No income tax is payable on compensation on land acquired under NHAI Act 1956

Exemption from income tax provided by RFCTLARR Act is also applicable to the compensation for land acquired under the National Highways Act 1956

In a recent judgment, Hon’ble High Court has held that RFCTLARR Act providing for exemption from income tax, stamp duty and fees would also be applicable to the compensation received for land acquired under the National Highways Act, 1956

ABCAUS Case Law Citation:
4825 (2025) (11) abcaus.in HC

In the instant case, the appellant assessee had challenged the order passed by the Income Tax Appellate Tribunal (ITAT/Tribunal) upholding the addition towards compensation received against the acquisition of land by National Highway Authority of India under the National Highways Act, 1956 treating it taxable.

The assessee had received compensation on account of compulsory acquisition of his agricultural land from NHAI under the National Highways Act, 1956 (the Act of 1956).  The assessee filed his return of income for the relevant assessment year showing the compensation to be taxable income under the head of Short Term Capital Gains.

The said return was processed by the Central Processing Centre (CPC), Bengaluru accepting the income returned and intimation order under Section 143(1)(a) was issued.

However, thereafter, the assessee realised that the agricultural land having been acquired under the Act of 1956, the compensation so paid was liable to be exempted from payment of income tax in light of Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (the RFCTLARR Act).

The assessee moved a rectification application u/s 154 before the Income Tax Officer and sought refund of tax paid.  The rectification application was rejected by the Assessing Officer on 24-1-2024 holding that (i) the issue relating to taxability of compensation cannot be rectified as it does not constitute mistake apparent on the face of record; and (ii) the land had been acquired by the NHAI under the Act of 1956 and the Act of 1956 being falling under the list of enactments specified in the Fourth Schedule, the same would be precluded from the RFCTLARR Act.

The CIT(A) dismissed the appeal of the assessee relying upon the decision of the ITAT. The Tribunal also dismissed the appeal of the assessee.

The Hon’ble High Court noted that order dated 28th August, 2015 issued by the Ministry of Rural Development shows that the Central Government had intended to ensure that the land owners who lost the lands not only under the RFCTLARR Act, but also under the enactments specified in the Fourth Schedule should have a uniform determination of compensation and the beneficial compensation under the RFCTLARR Act and thus made them applicable to all the enactments.

The Hon’ble High Court opined that in view of the said order, the basic objective behind the issuance of the 2015 order was to ensure that even in cases of land acquisition specified under the Fourth Schedule, which had made the provisions of the RFCTLARR act inapplicable, were nevertheless, brought within the purview of the RFCTLARR Act insofar as it related to determination of compensation, rehabilitation and resettlement. 

The Hon’ble High Court observed that Hon’ble Supreme Court had held that the benefits available to the landowners under the RFCTLARR Act are to be also available to similarly placed landowners whose lands are acquired under the 13 enactments specified in the Fourth Schedule including the Act of 1956 and further held that all aspects contained in Sections 26 to 28 of the RFCTLARR Act for determination of compensation will also be applicable notwithstanding Sections 3-J and 3-G(7)(a) of the Act of 1956.

In view of the above, the Hon’ble High Court held that once compensation is determined under the provisions of the RFCTLARR Act, as a necessary corollary, the benefits flowing from the provisions of the said Act, including exemptions from income tax, stamp duty and fees contemplated under Section 96 of the RFCTLARR Act, would also have to be made applicable.  Otherwise, the land-losers under the enactments specified in the Fourth Schedule are subjected to discrimination and this would be against the intent of the Union of India in issuing the 2015 Order and it would be contrary to the principles of law laid down by the Supreme Court.

Consequently, the substantial question of law was answered in favour of the assessee and against the Revenue and it was held that the compensation received against acquisition of land from the NHAI is not exigible to tax under Section 96 of the RFCTLARR Act.

Accordingly, the Assessing Officer was directed to pass consequential order in light of the substantial question of law answered.

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