The meaning of compensation and enhanced compensation under section 194 to 206C of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of compensation and enhanced compensation.
Meaning of compensation and enhanced compensation defined by court
The phrase ‘compensation and enhanced compensation’ used in section 194 to 206C of the Income Tax Act came up before Hon’ble Kerala High Court in Infopark Kerala vs. ACIT 2009 tax lr 151 (Ker.) and it explained.
Meaning : The word ‘compensation’ must mean compensation which is given under an award passed by the appropriate collector and the words ‘enhanced compensation’ mean the enhanced compensation becoming payable under the award of the civil court or the high court or of the apex court or under section 28A of the land acquisition act, 1894.
Section 194 to 206C of Income Tax Act
194. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution
or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax 63[at the rate of ten per cent] :
Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—
(a) the dividend is paid by the company by any mode other than cash; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed five thousand rupees:
Provided further that the provisions of this section shall not apply to such income credited or paid to—
(a) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;
(b) the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;
(c) any other insurer in respect of any shares owned by it or in which it has full beneficial interest;
[(d) a “business trust”, as defined in clause (13A) of section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10;
(e) any other person as may be notified by the Central Government in the Official Gazette in this behalf.]
In this article, you can get guidance from high courts on the meaning of compensation and enhanced compensation under section 194 of the Income Tax Act.
Updated up to Finance Act 2021