Compulsory Acquisition Compensation Under Mediation Agreement

Compulsory Acquisition Compensation Under Mediation Agreement Exempt From TDS Under Income Tax Act

Issue

Whether tax is liable to be deducted at source (TDS) under Section 194LA of the Income-tax Act, 1961 (or Section 393 of the Income-tax Act, 2025) on compensation amounts payable for the compulsory acquisition of land when disbursed under a formal Mediation Agreement, and whether Form 16A needs to be issued.

Facts

The case arose from legal disputes concerning the compensation amounts payable for the compulsory acquisition of immovable property (land).
To resolve these ongoing disputes, the involved parties mutually executed a formal Mediation Agreement.
The Mediation Agreement detailed the structural terms, amounts, and settlement layout for distributing the land acquisition compensation to the respective claimants.
During the disbursement process, an apprehension was explicitly raised regarding whether the paying authorities would deduct tax at source (TDS) on these amounts and consequently issue Form 16A.
The assessee contended that compensation originating from the compulsory acquisition of land is structurally exempt from TDS under the applicable provisions of the Income-tax Act.

Decision

Held, yes: The statutory compensation awarded specifically on account of the compulsory acquisition of land is not liable for any deduction of tax at source (TDS) under the Income-tax Act.
Held, yes: Consequently, all settlement payments due under the executed Mediation Agreement must be disbursed directly to the claimants in full, with a mandatory direction to the authorities to process them without any TDS [Para 23].

Key Takeaways

Preservation of Exemption Status: Resolving a land acquisition dispute through an alternative dispute resolution mechanism, like a Mediation Agreement, does not alter the underlying legal character of the payout; it remains tax/TDS-exempt compulsory acquisition compensation.
Redundancy of Form 16A: Because the transaction itself qualifies for zero TDS under the Act, the paying authorities are not required (or permitted) to deduct tax, thereby eliminating the need to generate or issue Form 16A.
Absolute Protection on Disbursals: Administrative or procedural apprehensions cannot override statutory exemptions; court-sanctioned mediation payouts for land acquisition must be paid out without withholding any tax.

HIGH COURT OF KARNATAKA

Karnataka Neeravari Nigam

Eranna^*

Suraj Govindaraj, J.

WRIT PETITION NO. 200229 OF 2023 (LA-RES)

APRIL 27, 2026

Sudarshan M., Adv. for the Petitioner. Shashikiran Shetty, AG, Malhar Rao, AAG, Smt. Maya T.R., HCGP and Manjunath Gunni, Adv. for the Respondent.

ORDER

1. The petitioner, Karnataka Niravari Nigam Limited who is the beneficiary of the acquisition, is before this Court seeking for the following reliefs:

Issue a writ of certiorari in the nature of quashing the impugned judgment and award dated 04.03.2021 passed in LACA No.727/2018 by the learned III Addl. District and Sessions Judge at Kalaburagi, Vide. Annexure-A, in the interest of justice and equity.

II)

If any other order/s deems fit by this Hon’ble Court, in the interest of justice and equity.

2. Having regard to the admitted position that the acquisition proceedings have remained pending for an inordinately long period of time, and further taking into consideration that the land losers have not received the compensation amounts within a reasonable or statutorily contemplated timeframe, this Court found it necessary to consider appropriate measures to ensure expeditious and effective resolution of the disputes. It is also of relevance that the land losers have been constrained to initiate proceedings for enforcement of the decrees passed against the beneficiary of the acquisition, which itself indicates the protracted nature of the litigation and the absence of finality.

3. This Court being conscious of the fact that continued pendency of such proceedings would result in manifest prejudice to all stakeholders. On the one hand, the land losers would be deprived of the immediate and beneficial enjoyment of the compensation amounts awarded to them, thereby defeating the very purpose of acquisition jurisprudence which mandates timely recompense for compulsory deprivation of property. On the other hand, the beneficiary of the acquisition, as well as the State Government, would be exposed to an everincreasing financial burden on account of the accrual of statutory interest, additional interest, and other consequential liabilities during the pendency of the proceedings.