RFCTLARR Act Compensation Exempt from Income Tax — Andhra Pradesh High Court Interprets Section 96 and Section 194LA

Case Overview

Case Name: Chalamala Narasa Reddy Vs Special Deputy Collector Lao Somasila Project
Court: Andhra Pradesh High Court
Appeal Number: Civil Revision Petition No: 448/2026
Date of Order: 07/08/2026

Background and Context

The Andhra Pradesh High Court, in a common order disposing of multiple Civil Revision Petitions raising an identical legal issue, examined whether compensation awarded under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) is liable to income tax deduction at source under Section 194LA of the Income-tax Act, 1961.

The petitioners were decree holders in Land Acquisition Original Petitions who had filed Execution Applications under Rules 231 to 235 of the Civil Rules of Practice, seeking transfer of awarded compensation amounts through the CFMS online system directly to their accounts. These applications were resisted by the Special Deputy Collector-cum-Land Acquisition Officer, Somasila Project, Unit-IV, Rajampet, who maintained that since the compensation in question related to structures, income tax was necessarily required to be deducted at source before any disbursement could be made.

The Dispute: Tax Deduction on Compensation for Structures

The core controversy revolved around whether compensation awarded for structures standing on agricultural land — acquired under the RFCTLARR Act — would attract TDS obligations under Section 194LA of the Income-tax Act, 1961.

The Special Deputy Collector contended that:

  • Section 194LA of the Income-tax Act mandates deduction of tax at source on compensation paid for compulsory acquisition of immovable property other than agricultural land
  • While agricultural land itself enjoys an exemption, structures erected upon agricultural land remain taxable
  • Reliance was placed on the Supreme Court's ruling in Union of India v. Hari Singh, (2018) 15 SCC 201 to support the proposition that such structures do not share the same exemption as the underlying agricultural land
  • Accordingly, the application for direct payment without tax deduction ought to be dismissed

The Executing Court's Order

The Principal Civil Judge (Senior Division), Rajampet, by order dated 29.12.2025, partly allowed the execution applications. However, rather than granting outright relief, the Executing Court directed that the petitioners retain the liberty to approach the competent income-tax authority and seek a certificate of lower or nil deduction under Section 197 of the Income-tax Act, 1961.

In arriving at this conclusion, the Executing Court drew support from:

  1. Nalini v. Deputy Collector, 2006 (4) KARLJ 87 — a Kerala High Court decision
  2. Union of India v. Hari Singh, (2018) 15 SCC 201 — the Supreme Court ruling

Dissatisfied with this partial relief, the petitioners challenged the order before the Andhra Pradesh High Court by way of Civil Revision Petitions.

Petitioners' Argument: CBDT Circular No. 36 of 2016

Before the High Court, the petitioners placed reliance on CBDT Circular No. 36 of 2016 dated 25.10.2016, which clarifies the tax treatment of compensation received by land owners when their land is acquired under the RFCTLARR Act.

The petitioners argued that under the scheme of the RFCTLARR Act, no tax whatsoever can be levied on any compensation covered by an award or agreement made under Section 96 of that Act. Since the payments at issue arose from awards made under the RFCTLARR Act, the income-tax exemption under Section 96 was squarely attracted, and consequently, TDS under Section 194LA could not be applied.

Statutory Framework Examined by the Court

The High Court undertook a careful examination of the relevant statutory provisions before arriving at its conclusions.

Section 96 of the RFCTLARR Act

The Court extracted the full text of Section 96, which reads as under:

"96. Exemption from income-tax, stamp duty and fees. — No income tax or stamp duty shall be levied on any award or agreement made under this Act, except under Section 46 and no person claiming under any such award or agreement shall be liable to pay any fee for a copy of the same."

This provision creates a broad statutory exemption covering all awards and agreements made under the RFCTLARR Act, with only one carved-out exception — awards or agreements made under Section 46 of the RFCTLARR Act.

Section 194LA of the Income-tax Act, 1961

The Court also reproduced Section 194LA in its entirety, which provides: