CBDT circular on Taxability of compensation received on compulsory acquisition of Agricultural land

With the help of Circular No. 36/2016, The Ministry of Finance has cleared all the doubts and clarified that receipt of compensation in case of compulsory acquisition of agricultural land is exempt from tax under Income Tax Act, 1961, Rehabilitation and Resettlement Act, 2013 and Right to Fair Compensation and Transparency in Land Acquisition.

Compulsory acquisition of agricultural land -exempt from Income Tax

The Right to Fair Compensation and Transparency in Land Acquisition Act exempts all the acquisitions except for the acquisition as provided u/s 46 of the Act from the imposition of Income Tax.

The confusion that was there under the current provisions of the Income Tax Act is that the agricultural land is not considered a capital asset provided it is not located in the specified urban areas. Hence, capital gains tax on the sale of agricultural land that is located in specified areas and the non-agricultural land which is situated anywhere were demanded to be even when in the case of a compulsory acquisition under the Right to Fair Compensation and Transparency in Land Acquisition Act.

Amendment of Finance Act, 2004:

The Finance (No.2) Act, 2004 introduced Section 10 (37) in existing Act for providing a specific exemption to capital gains which arise to the individual or the HUF in the case of compulsory acquisition of their agricultural land located in the specified urban limit, provided fulfillment of some conditions.

(37) in the case of any assessee who is an HUF or an individual, any income which is chargeable under the head Capital gains arises from the sale of agricultural land, where-

1. such agricultural land is located in any area as referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2;
2. such agricultural land, during the period of 2 years immediately preceding the date of sale, was used for purpose of agricultural by such HUF or individual or his parents;

iii. such transfer should be through compulsory acquisition as per any law, or should be for consideration approved or determined by the Reserve Bank of India or Central Government;

2004. such income should have raised from the consideration or compensation for such transfer has been received by the assessee on or after the 1st day of April 2004.

Right to Fair Compensation and Transparency in Land Acquisition Act

All the confusion began when the Right to Fair Compensation and Transparency in Land Acquisition Act came into force on January 1^st, 2014. The section 96 of the Act states that the income tax should not be imposed on any agreement or award which is made under this Act. Hence, the compensation which is received for compulsory acquisition of land as per Act is exempt from levy of Income tax.

Exception:
While the sec 96 of the Act permits exemption from the imposition of tax under the Income Tax Act, 1961, in the case of any agreement or any award made according to this Act, it also provides exceptions to transactions which are covered under section 46 of the Act.

1. Where a person not being a specified person buys land through private talks for an area which is equal to or more than the limits, as may be specified by the appropriate Government, bearing in mind the specific State circumstances and factors, for which payment of Resettlement and Rehabilitation Costs under the Act is needed, he needs to file the application notifying the District Collector about-
   1. the intent for purchasing;
   2. reasons for such purchase;
   3. particulars of the lands which is to be purchased
2. The Collector would be bound by his duty for referring the matter to Commissioner for the satisfaction of all the related provisions of this Act related to resettlement and rehabilitation.
3. Depending upon the Rehabilitation and Resettlement Scheme which is approved by the Commissioner according to the provisions of this Act, the Collector must pass the individual awards with Resettlement and Rehabilitation entitlements according to the provisions of this Act.
4. No change in use of land should be permitted if the resettlement and rehabilitation are not fulfilled within the total.
5. Any land purchase done by a person apart from the specified persons without fulfilling with the provisions as contained in the Rehabilitation and Resettlement Scheme would be void ab initio

The Issue- Distinction between acquisition of agricultural land and non agricultural land

Since there is no distinction between the compensation which is received for the compulsory acquisition of the agricultural land and non-agricultural land for providing exemption from income-tax under the Rehabilitation and Resettlement Act, the exemption which is provided under the section 96 of the Rehabilitation and Resettlement Act is much wider in scope as compared to the tax-exemption offered under the current provisions of the Income-tax Act. This lets to uncertainty with respect to the taxability of compensation which is received on the compulsory acquisition of land, particularly those related to the acquisition of the non-agricultural land.

The Solution

This matter was observed by the Board and is clarified that the compensation which is received as an award or agreement that was exempted from imposition of income-tax under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition Act should not be taxed under the Income-tax Act, even in case there are no specific provisions of exemption for compensation under the act.

The Bottom Line

The circular handed out by the Finance Ministry has certainly removed all the ambiguity to the question that the compensation is exempt regardless of the fact whether the land is categorized as an agricultural or non-agricultural land under the Income Tax Act, 1961 as well as Right to Fair Compensation and Transparency in Land Acquisition Act.

Related Read- Income from sale of agricultural land situated beyond the municipal limits cannot be taxed as business income