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Land acquisition - compensation - A fresh look at income tax exemption


NOVEMBER 25, 2022

By J B Mohapatra

jb_mohapatraLAND acquisition by specific government is legal and permissible under various statutes - Ancient Monuments and Archaeological Sites and Remains Act, 1958, Atomic Energy Act, 1962, Damodar Valley Corporation Act,1948, Indian Tramways Act, 1886, Land Acquisition (Mines) Act, 1885, Metro Railways (Construction of Works) Act, 1978, National Highways Act, 1956, Petroleum and Mineral Pipelines (Acquisition of Rights of User in Land) Act, 1962, Requisitioning and Acquisition of Immovable Property Act, 1952, Resettlement of Displaced Persons (Land Acquisition) Act, 1948, Coal Bearing Areas Acquisition and Development Act, 1957, Electricity Act, 2003, Railways Act, 1989 - for discharging specific mandate laid under those statutes. A further slew of objects under section 2 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLAAR Act)- from strategic, to infrastructure, industrial corridors, manufacturing zones, residential housing for rural and urban poor, under education research schemes, for sports, healthcare, tourism, transportation, for project affected families etc- also empowers the appropriate government to acquire land for its use, to hold and to have control over such land against payment of fair compensation, and planned program of rehabilitation and resettlement. Compensation is 4 times of market value of land in rural areas and 2 times of market value of land in urban areas. Since provisions of RFCTLAAR Act, 2013 relating to determination of compensation has been extended to land acquisition under various other legislations in Fourth Schedule of RFCTLAAR Act, 2013 (National Highway Act for example) under gazette order dated 28-8-15 of Ministry of Rural Development ( RFCTLAAR (Removal of Difficulties) Order, 2015), it presupposes that any acquisition by appropriate government for specified statutory purpose would entail determination and payment of compensation in accordance with the First Schedule of RFCTLAAR Act.

This compensation furthermore is exempt from income tax, stamp duty and fees in terms of section 96 of RFCTLAAR Act, which reads as follows:

"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 46 and no person claiming under any such award or agreement shall be liable to pay any fee for a copy of the same."

CBDT in Circular no 36/2016 dated 25-10-16 following up on section 96 of RFCTLAAR Act has clarified its position as follows:

"2. The RFCTLARR Act which came into effect from 1st January, 2014, in section 96 inter alia provides that income-tax shall not be levied on any award or agreement made (except those made under section 46 under the RFCTLARR Act. Therefore, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of RFCTLARR Act), is exempted from the levy of income-tax.

3. As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax under the RFCTLARR Act, the exemption provided under section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under the existing provisions of Income Tax Act 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of Income Tax Act 1961 even if there is no specific provision of exemption for such compensation in the Income tax Act 1961 ."

Sum and substance of CBDT Circular is that income tax exemption on compensation received under RFCTLAAR Act is available in respect of both agricultural and non-agricultural land including such parcels of urban land within the meaning of section 2(14)(iii) items (a) and (b) of the Income Tax Act.

Who is entitled to compensation on compulsory acquisition of land under RFCTLAAR Act stands defined in section 3(x) of the said Act under 'person interested" as follows:

"(x) - person interested means-

(i) all persons claiming an interest in compensation to be made on account of the acquisition of land under this Act;

(ii) the Scheduled Tribes and other traditional forest dwellers, who have lost any forest rights recognised under the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 (2 of 2007);

(iii) a person interested in an easement affecting the land;

(iv) persons having tenancy rights under the relevant State laws including share-croppers by whatever name they may be called; and

(v) any person whose primary source of livelihood is likely to be adversely affected ; "

By implication 'person interested' would include 'land owner' as defined in section 3(r) of that Act to mean any person ' whose name is recorded as the owner of the land or building or part thereof in the records of the authority concerned' .

Conversely there is no reference to 'person interested' in the preamble to RFCTLAAR Act laying down the reasons and objects behind the new legislation, and reads as follows:

"An Act to ensure, in consultation with institutions of local self-government and Gram Sabhas established under the Constitution, a humane, participative, informed and transparent process for land acquisition for industrialisation, development of essential infrastructural facilities and urbanisation with the least disturbance to the owners of the land and other affected families and provide just and fair compensation to the affected families whose land has been acquired or proposed to be acquired or are affected by such acquisition and make adequate provisions for such affected persons for their rehabilitation and resettlement and for ensuring that the cumulative outcome of compulsory acquisition should be that affected persons become partners in development leading to an improvement in their post -acquisition social and economic status and for matters connected therewith or incidental thereto."

Of the 4 components in RFCTLAAR Act- acquisition, compensation, rehabilitation and resettlement - compensation subsequent to acquisition and to whom it is paid assume greater significance, since nothing in the present law differentiates the cases of speculative or investment driven purchases of land prior to issuance of preliminary notification under section 11 of RFCTLAAR Act, nor proscribes payment of compensation in those cases. Also, in view of pre-determined statutory steps in RFCTLAAR Act in the pre-notification stages- from receipt of proposal by the appropriate government to conduction of social impact assessment, approval by the state authority committee or delegated committee for approving legitimacy of public purpose, examination by independent expert group of the social impact assessment report, collector's report on status of alternative sites, and obtaining consent of the affected people- being long and arduous, anyone in an informational advantageous position and willing to leverage that position for commercial gain is not legally hamstrung from trading or tipping or transacting on that information, often leading to frantic strategic transactions and an overheated market prior to issuance of preliminary notification under section 11 of RFCTLAAR Act. Even otherwise, concept of insider trading in property dealing is alien to proceedings under IPC as held by Supreme Court in its order dated 19-7-21 in the case of State of Andhra Pradesh vs Chakka Guru Murali Mohan, and anyone even in a fiduciary position qua the price sensitive unpublished information relating to acquisition proposals would have valid legal points to contest any charges of criminality in dealing with such information, if the overall-facts otherwise support his case.

Leaving aside the criminality angles in receiving and acting upon material and significant information relating to probable acquisition of land, the bigger question is prevalence of asymmetric information in land markets and to what length the law can countenance leveraging of those informational advantages for maximising tax-free private profits. Admittedly definition of 'affected family' in section 3(c),'holding of land' in section 3(n) and 'land owner' in section 3(r) in RFCTLAAR Act do not contain any minimum continuous holding period for entitlement of a 'person interested' to compensation for reasons of equity and ease in administering the statutory provisions, but clubbing all manner of compensation including those cases where ownership over notified land stood vested with a 'person interested' only a few years to few days prior to preliminary notification under section 11 of RFCTLAAR Act for extending exemption from income tax may well be advancing an unintended benefit to the category of property developers, investors and speculators, who are qualitatively distinguishable from the class of 'affected families' within the meaning of preamble/ objects clause of that legislation.

Finally, since all types of capital gains under the Income Tax Act for the purposes of determining their taxability and quantum of taxation are calibrated in accordance with a holding period depending on the nature of the underlying capital asset, it may be pragmatic from a market perspective to similarly configure exemption under section 96 of RFCTLAAR Act to a minimum holding period, say 3 to 5 years, prior to the preliminary notification under section11 of that Act. After all, disgorging due taxes on compensation for compulsory acquisition of land, where land has been ostensibly acquired for a quick tax-free gain, is not inequitous taking the larger legislative intent in focus.


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