Bombay High Court Bars TDS Deduction on Highway Land Compensation Awards

In a significant ruling protecting the rights of landowners, the Bombay High Court has held that no Tax Deducted at Source (TDS) can be imposed on compensation awarded under Section 3G(5) of the National Highways Act, 1956. The Aurangabad Bench clarified that compensation granted through arbitral awards for land acquisition is fully exempt from income tax under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.

Justice Arun R. Pedneker observed that forcing farmers and landowners to first suffer TDS deductions and later seek refunds from tax authorities would defeat the welfare objective of the 2013 land acquisition law. The Court stressed that the legislation was enacted to ensure fair compensation and rehabilitation for affected families, not to burden them with additional procedural hurdles.

The dispute arose after executing courts directed a 10% TDS deduction while releasing compensation amounts awarded to landowners whose agricultural lands were acquired for national highway expansion projects. The petitioners challenged these directions, arguing that such deductions were contrary to the statutory exemption under Section 96 of the 2013 Act.

The Court agreed, holding that once compensation is crystallised through an arbitral award, it assumes the character of a “judgment debt” and must be paid in full without deductions. The Bench also relied on earlier judicial precedents and CBDT Circular No. 36/2016, which clarified that compensation under the 2013 Act is exempt from income tax. Consequently, the High Court quashed the impugned orders and directed authorities to redeposit any deducted TDS amounts within four weeks.