DTC and compulsory acquisition

The Draft Land Acquisition and Resettlement and Rehabilitation Bill (LARR Bill), if signed into law, could test and challenge the taxman like never before unless he writes in a futuristic law. Both the extant law and the Direct Taxes Code Bill, 2010 (the DTC) in the anvil are caught in a time warp. Both envisage postponement of the denouement till the actual compensation is received in case of compulsory acquisition under any law.

That is unlike in case of a voluntary transfer where tax liability arises in the very same previous year which the transfer was made no matter the consideration has been received or not. In the case of compulsory acquisition, the tax liability is postponed to the previous year when the actual compensation or the enhanced compensation is received. This perhaps is to assuage the feelings of the victims of compulsory acquisition. It is true that there shouldn't be a double whammy for them. Already their feathers have been ruffled by the act of intrusive compulsory acquisition. LARR Bill supplies new imponderables for the taxman to mull.

Annuities

The LAAR Bill contemplates annuities at the rate of Rs 3,000 a month for the first year and at the rate of Rs 2,000 a month for 20 years thereafter. What is the tax treatment of annuities? The law is well-settled that one must distinguish an annuity from annual instalment. While an annual instalment is doubtless a capital receipt, annuity is a revenue receipt and hence taxable as one's regular income.

Can the seller say that nomenclatures do not matter and what is called an annuity is indeed an annual instalment and hence should be exigible to capital gains tax rather than to normal tax. The reason why he is going to press this argument is on long term capital gains, there are rollover benefits which are going to be continued even under the DTC regime, thus giving one the elbow room to avoid tax if he is inclined to invest in the prescribed avenues.

Experience tells that people do like to invest especially if the lock-in period is agreeable and not very long rather than pay a tax that goes down the drain as far as he is concerned. And the taxman is likely to cling to the nomenclature with alacrity and pummel the seller with a tax on the entire annuity at the normal rates. A private builder acquiring more than 100 acres would be governed by the LARR and he has to be prepared for all these hypothetical questions head on.

TDS concerns

The issue is not only that of taxability but also of deduction of tax at source. The acquirer has to deduct a 10 per cent ad hoc tax from each payment in excess of Rs 1 lakh only if it is compensation or enhanced compensation for the immovable property acquired under any law compulsorily, and not on annuities. Any ambiguity on the nature of the payment would also then impinge on the TDS regime.

House for house which the LARR envisages could further complicate the matters. Will the house and the land on which the house stood at the time of compulsory acquisition be viewed as one or as separate properties while subjecting the compensation package to tax? Further, who would put a value on the house given in lieu of the house one is dispossessed of?

To be sure, the LARR Bill is at present only in its draft form and might be revised but its contours are going remain substantially the same. While for the harried property owner whose property is compulsorily acquired what matters is the amount of compensation and how soon it is paid, for the taxman , the nomenclature also matters. In the event, the question whether annual instalment is given the colour of annuity becomes a relevant issue in tax matters and not a mere pedantic exercise.

It must also be ensured that the tax deducted at source is refunded if no tax is warranted. As it is, one has to apply for refund if tax has been paid in excess either by way of a return or an application for refund. An unlettered person should not be allowed to stew in his own juice on the ground that ignorance of law is no excuse and he ought to have claimed the refund and the state will not come forward to grant refund unilaterally.

Many itinerant and unlettered workers are enriching the State by not being able to get their provident fund dues strewn across places. The problem is there is no unique digital account for each provident fund subscriber with the system adopted by the Employees' Provident Fund organisation being antiquated. Similar undue enrichment of the government must not take place this time round when in future more and more properties are acquired for industrialisation or urbanisation or both.

The Draft Land Acquisition and Resettlement and Rehabilitation Bill bristles with sticklish issues for the taxman

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