Karnataka High Court Rules: Interest Under Section 28 of Land Acquisition Act Constitutes Capital Receipt — TDS Not Applicable
Overview of the Dispute
A significant ruling has emerged from the Karnataka High Court in Defense Estate Officer Vs Sunanda W/O. Prabhakar Naik, decided on 20.08.2025 in Writ Petition No. 102884 of 2025 (GM-CPC), wherein the Court categorically held that interest awarded under Section 28 of the Land Acquisition Act, 1894 forms an integral part of the compensation amount and therefore qualifies as a capital receipt in the hands of the land loser. Consequently, no tax deduction at source is permissible on such interest.
The petition had been filed by the Defense Estate Officer, Karnataka and Goa Circle, challenging an order passed by the Execution Court dated 02.09.2022 in Execution Case No. 35/2020. The Execution Court had ruled that TDS was not required to be deducted from the amount payable to the land losers. The High Court upheld this finding and dismissed the writ petition.
Background and Factual Matrix
The case traces its origins to the compulsory acquisition of agricultural land admeasuring 1 acre 11 guntas situated at Kodar Village, Karwar Taluk, for the purpose of establishing the Naval Base Seabird Project. The acquisition process unfolded as follows:
- Preliminary notification: 19.09.1986
- Final notification: 09.03.1987
- Compensation award: 29.12.1988 — accepted by the landowners under protest
- A reference was thereafter sought and registered as LAC No. 250 of 1994
- After a gap of approximately 12 years, LAC No. 250 of 1994 was decided on 28.08.2006, resulting in enhancement of compensation under
Section 28of the Land Acquisition Act, 1894
Despite the passage of nearly four decades since the original acquisition, the enhanced compensation remained substantially unpaid. The landowners were compelled to initiate execution proceedings, registered as Execution Case No. 35 of 2020.
During the course of these proceedings, the Defense Estate Officer made partial payment on 26.12.2017, deducting ₹2,65,077 as TDS, and remitting only ₹10,93,852 as the balance.
The Execution Court's order dated 02.09.2022 held that since the land was agricultural in nature and the computation was governed by Section 28 and not Section 34 of the Land Acquisition Act, 1894, no deduction of tax at source was warranted. The Defense Estate Officer challenged this order before the Karnataka High Court.
Arguments Advanced by the Petitioner
The petitioner's counsel presented a multi-pronged argument in support of the TDS deduction:
Statutory Provisions Relied Upon
Section 56(2)(viii)of the Income-tax Act, 1961 — It was argued that income received by way of interest on compensation or enhanced compensation, as referred to underSection 145B(1), constitutes "income from other sources" chargeable to income tax under that head.Section 145Bof the Income-tax Act, 1961 — Interest received by any assessee on compensation or enhanced compensation is deemed to be income of the previous year in which it is received.Section 194-LAof the Income-tax Act, 1961 — The petitioner contended that the exemption from TDS underSection 194-LAapplies only to the compensation component and not to any interest element.