 3 SCC 1.

27. Monopolies and Restrictive Trade Practices Act, 1969.

28. (1986) 1 SCC 581.

29. (2019) 9 SCC 304.

30. National Highways Act, 1956.

31. State of U.P. v. Deepak Fertilizers & Petrochemical Corpn. Ltd., (2007) 10 SCC 342; Ayurveda Pharmacy v. State of T.N., (1989) 2 SCC 285.

32. Dictionary.com <www.dictionary.com>.

33. Black’s Law Dictionary (9th edn).

34. Special Economic Zones Act, 2005.

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