2017 (11) TMI 923 - SC - Income Tax

TDS on enhanced compensation - whether the tax at source is to be deducted on the amounts which are paid as compensation or enhanced compensation etc. on account of compulsory acquisition of land under the provisions of Land Acquisition Act 1894 - Land Acquisition Collector had deducted the tax at source and deposited the same with the Income Tax Department. - Held that - Since the Land Acquisition Collector had already deducted tax at source and deposited with the Income Tax Department in such circumstances better course of action which is in consonance with the provisions of Income Tax Act is for the respondents to approach the concerned Assessing Officer(s) and to raise the issue that no tax is payable on the compensation/enhanced compensation which is received by them as their land was agricultural land. Once such an issue is raised before the Assessing Officer(s) it is for the Assessing Officer(s) to examine the facts of each case and then apply the law as contained in the Income Tax Act to determine the aforesaid question. Appeal disposed of with directions to AO and Land Acquisition Collectors.

Summary

Issues:
1. Whether tax at source is to be deducted on compensation for land acquisitionRs.
2. Applicability of Section 194LA of the Income Tax Act, 1961.
3. Correct procedure for determining if the land acquired is agricultural land.
4. Refund of tax deducted at source.
5. Role of Assessing Officer in determining tax liability.
6. Compliance with Circular dated 13.04.2011 by the Department of Land Resources.

Analysis:

1. The Supreme Court examined whether tax at source should be deducted on compensation for land acquisition under the Land Acquisition Act, 1894. The issue revolved around the applicability of Section 194LA of the Income Tax Act, 1961, which specifies that tax at source is not to be deducted on compensation for agricultural land.

2. The High Court had directed the Income Tax Department to refund the deducted amount to the Collector and determine if the compensation was for agricultural land. However, the Additional Solicitor General argued that the Assessing Officer should decide the land's nature as per the Income Tax Act's provisions, particularly Section 2(14)(iii).

3. Referring to the Kerala High Court's judgment, the Supreme Court emphasized the need for parties to be informed about tax liabilities before compensation disbursement. The Court highlighted the importance of issuing notices regarding tax deductions and providing claimants with the option to seek exemptions or reduced tax rates under Section 197 of the Income Tax Act.

4. The Court acknowledged that tax deductions had already been refunded in some cases and considered a Circular issued by the Department of Land Resources. It concluded that the Assessing Officer should determine if compensation for agricultural land warrants tax refunds, and the Income Tax Department should follow the Circular's guidelines.

5. The Supreme Court set aside the previous directions and instructed respondents to file returns with the Assessing Officer within two months if they believed the acquired land was agricultural. The Assessing Officer would then assess each case based on the Land Acquisition Act and relevant legal precedents to decide on tax refunds.

6. The Court emphasized future compliance with the Kerala High Court's procedure for notifying parties about tax liabilities and ensuring proper assessment by the Assessing Officer. The judgment aimed to streamline the process of determining tax deductions on compensation for land acquisition, emphasizing adherence to legal provisions and fair treatment of taxpayers.