The Dilution Dilemma: Income Tax Immunity In Land Acquisition

INTRODUCTION:

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (“RFCTLARR Act”) is a general law governing the compulsory acquisition of land for strategic, infrastructural public purposes.  Land acquisitions are also governed by other sector specific legislations such as Railways Act, 1989, National Highways Act, 1956 etc. Since acquisition of land deprives the public of their right over the land, just and fair compensation is determined in accordance with the provisions of relevant statutes and the same is duly provided by the Government to the affected landowners.

Land is subjected to various forms of taxation depending upon the nature, ownership, use etc. under the State laws as it falls under Entry 18 of List II¹, Constitution of India, 1950.  Entry 82 of the Union List² empowers the parliament to levy taxes on income other than agricultural income as the same falls within the exclusive domain of the State vide Entry 46 of List II³ of the Constitution of India. Accordingly, any income derived from the land other than agricultural income is subjected to income tax.

This article examines the income tax implications on compulsory acquisition of land under RFCTLARR Act and other sector specific legislations to which only certain provisions of RFCTLARR Act are applicable.

IS COMPULSORY ACQUISITION OF LAND A TRANSFER?

Land is considered as a “capital asset” under Section 2(22) of the Income Tax Act, 2025⁴ (“IT Act, 2025”) and any income derived from the land is subjected to income tax except for agricultural land. In terms of 2(109)(c) of the IT Act, 2025⁵, transfer includes compulsory acquisition of a capital asset under any law in force. Therefore, compulsory acquisition of land is considered as a transfer of capital asset under the IT Act, 2025. Transfer of capital asset is subjected to capital gains tax under Section 67 of the IT Act, 2025⁶.

The compensation received shall be subjected to capital gains tax in the year in which the compensation is received in terms of Section 67(12)(a) of the IT Act, 2025⁷. Capital gains are computed in accordance with Section 72 of the IT Act, 2025⁸after deducting the cost of acquisition and the cost of improvement.

If the compensation is enhanced by the Court/Tribunal/other relevant authority, the same shall be subjected to capital gains tax in the year in which it is received in terms of Section 67(12)(b) of the IT Act, 2025⁹. Further, under Section 67(12)(c) of the IT Act, 2025¹⁰ if the compensation is enhanced pursuant to an interim order, the said amount shall be subjected to tax in the year in which the final order is passed. For the purposes of computation of capital gains for enhanced compensation,  the cost of acquisition and the cost of improvement shall be considered  “nil” in terms of Section 67(13) of the IT Act, 2025.¹¹

THE STATUTORY MATRIX OF TAX IMMUNITY: SECTION 96 OF THE RFCTLARR ACT

Section 96 of the RFCTLARR Act provides for exemption from income tax and stamp duty on compensation received pursuant to any award or agreement except where the acquisition is undertaken by private persons under Section 46 of the Act. As there was no corresponding provisions under the Income Tax Act, 1961 (“IT Act, 1961”) the CBDT issued Circular No.36/2016 [F.NO.225/88/2016-ITA.II], dated 25-10-2016 clarifying that the compulsory acquisition of non-agricultural land shall not be subjected to income tax despite the absence of specific statutory provision in this regard under the IT Act, 1961.

Further, the IT Act, 2025 vide entry 38C of Schedule III which provides for “Income not to be included in total income of eligible persons” states that any income pursuant to award or agreement made under RFCTLARR Act on account of compulsory acquisition of land shall not form a part of total income. 

Accordingly, it is settled that compensation received under RFCTLARR Act is exempted from capital gains tax by virtue of Section 96 of RFCTLARR Act.

The legal conundrum begins with Section 105 of the RFCTLARR Act. Section 105 of the RFCTLARR Act states that the provisions of the said Act shall not apply to enactments regulating land acquisitions enumerated under Schedule IV. Schedule IV lists out 13 sector specific land acquisition enactments such as The National Highways Act, 1956, The Electricity Act, 2003, The Railways Act, 1989 etc.

However, in terms of sub-section 3 to Section 105, as amended by Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (Removal of Difficulties) Order, 2015 (28-08-2015), the provisions pertaining to determination of compensation, rehabilitation and resettlement owing to compulsory acquisition of land shall stand extended to sector specific legislations enumerated under Schedule IV.

Determining whether the tax immunity under Section 96 applies to lands acquired under the various statutes of Schedule IV hinges on two foundational questions:

• Does Section 96 of RFCTLARR Act qualify as a provision relating to determination of compensation?
• Whether the interpretation of Section 105(3) of the RFCTLARR Act be restricted to the compensation framework provided under Schedule I to sector specific legislations, effectively barring the extension of all other RFCTLARR Act provisions?

Section 96 is a beneficial provision which ensures fair compensation provided to the affected families, whose land has been acquired, is not reduced on account of liabilities under fiscal statutes. Since capital gains tax has a direct effect on the compensation determined, exemption provided under Section 96 must be construed as a provision relating to compensation.

In order to understand the interpretation of Section 105(3) of the RFCTLARR Act, it is pertinent to refer to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Removal of Difficulties) Order, 2015 which amended Section 105(3) of the RFCTLARR Act. The preamble of the Order states that the “Central Government considers it necessary to extend the benefits available to the landowners under the RFCTLARR Act to similarly placed land owners whose lands are acquired under the 13 enactments specified in the Fourth Schedule.” ¹²

On perusal of the above, it is evident that the intention was to extend all the beneficial provisions of the RFCTLARR Act to the similarly placed landowners under the 13 sectoral enactments specified in Schedule IV. Exemption from income tax being one such benefits shall apply to similarly placed landowners whose lands are acquired under any of the 13 enactments covered under Schedule IV.

The said position is strengthened by the decision of the Hon’ble High Court of Chhattisgarh in the case of Sanjay Kumar Baid v. CIT¹³, wherein the issue was whether Section 96 of RFCTLARR Act would be applicable to the land acquired under National Highways Act, 1956. The Hon’ble High Court held that once compensation is determined under RFCTLARR Act, the benefits of the said Act including Section 96 which provides for exemption from income tax and stamp duty shall be applicable. The Hon’ble High Court relied on the decision of the Hon’ble Supreme Court in the case  of NHAI v. P. Nagaraju¹⁴ wherein it was held that landowners whose lands are taken under the statutes listed in the Fourth Schedule must receive the same statutory benefits as those whose land is acquired directly under the RFCTLARR Act.

CONCLUSION:

The Hon’ble High Court of Chhattisgarh has clarified that capital gains tax is not liable to be paid on the compensation received upon acquisition of land under the RFCTLARR Act and the 13 sectoral enactments specified in Schedule IV of the said Act. This clearly demonstrates the legislative intent that where a transfer takes place by operation of law, rather than voluntary act of the taxpayer, the Government does not intend to subject such transactions to capital gains taxation. The underlying rationale is that the taxation of capital gains pre-supposes a voluntary realization or disposition of a capital asset by the assessee, which is absent in cases where the transfer occurs automatically by virtue of law.

A comparable principle is recognized in the context of transmission of capital assets upon the death of a person, where the transfer to legal heirs or successors does not attract capital gains tax. In such situations also, the transfer is not occasioned by the free will or commercial intent of the transferor, but occurs solely due to the operation of law.

Similarly, the same rationale equally applies to acquisitions made under other enactments to which provisions of RFCTLARR Act do not apply, as such transfers are similarly compulsory in character and arise by operation of law, without any volitional act on the part of the owner. Hence, the exemption from income tax must logically extend to acquisitions executed under local enactments, even where the provisions of the RFCTLARR Act do not explicitly apply."

This article has been authored by Rishab J, Associate Partner, Shivadass and Shivadass Law Chambers and co-authored by G.S. Shri Gayathri, Senior Associate, Shivadass and Shivadass Law Chambers.

Footnotes

1. Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents; transfer and alienation of agricultural land; land improvement and agricultural loans; colonization.

2. Taxes on income other than agricultural income.

3. Taxes on agricultural income.

4. Section 2(14) of the Income Tax Act, 1961.

5. Section 2(47) of the Income Tax Act, 1961.

6. Section 45 of the Income Tax Act, 1961.

7. Section 45(5)(a) of the Income Tax Act, 1961.

8. Section 48 of the Income Tax Act, 1961.

9. Section 45(5)(b) of the Income Tax Act, 1961.

10. Section 45(5)(c) of the Income Tax Act, 1961.

11. Explanation (i) to Section 45(5) of the Income Tax Act, 1961.

12. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Removal of Difficulties) Order, 2015

13. (2025) 480 ITR 259

14. (2022) 15 SCC 1

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.