Section 10(37) Income Tax – Exemption on Transfer of Agricultural Land : Compensation received on compulsory acquisition

By | March 17, 2017
(Last Updated On: June 15, 2018)

Section 10(37) Income Tax Act

[ Section 10(37) Income Tax inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005 ]

Exemption of capital gains on compensation received on compulsory acquisition of agricultural land situated within specified urban limits

Relevant Section 10(37) Income Tax Act

Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included

….

(37)        in the case of an assessee, being an individual or a Hindu undivided family, any income chargeable under the head “Capital gains” arising from the transfer of agricultural land, where

(i)           such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2;

(ii)          such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his;

(iii)         such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India;

(iv)         such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004.

Explanation.—For the purposes of this clause, the expression “compensation or consideration” includes the compensation or con-sideration enhanced or further enhanced by any court, Tribunal or other authority;

Commentary on Section 10(37) of Income Tax Act

 Section 45 provides for taxation of capital gains arising from transfer of agricultural land situated within specified urban limits.

With a view to mitigate the hardship faced by the farmers on account of taxation of gains arising from such transfer, section 10(37) has been inserted with effect from assessment year 2005-06 to exempt such capital gains if the following conditions are satisfied:

♦             the gains arise to an individual or a Hindu undivided family;

♦             the gains arise from transfer of land situated in an area referred to in section 2(14)(iii)(a)/2(14)(iii)(b);

♦             the transfer is by way of compulsory acquisition or it is such that the consideration is determined or approved by the Central Government or the Reserve Bank of India (‘RBI’);

♦             the compensation or the consideration is received on or after 1-4-2004;

♦             the land was being used for agricultural purposes during the preceding two years by such individual or his parent or by such Hindu undivided family.

The exemption also applies to the compensation or consideration enhanced or further enhanced by any Court, tribunal or other authority

 Specified urban area – Specified urban areas referred to in section 2(14)(iii)(a)/(b) are:

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand  according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

(b) in any area within the distance, measured aerially,—

 (I)  not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.

Explanation.—For the purposes of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

Agricultural land and use for agricultural purposes – The term agricultural land is not defined in the Act. In CWT v. Court of Wards [1976] 105 ITR 133 (SC), it was held that for constituting agricultural land what is required to be shown is the connection with an agricultural purpose and user, that is, actual condition of the land and intended user and not mere potential use of the land. However  section 10(37)  specifically requires that agricultural land ‘was being used’ for agricultural purposes during the period of two years immediately preceding the date of transfer.

The phrase ‘was being used’ indicates that the land is required to be actually used for agricultural purposes and it would not include mere intended use. A similar term was examined by the Supreme Court in Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of Andhra Pradesh [2001] 247 ITR 36  in the context of section 3 of Andhra Pradesh Non-Agricultural Lands Assessment Act, 1963. Section 3 of the said Act provided for levy of tax on land which is used for any industrial/non-agricultural purposes. The Supreme Court held that the phrase ‘is used’ includes only land which is actually in use for industrial purpose and it will not include land meant to be used or set apart for being used for industrial/non-agricultural purposes

Case Laws on Section 10(37) Income Tax Act

Section 10(37) not available if agricultural activity not carried out

No Taxability of compensation received by land owners under RFCTLARR Act : CBDT Circular Clarify

Compulsory Acquisition Taxability

Income Tax on sale of agriculture land : Analysis

Compensation received taxable in the year of receipt

Related Books on Income Tax Act

Section 10(37) Income Tax

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