ITAT Rules Compensation for Compulsory Land Acquisition Not Taxable

The Income Tax Appellate Tribunal (ITAT), Raipur Bench, has made a significant ruling that compensation received for the compulsory acquisition of land by the National Highways Authority of India (NHAI) is not liable to income tax. This decision is based on the exemption provided under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act, 2013.

The appellant, Raipur Realty Pvt. Ltd., is engaged in the real estate business and filed its return of income for the Assessment Year (AY) 2017-18, declaring NIL taxable income. During the relevant year, lands owned by the assessee located at Abhanpur, Bhatgaon, and Nimora were compulsorily acquired by the NHAI under the National Highways Act, 1956.

The appellant claimed that the capital gains arising from the acquisition amounting to ₹3.41 crore were exempt from tax under Section 10(37) of the Income Tax Act, read with Section 96 of the RFCTLARR Act, 2013. However, the Principal Commissioner of Income Tax (PCIT) invoked the revisionary powers under Section 263 of the Income Tax Act and held that the assessment order required reconsideration.

Pursuant to the directions issued under Section 263, the Assessing Officer (AO) passed a fresh order, making an addition of ₹65,04,107 by denying the exemption claimed by the appellant. The order of the AO was later affirmed by the Commissioner of Income Tax (Appeals) (CIT(A)).

Ravi Agrawal, the counsel for the appellant, contended that the compensation received for the compulsory acquisition of land by the NHAI is exempt from income tax under Section 96 of the RFCTLARR Act, 2013. It was also argued that a 2015 Central Government notification extended the beneficial provisions of the RFCTLARR Act to acquisitions under enactments listed in the Fourth Schedule, including the National Highways Act.

On the other hand, Priyanka Patel, the counsel for the Revenue, contended that the National Highways Act, 1956, is included in the Fourth Schedule of the RFCTLARR Act, and therefore, the provisions of the RFCTLARR Act do not fully apply to such acquisitions. It was further submitted that only provisions relating to the determination of compensation and rehabilitation apply, and the exemption under Section 96 does not extend to such cases.

The ITAT, comprising Partha Sarathi Chaudhury, Judicial Member, and Arun Khodpia, Accounting Member, observed that in a similar case, Sanjay Kumar Baid, Arihant Bearing & Mill Stores Vs. Income Tax Officer, 2025, the legal position was already clarified. The court held that the exemption provided under Section 96 of the RFCTLARR Act applies even to land acquisitions carried out under the National Highways Act.

The Tribunal noted that once compensation is determined under the RFCTLARR Act, the benefits flowing from the Act, including exemption from income tax, must also apply. Denial of such exemption would lead to discrimination between landowners whose lands are acquired under different statutes.

Accordingly, the Tribunal allowed the appeal of the appellant and directed the AO to pass a consequential order granting relief.