NO TDS u/s 194A on Interest awarded under Land Acquisition Act

JUDGMENT

Ms. Harsha Devani, J. – By this petition under Article 226 of the Constitution of India, the petitioner has challenged the communication dated 9th February, 2015 issued by the Income Tax Officer, TDS-1, Surat as well as the action of the second respondent of deducting and depositing an amount of Rs. 2,07,416/- towards 10% TDS from the total amount of interest and further seeks a direction to the second respondent to pay the amount of TDS, that is, Rs. 2,07,416/- to the petitioner.

2. The petitioner is the original claimant in Land Reference Case No. 1737/1999 which came to be decided by the learned Principal Senior Civil Judge, Junagadh by an award dated 23rd March, 2011 whereby the reference was partly allowed and additional compensation was awarded at the rate of Rs. 41.60 per square metre for the irrigated lands and Rs. 33.28 per square metre for non-irrigated lands along with other benefits under the Land Acquisition Act, 1894 (hereinafter referred to as the “Act of 1894”).

3. Pursuant to the award passed by the Reference Court, the second respondent – Executive Engineer, Junagadh Irrigation Scheme Division submitted a calculation sheet which showed an amount of interest of Rs. 20,74,157/- in Column No. 15 thereof and the amount of TDS to be deducted as per section 194A was shown to be Rs. 2,07,416/- in Column No. 18 thereof,. The petitioner made an application in Form No. 13 to the Income Tax Department on 9th January, 2015 under section 197(1) for deciding the tax liability of interest and to issue a certificate as to NIL tax liability. By the impugned communication dated 9th February, 2015 (wrongly typed as 09.02.2014 in the letter as per paragraph 5 of the affidavit-in-reply), the application has been rejected on the ground that the interest amount on the delayed payment of compensation and enhanced value of compensation is taxable as per the provisions of section 57(iv) read with sections 56(2)(viii) and 145A(b) of the I.T. Act. Being aggrieved, the petitioner has filed the present petition.

4. Mr. Tushar Sheth, learned advocate for the petitioner invited the attention of the court to the statement showing the amount of compensation to be deposited in the court in terms of the award dated 23rd March, 2011 passed by the learned Principal Senior Civil Judge, to point out that the amount referred to in Column No. 15 was the amount of interest payable under section 28 of the Act of 1894. It was pointed out that in terms of Column No. 18 of the said statement, out of the amount of interest of Rs. 20,74,157/-, income tax of Rs. 2,07,416/- is required to be deducted at source. It was pointed out that the petitioner’s application for a certificate for no deduction of income tax under section 197 of the I.T. Act has been rejected on the ground that the interest amount on delayed payment of compensation and enhanced value of compensation is taxable as per section 57(iv) read with sections 56(2)(viii) and 145A(b) of the Income Tax Act. Reference was made to the decision of the Supreme Court in the case of CIT v. Ghanshyam (HUF) [2009] 182 Taxman 368, to point out that the court in the said case has held that interest under section 28 of the Act of 1894 is part of the amount of compensation whereas interest under section 34 thereof is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of the enhanced value of the land which is not the case in the matter of payment of interest under section 34. The court, accordingly, held that interest paid on excess compensation under section 28 of the Act of 1894 has to be treated as part of compensation under section 45(5) of the Income Tax Act. It was submitted that, therefore, when the interest under section 28 of the Act of 1894 is to be treated as part of compensation and is liable to capital gains under section 45(5) of the I.T. Act, such amount cannot be treated as income from other sources and hence, no tax can be deducted at source by considering the same to be interest as contemplated under section 45(5) of the I.T. Act. It was submitted that subsequent to the refusal to grant the certificate under section 197 of the I.T. Act, the second respondent has deducted tax at source to the extent of Rs. 2,07,416/-. It was submitted that such action of the second respondent not being in consonance with the statutory provisions, the respondents are required to be directed to pay such amount to the petitioner. It was, accordingly, urged that the petition deserves to be allowed by quashing and setting aside the impugned communication dated 9th February, 2014 (sic. 2015) issued by the Income Tax Officer, TDS-1 refusing to grant the certificate under section 197 of the Act as well as holding the action of the respondents in deducting Rs. 2,07,416/- towards 10% TDS to be illegal and invalid.

4.1 In support of his submissions, the learned counsel placed reliance upon a decision of the Punjab & Haryana High Court in the case of Jagmal Singh v. State of Haryana rendered in Civil Revision No. 7740 of 2012 on 18th July, 2013, wherein the court placing reliance upon the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra) observed that it was clear from the observations of the Supreme Court that interest under section 28 is, unlike under section 34 of the 1894 Act, an accretion in value and regarded as part of the compensation itself which is not the case of interest under section 34. The court held that any component of compensation that goes towards the discharge of liability under section 28 must be taken as part of the compensation to which section 194 LA shall apply and that compensation being the value of agricultural land, then the exclusion as provided under the section shall also be attracted. The court observed that in the facts of the said case, compensation assessed and the interest calculated were for acquiring agricultural land and the amount deposited represented the liability under section 28 of the Act of 1894 and hence, there was no requirement of collecting TDS for this amount. The court clarified that any liability which goes towards interest calculated under section 34 of the Act of 1894 would not obtain the benefit and if there is any deduction for TDS for such a component of interest, it shall be perfectly justified. While any deduction made under TDS will not cause any serious prejudice even if the amount ought not to have been deducted by enabling a party applying for refund, if, it might involve a large number of cases, it shall be quite unnecessary for the land owners to directly apply for income tax for refund in every case. Such a requirement is a needless circuitous exercise. What can be prevented even in the first place by not requiring a TDS to be applied for compensation relatable to sections 23(1A), 23(2) and 28 of the Land Acquisition Act, in respect of the acquisition of agricultural land, it shall not be unnecessarily gone through. The court, accordingly, issued a direction to the Collector not to make such TDS for deposit of money in the court in satisfaction of the award and further directed that the shortfall in the amount in the said cases shall be made good by depositing the same and left it open to the Collector to obtain refund of the amount remitted to the TDS account, without any such legal requirement, from the Income Tax Department, in accordance with law.

4.2 Reliance was also placed upon the decision of the Punjab & Haryana High Court in the case of Haryana State Industrial Development Corpn. Ltd. v. Savitri rendered in Civil Revision No. 2509 of 2012 on 29th November, 2013 wherein the court placed reliance upon its earlier decision in the case of Jagmal Singh (supra) and held that it is clear that no tax is to be deducted at source from compensation awarded in lieu of agricultural land. In respect of ‘interest’, it has to be seen as to whether interest is a part of the compensation. If the answer is in the affirmative, then tax cannot be deducted at source. However, if it is for delay in making payment it does not form part of the compensation and tax may be deducted at source. The court held that in the facts of the said case, the land was agricultural land and enhanced compensation and interest was awarded under section 28 and hence in view of the specific finding in Ghanshyam (HUF)’s case (supra) the amount awarded under section 28 of the Land Acquisition Act is accretion in value and interest therein forms part of compensation; income tax cannot be deducted at source since the land acquired is agricultural land. The learned counsel for the petitioner further pointed out that the land in question being agricultural land in the rural area, the same has not been taxed under the heading of capital gains under section 45(5) of the Act.

5. Opposing the petition, Mr. Sudhir Mehta, learned senior standing counsel for the respondents submitted that under the award passed by the Reference Court, the petitioner was to receive additional compensation and interest of Rs. 20,74,157/- on such additional compensation. Under the circumstances, the second respondent proposed deduction of income tax on interest of Rs. 20,74,157/- which was worked out at Rs. 2,07,416/- in terms of the provisions of section 194A of the Income Tax Act. It was submitted that the Income Tax Officer, TDS-1, Surat while rejecting the application made by the petitioner under section 197 of the I.T. Act, has taken into consideration the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of that Act. According to the learned counsel, the action of the Assessing Officer in rejecting the application is just, legal and valid because in terms of the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of the I.T. Act, tax is required to be deducted at source under section 194A of the I.T. Act at the rate of 10% from the interest payable under section 28 of the Act of 1894. Referring to the provisions of section 56 of the I.T. Act, it was pointed out that sub-clause (viii) of sub-section (2) thereof provides that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A is chargeable to income tax under the head “Income from other sources”. It was pointed out that under sub-clause (iv) of section 57, in case of the nature of income referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income is permissible. It was pointed out that under section 145A of the Act, interest received by the assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. It was submitted that the interest on enhanced compensation under section 28 of the Act of 1894 being in the nature of enhanced compensation, is deemed to be the income of the assessee in the year under consideration and has to be taxed as per the provisions of section 56(2)(viii) of the Act, as income from other sources.

5.1 As regards the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra), Mr. Mehta submitted that such decision was rendered prior to the amendment in the I.T. Act whereby clause (b) which provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income in the year in which it is received, came to be inserted in section 145A of the Act and hence, would not have any applicability in the facts of the present case. In support of his submissions, the learned counsel placed reliance upon the decision of the Punjab & Haryana High Court in the case of Hari Kishan v. Union of India [CWP No. 2290 of 2001 dated 30-1-2014] wherein the court has placed reliance upon its earlier decision in the case of CIT v. Bir Singh (HUF) ITA No. 209 of 2004 on 27th October, 2010, wherein the court after considering the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) has held that the interest received by the petitioner was on account of delay in making the payment of enhanced compensation which would not partake the character of compensation for acquisition of agricultural land and thus, was not exempt under the Income Tax Act. Once that was so, the tax at source had rightly been deducted by the payer.

5.2 Reliance was also placed upon the decision of the Punjab & Haryana High Court in the case of Bir Singh (HUF) (supra) wherein the court held thus:-

“25. The apex Court in the aforesaid decision has held that interest directed by the Collector is to be treated as part of compensation while the interest on the enhanced compensation directed by the Court is not. Even though there is little confusion in reference to the relevant sections but as per discussion, it is clear that interest directed by the Collector partakes the character of compensation and forms part thereof under Section 34 of the Act whereas the interest ordered by the Court falls under Section 28 of the Act.

5.3 Reliance was also placed upon the decision of the Punjab & Haryana High Court in the case of Manjet Singh (HUF) Karta Manjeet Singh v. Union of India [2016] 237 Taxman 116 , wherein the question for consideration in the petitions related to the nature of interest received by the land owner under section 28 of the 1894 Act namely, as to whether interest which is received by the land owner partakes the character of income or not and in such a situation whether it is taxable under the provisions of the Act. The court placed reliance upon the decision of the Supreme Court in the case ofDr. Shamlal Narula v. CIT [1964] 53 ITR 151, the decision of the Supreme Court in the case of T.N.K. Govindaraju Chettyv. CIT [1967] 66 ITR 465, the decision of the Supreme Court in the case of Bikram Singh v. Land Acquisition Collector[1997] 224 ITR 551  and held that the interest received as income on the delayed payment of compensation determined under section 28 or 31 of the Act is a taxable event. The court held that in view of the authoritative pronouncements of the apex court in the above referred decisions, the assessee cannot derive any benefit from the observations of the Supreme Court in the case of Ghanshyam (HUF) (supra) and dismissed the petitions.

5.4 Reliance was also placed upon the decision of the Delhi High Court in the case of CIT v. Sharda Kochhar 226 Taxman 199 (Mag.), wherein the question before the Delhi High Court was as to whether the amount received by the assessee during the previous year relevant to assessment year 1988-89 was taxable in view of the provisions of section 45(5)(b) of the Income Tax Act. The court following the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra) held that the addition made by the Assessing Officer was in accordance with law, that is, section 45(5) of the Income Tax Act. It was submitted that thus, various High Courts have taken a consistent view that interest paid under section 28 of the Act of 1894 is in the nature of income from other sources and is taxable under section 56 of the Act. Under the circumstances, the second respondent was wholly justified in deducting tax at source under section 194A of the I.T. Act and that the first respondent was justified in rejecting the application for issuance of certificate under section 197 of the I.T. Act for no deduction of tax. It was, accordingly, urged that the petition being devoid of merits, deserves to be dismissed.

6. The facts as emerging from the record are that the petitioner’s agricultural lands came to be acquired under the provisions of the Act of 1894 for the public purpose of the Ozat-2 Irrigation Scheme. The award passed by the Collector came to be challenged by the petitioner before the learned Principal Senior Civil Judge, Junagadh (hereinafter referred to as the “Reference Court”), who by an order dated 20th March, 2011 awarded additional compensation of Rs. 5,01,846/- in favour of the petitioner together with other statutory benefits. Pursuant to such award, the second respondent calculated the amount payable to the petitioner and in terms of the statement showing the amount of compensation to be deposited in the court, computed an amount of Rs. 20,74,157/- as payable to the petitioner by way of interest under section 28 of the Act of 1894. In support of such statement, the second respondent has also issued a communication dated 12th October, 2015 certifying that the interest shown in Columns No. 13 and 14 indicates the interest under section 28 of the Act of 1894. It may be noted that Column No. 15 is comprised of the total amount of interest under Columns No. 13 and 14 of the above statement. Undisputedly, therefore, the amount of interest from which the income tax is sought to be deducted at source, is interest payable under section 28 of the Act of 1894.

7. At this juncture, reference may be made to the decision of the Supreme Court in the case of Ghanshyam (HUF) (supra) wherein, the court has examined the provisions of the Land Acquisition Act, 1894 as well as the provisions of section 45 of the I.T. Act and the intention behind insertion of sub-section (5) of section 45. The court noted that sub-section (5) of section 45 was inserted to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. The court considered the provisions of sections 23(1), 23(1-A) and section 23(2) of the Act as well as section 28 and section 34 of the Act of 1894 and observed that section 23(1-A) was introduced in the 1894 Act to mitigate the hardship caused to the owner of the land who is deprived of its enjoyment by taking possession from him and using it for public purpose, because of the considerable delay and offering payment thereof. To obviate such hardship, section 23(1-A) was introduced and the legislature envisaged that the owner is entitled to 12% per annum additional amount on the market value for a period commencing on or from the date of publication of the notification under section 4(1) of the 1894 Act up to the date of the award of the Collector or the date of taking possession of the land, whichever is earlier. The court held that the additional amount payable under section 23(1-A) of the 1894 Act is neither interest nor solatium. It is an additional compensation designed to compensate the owner of the land for the rise in price during the pendency of the land acquisition proceedings. It is a measure to offset the effect of inflation and the continuous rise in the value of properties. Therefore, the amount payable under section 23(1-A) of the Act is an additional compensation in respect to the acquisition and has to be reckoned as part of the market value of the land. The court further held that the award of interest under section 28 of the 1894 Act is discretionary. Section 28 applies when the amount originally awarded has been paid or deposited and when the court awards excess amount. In such cases, interest on that excess alone is payable. Section 28 empowers the court to award interest on the excess amount of compensation awarded by it over the amount awarded by the Collector. The compensation awarded by the court includes the additional compensation awarded under section 23(1-A) and the solatium under section 23(2) of the said Act. This award of interest is not mandatory but is left to the discretion of the court. It was further held that section 28 is applicable only in respect of the excess amount which is determined by the court after a reference under section 18 of the 1894 Act. Section 28 does not apply to cases of undue delay in making award for compensation. The court observed that interest is different from compensation. However, interest paid on the excess amount under section 28 of the 1894 Act depends upon a claim made by a person whose land is acquired whereas interest under section 34 is for the delay in making payment. This vital difference needs to be kept in mind in deciding the matter. Interest under section 28 is part of the amount of compensation whereas interest under section 34 is only for delay in making payment after the compensation amount is determined. Interest under section 28 is a part of the enhanced value of the land which is not the case in the matter of payment of interest under section 34. The court, thereafter, specifically considered the question as to whether additional amount under section 23(1-A), solatium under section 23(2), interest paid on excess compensation under section 28 and interest under section 34 of the 1894 Act, could be treated as part of compensation under section 45(5) of the 1961 Act and the court held thus:—

Thus, the court has held that interest under section 28 of the Act of 1894 is an accretion to compensation and forms part of the compensation and, therefore, exigible to tax under section 45(5) of the Act. Such decision was, therefore, rendered in favour of the revenue.

8. The above referred decision in the case of Ghanshyam (HUF) (supra) came to be followed by the Supreme Court in the case of CIT v. Govindbhai Mamaiya [2014] 367 ITR 498  wherein the court after referring to the above decision in the case of Ghanshyam (HUF) (supra) held that it is clear that whereas interest under section 34 of the Act of 1894 is not treated as a part of income subject to tax, the interest earned under section 28, which is on enhanced compensation, is treated as an accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to tax under section 45(5) of the Income Tax Act.

9. Thus, the Supreme Court in the case of Ghanshyam (HUF) (supra) has held that the interest under section 28 of the Act of 1894 unlike interest under section 34 is an accretion to the value and hence, it is a part of the enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. Therefore, interest under section 28 of the Act of 1894 would form part of the enhanced compensation and would be exigible to capital gains under section 45(5) of the I.T. Act. In other words, in case of a transaction which is otherwise exigible to capital gains tax under section 45 of the I.T. Act, the interest received under section 28 of the Act of 1894 being an accretion to the value, would form part of the compensation and would be exigible to tax under section 45(5) of the I.T. Act, whereas the interest received under section 34 of the Act of 1894 would be “interest” within the meaning of such expression as envisaged under section 145A of the I.T. Act and would be deemed to be the income of the year under consideration, chargeable to tax as income from other sources under section 56 of the I.T. Act.

10. In the facts of the present case, it is an admitted position that the interest on which the tax is sought to be deducted at source under section 194A of the Act is interest under section 28 of the Act of 1894 and not under section 34 thereof. As noted hereinabove, the petitioner’s application for a certificate under section 197 of the I.T. Act for no deduction of tax at source has been rejected on the ground that the interest amount received under section 28 of the Act of 1894 is taxable as per the provisions of section 57(iv) read with section 56(2)(viii) and section 145A(b) of the I.T. Act. Section 145A of the I.T. bears the heading “Method of accounting in certain cases”. Section 145A(b) provides that notwithstanding anything to the contrary contained in section 145, interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Clause (viii) of sub-section (2) of section 56 of the I.T. Act provides for income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A which is chargeable as income from other sources. The first respondent Income Tax Officer seeks to tax the interest received by the petitioner under section 28 of the Act of 1894 as income from other sources under section 56(2)(viii) read with section 145A(b) of the I.T. Act. In the opinion of this court, in the light of the law laid down by the Supreme Court in the case of Ghanshyam (HUF) (supra), the interest received under section 28 of the Act of 1894 would not fall within the ambit of the expression “interest” as envisaged under section 145A(b) of the I.T. Act, inasmuch as, the Supreme Court in the above decision has held that interest under section 28 of the Act of 1894 is not in the nature of interest but is an accretion to the compensation and, therefore, forms part of the compensation. At this stage it may be apt to quote the following part of the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra):

Thus, it is clear that the Supreme Court after considering the scheme of section 45(5) of the I.T. Act has categorically held that payment made under section 28 of the Act of 1894 is enhanced compensation, as a necessary corollary, therefore, the contention that payment made under section 28 of the Act of 1894 is interest as envisaged under section 145A of the I.T. Act and has to be treated as income from other sources, deserves to be rejected.

11. It has been vehemently contended on behalf of the first respondent that the above decision has been rendered prior to the substitution of section 145A of the I.T. Act by Finance (No. 2) Act, 2009 with effect from 1st April, 2010, and hence, would have no applicability to the facts of the present case. The scope and effect of the substitution (with effect from 1st April, 2010) of section 145A, as also amendment made in section 56(2) by Act 33 of 2009 have been elaborated in the following portion of the departmental circular No. 5/2010, dated 3.6.2010, as follows:

“Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation.-

Thus, the substitution of section 145A by Finance (No. 2) Act, 2009 was not in connection with the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) but was brought in to mitigate the hardship caused to the assessee on account of the decision of the Supreme Court in Rama Bai v. CIT [1990] 181 ITR 400  whereby it was held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. Therefore, when one reads the words “interest received on compensation or enhanced compensation” in section 145A of the I.T. Act, the same have to be construed in the manner interpreted by the Supreme Court in Ghanshyam (HUF)’s case (supra).

12. On behalf of the first respondent, reliance has been placed upon decisions of different High Courts taking a different view. This court is not in agreement with the view adopted by the other High Courts which are not consistent with the law laid down in the case of Ghanshyam (HUF) (supra). In Manjet Singh (HUF) Karta Manjeet Singh’s case (supra), the Punjab and Haryana High Court has chosen to place reliance upon various decisions of the Supreme Court rendered during the period 1964 to 1997 and has chosen to brush aside the subsequent decision of the Supreme Court in Ghanshyam (HUF)’scase (supra) which is directly on the issue by observing that the assessee cannot derive any benefit from the observations made by the Supreme Court as quoted therein. In Hari Kishan’s case (supra), the Punjab and Haryana High Court has placed reliance upon its earlier decision in the case of Manjet Singh (HUF) Karta Manjeet Singh (supra). In Bir Singh (HUF)’s case (supra), the Punjab and Haryana High Court has held that under the scheme of the 1894 Act, interest under section 34 is part of compensation while interest under section 28 is not the interest which partakes the character of compensation and is treated differently. In the opinion of this court, the above view of the Punjab and Haryana High Court is contrary to what has been held in the decision of the Supreme Court in Ghanshyam (HUF)’s case (supra) wherein it has been held that interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. This court is in agreement with the view adopted by the Punjab and Haryana High Court in Jagmal Singh’s case (supra), which has been extensively referred to in paragraph 4.1 above. The decision of the Delhi High Court in Sharda Kochhar’s case (supra), having been rendered in the context of a different controversy would have no applicability to the facts of the present case.

13. The upshot of the above discussion is that since interest under section 28 of the Act of 1894, partakes the character of compensation, it does not fall within the ambit of the expression “interest” as contemplated in section 145A of the I.T. Act. The first respondent – Income Tax Officer was, therefore, not justified in refusing to grant a certificate under section 197 of the I.T. Act to the petitioner for non-deduction of tax at source, inasmuch as, the petitioner is not liable to pay any tax under the head “income from other sources” on the interest paid to it under section 28 of the Act of 1894.

14. The petitioner had earlier challenged the communication dated 9th February, 2015 whereby its application for a certificate under section 197 of the I.T. Act had been rejected, and subsequently, tax on the interest payable under section 28 of the Act of 1894 has already been deducted at source. Consequently, the challenge to the above communication has become infructuous and hence, the prayer clause came to be modified. However, since the amount paid under section 28 of the Act of 1894 forms part of the compensation and not interest, the second respondent was not justified in deducting tax at source under section 194A of the I.T. Act in respect of such amount. The petitioner is, therefore, entitled to refund of the amount wrongly deducted under section 194A of the I.T. Act.

15. For the foregoing reasons, the petition succeeds and is accordingly allowed. The second respondent having wrongly deducted an amount of Rs. 2,07,416/- by way of tax deducted at source out of the amount of Rs. 20,74,157/- payable to the petitioner under section 28 of the Act of 1894 and having deposited the same with the income-tax authorities, taking a cue from the decision of the Punjab and Haryana High Court in Jagmal Singh’s case (supra), the first respondent is directed to forthwith deposit such amount with the Reference Court, which shall thereafter disburse such amount to the petitioner herein. Rule is made absolute accordingly with costs.