The tax treatment of compensation received on compulsory acquisition of land under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) received significant clarity after the Central Board of Direct Taxes (CBDT) issued Circular No. 36/2016 dated October 25, 2016. The circular reaffirmed that compensation exempt from income tax under Section 96 of the RFCTLARR Act cannot be subjected to tax under the Income-tax Act, 1961.
Section 96 of the RFCTLARR Act provides that no income tax shall be levied on any award or agreement made under the Act, except those covered under Section 46, which deals with certain acquisitions undertaken through private companies. The provision came into force along with the land acquisition legislation on January 1, 2014, and was intended to ensure that landowners receive the full benefit of compensation awarded for compulsory acquisition.
Prior to the CBDT clarification, uncertainty existed regarding compensation received for acquisition of non-agricultural land. While the Income-tax Act already contained exemptions for certain categories of agricultural land, particularly through Section 10(37), there was no explicit provision dealing with all categories of compensation covered by the RFCTLARR Act. This led to questions over whether compensation for compulsory acquisition of non-agricultural land could still attract tax despite the exemption contained in Section 96.
Addressing this issue, CBDT clarified that where an award or agreement enjoys exemption from income tax under Section 96 of the RFCTLARR Act, such compensation shall not be taxable under the Income-tax Act, 1961, even if the Income-tax Act does not contain a separate exemption provision for that specific category of compensation. The Board observed that Section 96 grants a wider exemption because it does not distinguish between agricultural and non-agricultural land acquired under the RFCTLARR framework.
The clarification has been relied upon in judicial proceedings as well. The Bombay High Court has noted that compensation received pursuant to an award or agreement covered by the RFCTLARR Act is entitled to the benefit of Section 96, with the CBDT circular reinforcing the legislative intent that such receipts should remain outside the scope of income tax.
Subsequent legislative developments also aligned the tax framework with the exemption under Section 96. Amendments relating to tax deduction at source on land acquisition compensation were introduced to ensure that payments exempt under the RFCTLARR Act are not subjected to tax withholding merely because of procedural provisions in the Income-tax Act.
The CBDT Circular remains an important safeguard for landowners affected by compulsory acquisition, ensuring that compensation awarded under the RFCTLARR Act reaches beneficiaries without being diminished by income tax liabilities, except in cases specifically excluded by Section 46 of the Act.
