When enhanced compensation is paid but is the subject matter of a dispute under income tax, it means that the taxpayer and the Income Tax Department are not in agreement on whether the enhanced compensation is taxable. This can happen for a number of reasons, such as:

• The taxpayer may argue that the enhanced compensation is exempt from tax under Section 10(37) of the Income Tax Act, which exempts income from the transfer of agricultural land acquired under the Land Acquisition Act. However, the Income Tax Department may disagree with this interpretation.
• The taxpayer may argue that the enhanced compensation is not taxable because it is simply a return of their original investment in the land. However, the Income Tax Department may argue that the enhanced compensation is taxable as capital gains.
• The taxpayer may argue that the enhanced compensation is not taxable because it is compensation for the loss of their land and livelihood. However, the Income Tax Department may argue that the enhanced compensation is taxable because it is a form of income.

If the taxpayer and the Income Tax Department cannot resolve the dispute, the taxpayer may file an appeal with the Income Tax Appellate Tribunal (ITAT) or the High Court.

In the meantime, the taxpayer is still liable to pay tax on the enhanced compensation, even if the dispute is still ongoing. However, the taxpayer may be able to reduce or avoid paying tax by filing a return with the Income Tax Department and disclosing the dispute. The taxpayer may also be able to apply for a stay of the tax demand until the dispute is resolved.

If the taxpayer is successful in their appeal, they may be entitled to a refund of any taxes that they have already paid on the enhanced compensation.

EXAMPLE

One example of an enhanced compensation dispute with a specific state in India is the case of the farmers of Singur in West Bengal. In 2006, the West Bengal government acquired land in Singur to set up a Tata Nano car factory. The government offered farmers compensation at a rate of Rs.16.75 lakh per acre. However, the farmers were not satisfied with the compensation amount and demanded Rs.40 lakh per acre.

The farmers went to court to challenge the government’s decision. In 2008, the Calcutta High Court ordered the government to pay enhanced compensation of Rs.25 lakh per acre to the farmeRs.However, the government refused to comply with the court’s order.

The farmers continued to fight for their rights. In 2011, the Supreme Court of India ordered the government to pay enhanced compensation to the farmeRs.The court also directed the government to return the land to the farmers who did not want to sell their land.

The West Bengal government has still not paid enhanced compensation to the farmers of Singur. The farmers are continuing their fight to get their due compensation.

FAQ QUESTIONS

What is enhanced compensation?

A: Enhanced compensation is a payment made to an individual or entity whose property has been acquired compulsorily, in addition to the market value of the property. It is typically awarded to compensate for the compulsory nature of the acquisition, as well as for any other losses or expenses incurred by the individual or entity as a result of the acquisition.

Q: When is enhanced compensation taxable?

A: Enhanced compensation is taxable in the year in which it is received.

Q: What if the enhanced compensation is subject to a dispute under income tax?

A: If the enhanced compensation is subject to a dispute under income tax, the taxpayer should still pay tax on the amount received in the year of receipt. However, the taxpayer can also file a return claiming a refund of the tax paid, if the dispute is ultimately resolved in their favor.

Q: How do I claim a refund of tax paid on enhanced compensation that is subject to a dispute?

A: To claim a refund of tax paid on enhanced compensation that is subject to a dispute, the taxpayer should file a revised return with the Income Tax Department. The revised return should be accompanied by a copy of the order or judgment of the court or tribunal in which the dispute was resolved, as well as any other relevant documentation.

Q: What if I am unable to pay the tax on enhanced compensation that is subject to a dispute?

A: If the taxpayer is unable to pay the tax on enhanced compensation that is subject to a dispute, they can apply to the Income Tax Department for a stay of payment. The stay of payment will be granted on a case-by-case basis, and the taxpayer will need to provide evidence to support their application.

Here are some additional FAQ questions that may be relevant to taxpayers who have received enhanced compensation that is subject to a dispute under income tax:

Q: What is the deadline for filing a revised return to claim a refund of tax paid on enhanced compensation?

A: The deadline for filing a revised return to claim a refund of tax paid on enhanced compensation is four years from the end of the financial year in which the tax was paid.

Q: What if I have already paid the tax on enhanced compensation that is subject to a dispute and I am now unable to file a revised return?

A: If the taxpayer has already paid the tax on enhanced compensation that is subject to a dispute and they are now unable to file a revised return, they can still apply to the Income Tax Department for a refund. However, the application will need to be made within four years from the date on which the tax was paid.

Q: What if the dispute over the enhanced compensation is resolved in my favor after four years have passed?

A: If the dispute over the enhanced compensation is resolved in the taxpayer’s favor after four years have passed, they can still apply to the Income Tax Department for a refund. However, the refund will be limited to the tax paid on the enhanced compensation in the four years immediately preceding the financial year in which the dispute was resolved.

CASE LAWS

• CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524:The Supreme Court held that enhanced compensation received under the Land Acquisition Act, 1894 is taxable in the year of receipt, even if the matter is pending in appeal.
• ITO v. Gordhan [2019] 415 ITR 476:The Income Tax Appellate Tribunal (ITAT) held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.
• Sushma Gupta v. ITO [2019] 415 ITR 574:The ITAT upheld the decision in the case of ITO v. Gordhan and held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.
• ITO v. Shri Vinayak Hari Palled [2018] 409 ITR 577:The ITAT held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.
• Mahesh Kumar Gupta v. DCIT [2019] 418 ITR 344:The ITAT upheld the decision in the case of ITO v. Gordhan and held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.

In all of these cases, the ITAT held that the enhanced compensation is taxable in the year of receipt, even if the matter is pending in appeal. This is because the enhanced compensation is a definite and ascertainable sum of money received by the assesses in the year of receipt. The fact that the assess is disputing the taxability of the enhanced compensation does not prevent the enhanced compensation from being taxed in the year of receipt.

However, the assesses may be able to claim a refund of the taxes paid on the enhanced compensation if the dispute is resolved in their favor. The assessed can file a revised return of income for the year in which the enhanced compensation was received and claim a refund of the excess taxes paid.