Chhattisgarh HC rules no income tax on Rs 73 lakh land compensation, if...

Tax relief: A taxpayer who sold his land for Rs 73 lakh to the National Highways Authority of India (NHAI) has been granted complete income tax exemption on the compensation amount, following a recent Chhattisgarh High Court decision. The court clarified that, under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act), compensation awarded for compulsory land acquisition by NHAI is not subject to income tax. This verdict brings significant relief to landowners whose properties are compulsorily acquired for public projects, aligning legal protections with the intent of the 2013 Act.

The judgment follows a legal battle in which the taxpayer, Sanjay, had declared Rs 73 lakh as short-term capital gains in his income tax return, attributing Rs 53 lakh to compensation for compulsory acquisition under the National Highways Act, 1956. He paid Rs 24 lakh in tax before realising that such compensation is exempt under Section 96 of the RFCTLARR Act. Despite promptly notifying tax authorities, his exemption claim was denied, prompting appeals.

Citing the Central Government's order dated 28 August 2015, the Chhattisgarh High Court observed that the intent was to extend the RFCTLARR Act's compensation and exemption provisions to land acquired under statutes listed in the Fourth Schedule, including the National Highways Act, 1956. The court concluded that the same tax exemptions and benefits must apply to all such compulsory land acquisitions.

The court's rationale rested on the principle of uniformity, noting that denying the tax exemption to those whose land was acquired under the National Highways Act would result in discriminatory treatment. It referenced Supreme Court rulings, including Union of India vs Tarsem Singh and P. Nagaraju alias Cheluvaiah, which upheld similar interpretations favouring landowners.

Lalan Gupta, Partner at Shardul Amarchand Mangaldas & Co., told the Economic Times: "At its core, compulsory acquisition is not a voluntary transaction but an enforced loss. The Chhattisgarh High Court has rightly recognised that the 2013 Act's protections must travel with the compensation, including the tax exemption under Section 96, so that affected landowners are not penalised merely because their property was acquired under a different statute. It thus reduces litigation, restores fairness, and upholds the intent of the 2013 Act to treat affected landowners as a homogenous class entitled to just and untaxed compensation."

In its final decision, the Chhattisgarh High Court stated, "For the foregoing reasons, we are of the considered opinion that Section 96 of the RFCTLARR Act providing for exemption from income tax, stamp duty and fees would also be applicable to the land acquired under the Act of 1956 and to the compensation paid by the NHAI and consequently, the assessee would not be liable to pay income tax on the amount of compensation paid to him against the acquisition of his land under the Act of 1956."

The court further declared: "Consequently, the substantial question of law is answered in favour of the assessee and against the Revenue and it is held that the compensation received against acquisition of land from the NHAI is not eligible to tax under Section 96 of the RFCTLARR Act."

Additionally, the bench directed the assessing officer to implement the order accordingly, stating, "In view of the above, the Assessing Officer is directed to pass a consequential order in light of the substantial question of law answered herein-above. The tax appeal stands allowed to the extent sketched herein-above." The decision provides clarity and legal certainty on the tax treatment of compensation for compulsorily acquired land.