Karnataka High Court Upholds LARR Act 2013 Compensation and Income Tax Exemption for KIADB Land Acquisitions

Case Overview

Case Name: Bangalore Metro Rail Corporation Limited Vs Sri. Balaji Corporate Services (Karnataka High Court)

Appeal Numbers: Writ Appeal No. 890 of 2022 (LA-KIADB) C/W Writ Appeal No. 892 of 2022 (LA-KIADB) and Writ Appeal No. 1070 of 2022

Date of Order: 27/09/2023

Court: Karnataka High Court (Division Bench)

Background and Context

A Division Bench of the Karnataka High Court was called upon to adjudicate a cluster of writ appeals arising from a common order dated 21.04.2022 passed in W.P.No.43206/2018 c/w W.P.No.53718/2017 (LA-KIADB). At the heart of these proceedings lay two interlinked questions of significant legal consequence: first, whether land losers whose properties were compulsorily acquired under the Karnataka Industrial Areas Development Act, 1966 (KIAD Act) pursuant to notifications issued after 01.01.2014 were entitled to compensation computed under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (Act, 2013); and second, whether such compensation attracted exemption from income tax and deduction of tax at source.

The acquisitions in question formed part of the Bangalore Metro Rail Project – Phase II. The writ petitioners were owners of properties situated at Sadaramangala Village, Whitefield Main Road, Bengaluru (subject matter of W.A.No.890/2022) and at Hoodi Village, K.R. Puram, Bangalore East Taluk (subject matter of W.A.No.892/2022). The properties at Sadaramangala Village had been notified through Preliminary Notification dated 22.09.2015 and Final Notification dated 04.04.2016 under Section 28(1) and Section 28(4) of the KIAD Act in respect of property No.R1E-235, while property No.R1E-235A was the subject of Preliminary Notification dated 16.12.2017 and Final Notification dated 25.05.2018. General awards in respect of both properties were passed on 25.10.2018.

The properties at Hoodi Village, the subject of W.P.No.53718/2017, had been notified for acquisition for the Bangalore Metro Rail Project – Phase II through Preliminary Notification dated 27.04.2015 and Final Notification dated 29.12.2015 for property No.R1-171, and through Preliminary Notification dated 03.07.2017 and Final Notification dated 25.05.2017 for property No.R1E-171. In respect of those properties, no general award had been passed, but the KIADB had issued an Official Memorandum dated 06.07.2017 directing payment of compensation under the Land Acquisition Act, 1894 (Act, 1894).

Principal Grievances of the Assessee

The assessees — the landowners whose properties were acquired — advanced two core grievances before the writ court and subsequently before the Division Bench:

  • Quantum of Compensation: They contended that since the acquisition notifications were issued after 01.01.2014, the date on which the Act, 2013 came into force, compensation ought to have been determined under the Act, 2013 and not under the repealed Act, 1894. Applying the Act, 1894 to post-2014 acquisitions was characterised as illegal, arbitrary, and violative of Article 14 of the Constitution of India.

  • Tax Deduction at Source: The assessees further contended that compensation under the Act, 2013 enjoys a specific statutory exemption from income tax, and accordingly the deduction of tax at source from their compensation was impermissible. They relied upon Section 96 of the Act, 2013, Section 194-LA of the Income Tax Act, 1961, Section 10(37) of the Income Tax Act, 1961, and the CBDT Circular dated 25.10.2016.

Issues Framed for Adjudication

The learned Single Judge framed the following points for determination:

  1. Whether the writ petitions were maintainable given the availability of an alternate remedy of seeking enhancement of compensation before the Reference Court.
  2. Whether the assessees were entitled to compensation under the Act, 1894 or under the Act, 2013 in respect of lands acquired pursuant to preliminary notifications issued after 01.01.2014 under Section 28(1) of the KIAD Act.
  3. Whether the compensation payable was exempt from deduction of tax at source and from payment of income tax in view of Section 96 of the Act, 2013, Section 194-LA of the Income Tax Act, 1961 as amended by the Finance Act, 2017 with effect from 01.04.2017, and the CBDT Circular dated 25.10.2016.

The learned Single Judge answered all three points in favour of the assessees, quashed the impugned awards dated 25.10.2018, quashed the endorsement dated 19.09.2018 and the Official Memorandum dated 06.10.2017, directed refund of tax deducted at source along with applicable interest, declared that the assessees were entitled to compensation under the Act, 2013, and further declared that such compensation was exempt from income tax and from deduction of tax at source under the Income Tax Act, 1961. The acquiring authorities and BMRCL were directed to pass fresh or modified awards within three months.

Contentions of the Appellants

Position of BMRCL (W.A.No.890/2022 and W.A.No.892/2022)

BMRCL, arrayed as a respondent before the Single Judge, preferred these appeals raising several grounds. After filing a memo dated 03.07.2023, the appellants restricted their challenge to the following five propositions: