Capital Gains & Interest on compensation received on Compulsory acquisition of urban agricultural land

Capital Gains & Interest on compensation received on Compulsory acquisition of urban agricultural land

Section 10(37) inserted by the Finance Act, 2004, with effect from 01.04.2005 (from assessment year 2005-06). Under Section 10(37) of the Income Tax Act, Capital Gains on compensation received on compulsory acquisition of urban agricultural land is exempt from tax.

Background

With a view to mitigate the hardship faced by the farmers whose agricultural land situated in specified urban limits has been compulsorily acquired, the Finance Act 2004 has inserted clause(37) in section 10 so as to exempt the capital gains arising to an individual or a Hindu undivided family from transfer of agricultural land by way of compulsory acquisition where the compensation or the enhanced compensation or consideration, is received on or after 01.04.2004.

Text of Section 10(37)

10(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 consideration enhanced or further enhanced by any court, Tribunal or other authority;

What is Compulsory acquisition

Compulsory acquisition is the power of government to acquire private rights in land without the willing consent of its owner or occupant in order to benefit society. This power is often necessary for social and economic development and the protection of the natural environment.

Urban agricultural land

Urban agricultural is a land located in specified location and used for agricultural purposes.

Specified location means the following:

(i)  Land in any area which is within the jurisdiction of a municipality or cantonment board and have a population upto 10,000; or

(ii) Land in any area within such distance, measured aerially, in relation to the range of population:

S. No.	Shortest Distance of agricultural land from Municipality or Cantonment Board to be measured aerially	Population of the Area
(i)	Upto 2 kilometres	Above 10,000 and upto 1,00,000
(ii)	Upto 6 kilometres	Above 1,00,000 and upto 10,00,000
(iii)	Upto 8 kilometres	Above 10,00,000

For the purpose of this sub-clause “population” is defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the financial year.

The distance from municipality is required to be measured aerially i.e. by crow’s flies and not by approach road.

Quantum of Exemption

Any capital gains (whether short-term or long-term) arising to an individual or a Hindu Undivided Family (HUF) from transfer of urban agricultural land by way of compulsory acquisition is exempt from tax if following conditions are satisfied:—

Essential Conditions for availing exemption under section 10(37)

Section 10(37) is applicable if the following conditions are satisfied. In other words, capital gains will be exempted if the following conditions are satisfied:—

(i) The agricultural land should belong to an individual or Hindu Undivided Family (HUF).

(ii) The capital gain arises from compensation or the enhanced compensation or consideration, as the case may be, should be received on or after 01.04.2004.

(iii)  He or it owns an agricultural land which is situated in area specified in sections 2(14)(iii)(a) and 2(14)(iii)(b) i.e. the land is situate in any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a distance of more than 8 KM, from the local limits; and the population of the village where the land situated exceed 10,000 as per latest census report..

(iv)  The agricultural land was used by the individual or his parents or in case of HUF by the HUF for agricultural purposes during the period of 2 years immediately prior to the date of transfer (compulsory acquisition).

(v) There is a transfer of the agricultural land by way of compulsory acquisition under any law or the consideration for transfer is  determined or approved by the Central Government (not by a State Government) or Reserve Bank of India.

(vi) Where the compulsory acquisition has taken place before 01.04.2004 but the compensation is received after 31.03.2014, it shall be exempt.

PROVISIONS ILLUSTRATED:

Mr. ‘A’ is an owner of land in Faridabad. Such land was being used for agricultural purpose from last 3 years. On 02.04.2019, his land was acquired by Central Government. Mr. ‘X’ had received compensation of  Rs. 50,00,000/- in respect of land on 01.07.2019.

SOLUTION:

Capital gains received due to compulsory acquisition of agricultural land is fully exempt from Income-tax under section 10(37) from assessment year 2005-06. Mr. ‘A’ fulfilled all conditions which are required under this section. Hence, the capital gain of Rs. 50,00,000/- is exempt from Income-tax under the head “Capital Gains”.

(vii) But if part of the original compensation in the above case has already been received before 01.04.2004, then exemption shall not be available even though balance original compensation is received after 31.03.2004.

(viii) However, enhanced compensation received on or after 01.04.2004 against agricultural land compulsorily acquired before 01.04.2004 shall be exempt.

If the above conditions satisfied, capital gain (short-term or long-term) is exempt from Income-tax from the assessment year 2005- 06.

Compulsory Acquisition of Urban Agricultural Land though Sale price fixed on negotiated settlement eligible for Tax Exemption

The assessee along with her husband, was in possession of 47.54 Ares of land in Vizhinjam village which was subsequently acquired by the Government for the Vizhinjam International Seaport. The same was sold by executing a sale deed in favour of Vizhinjam International Seaport for a total consideration of Rs.3,22,99,490, out of this the share of the assessee is Rs.1,61,49,745. Before the authorities, the assessee claimed that was agricultural land and was compulsorily acquired by the Government of Kerala and the assessee was entitled to the benefit of section 10(37) of the Income Tax Act.

The assessee’s 70 cents of land at Vizhinjam Village was notified for compulsory acquisition by Government of Kerala for developing Vizhinjam International Seaport. Though the acquisition proceedings were taken under the Land Acquisition Act, the final price was fixed upon negotiated sale agreement. The Assessing Officer has allowed the claim of the assessee for deduction under section 54B of the Income Tax Act (the Act). Section 54B of the Income Tax Act provides for a deduction on account of transfer of land used for agricultural purpose and for purchase of another agricultural land. Therefore, admittedly, when deduction has been granted under section 54B of the Act, the Assessing Officer also categorically admitted that the land sold was an agricultural land. The Assessing Officer, however, noticed that the land was within Trivandrum Municipal Corporation, and therefore, would be an urban agricultural land falling within the provisions of section 2(14)(iii) of the Act. The only reason for the Assessing Officer to deny the benefit of section 10(37) was that the impugned land was acquired by executing a sale deed in favour of Vizhinjam International Seaport and it was not a case of compulsory acquisition, but a sale through a negotiated settlement. The Hon’ble Apex Court in the case of Balakrishnan v. Union of India & Others (2017) 391 ITR 178 (SC) had categorically held merely because the sale price was fixed through a negotiated settlement, the character of acquisition would still remain compulsory.

In the instant case, the entire procedure prescribed under the Land Acquisition Act was followed, only price was fixed upon a negotiated settlement. Therefore, in view of the above judgment of the Hon’ble Apex Court (supra), we hold that the acquisition of the urban agricultural land was a compulsory acquisition and the same would be entitled to the benefit enumerated in section 10(37) of the Act. It is ordered accordingly. (Related Assessment Year : 2012-13) – [ITO v. Smt. Girijakumari M – Date of Judgement : 10.10.2018 (ITAT Cochin)]

Taxability of interest received by assessee on enhanced compensation awarded by Court, pursuant to compulsory acquisition of assessee’s agricultural land by Government

Interest received on enhanced compensation is taxable as Income from other sources as per section Section 57(iv) read with 56(2)(viii). However, compensation amount received by any assessee, in case of rural agricultural land, which is acquired by way of compulsory acquisition, is exempt under section 10(37). Now, there are many instances when the amount of compensation fixed by Collector is disputed before Courts, who may or may not order enhanced compensation at their discretion. Issue arises, as to what will be the tax consequences of interest received on such enhanced compensation, in case the same, is awarded by Courts.

Text of Section 28 of Land Acquisition Act, 1894

Collector may be directed to pay interest on excess compensation

28. If the sum which, in the opinion of the Court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court:

Provided that the award of the Court may also direct that where such excess or any part thereof is paid into Court after the date of expiry of a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of such excess or part thereof which has not been paid into Court before the date of such expiry.

Text of Section 34 of Land Acquisition Act, 1894

Payment of interest

34. When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited:

Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of compensation or part thereof which has not been paid or deposited before the date of such expiry.

Interest on late receipt of compensation from Compulsory Acquisition is taxable

Interest on late receipt of compensation is taxable under the head “Income from other sources” under section 56(2)(viii). However, 50% of this interest shall be exempted under section 57(iv). Such interest would be taxable in the year of receipt under section 145B(1).

CBDT’s Circular No. 36 of 2016, Dated: 25.10.2016 [F.No. 225/S8/2016-ITA.II]

Subject: Taxability of the compensation received by the land owners for the land acquired under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (‘RFCTLAAR Act’) – regarding

Under the existing provisions of the Income-tax Act 1961 (‘the Act’), an agricultural land which is not situated in specified urban area, is not regarded as a capital asset Hence, capital gains arising from the transfer (including compulsory acquisition] of such agricultural land is not taxable. Finance (No, 2] Act, 2004 inserted section 10(37) in the Act from 01.04.2005 to provide specific exemption to the capital gains arising to an Individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban limit, subject to fulfilment of certain conditions. Therefore, compensation received from compulsory acquisition of an agricultural land is not taxable under the Act (subject to fulfilment of certain conditions for specified urban land).

2. The RFCTLARR Act which came into effect from 1st January, 2014, in section 96, inter alia provides that income-tax shall not be levied on any award or agreement made [except those made under section 46) under the RFCTLARR Act Therefore, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of RFCTLARR Act), is exempted from the levy of income-tax.

3. As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax under the RFCTLARR Act, the exemption provided under section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961.

4. The above may be brought to the notice of all concerned.

5. Hindi version of the order shall follow.

Agricultural land – Acquired by Government – Enhanced compensation including interest received would be eligible for exemption

Allowing the appeal of the assessee the Tribunal held that, where the Agricultural land is acquired by Government, enhanced compensation including interest received by the assessee is exempt from the tax. Accordingly TDS amount that was deducted on account of enhanced compensation was to be refunded. (Related Assessment year : 2011-12) – [Baldev Singh v. ITO (2019) 176 ITD 1 (ITAT Delhi)]

Acquisition of agricultural land – Interest awarded on enhanced compensation paid by Government for acquisition of agricultural land under Section 28 of Acquisition Act, 1894 would partake of character of compensation and would be eligible for exemption

Assessees claimed that interest received by him on enhanced compensation was nothing but compensation and therefore even for the interest portion received, was eligible for exemption u/s. 10(37). Assessing Officer held that section 56(2)(viii) was unambiguous and include interest of any nature and kind without making any distinction of interest received under different provisions of the Land Acquisition Act, 1894. Hence, the interest income in question could not be considered as compensation or enhanced compensation and not eligible for exemption. It was not disputed by Assessing Officer that the land acquired was agricultural land and the conditions laid down under section 10(37)(i) to (iv) are applicable to the land which was in question compulsorily acquired. It was also not in dispute that the interest in question was interest awarded under section 28 of the Land Acquisition Act, 1894. Following the decision in case of Movaliya Bhikhubhai Balabhai v. ITO -TDS-1-Surat (2016) 70 com45 (Gujarat) it was concluded that interest awarded under section 28 of Land Acquisition Act, 1894 partook the character of compensation paid by government on compulsory acquisition of assessee’s agricultural land and was, accordingly, eligible for exemption under section 10(37). (Related Assessmnet year :  2013-14) – [ITO v. Vinayak Hari Palled (2018) 173 ITD 399 (ITAT Bangalore)]

Interest on compensation- Interest awarded under section 28 of Land Acquisition Act, 1894 on enhanced compensation paid for acquisition of agricultural land, would be eligible for exemption

It was held that interest awarded under section 28 of Land Acquisition Act, 1894 on enhanced compensation paid for acquisition of agricultural land, would be eligible for exemption. (Related Assessmnet year : 2013-14) – [ITO v. Sangappa S. Kudarikannur (2018) 172 ITD 332 : 96 taxmann.com 541 (ITAT Bangalore)]

Interest awarded under Land Acquisition Act is in nature of solatium and an integral part of compensation and receipt of same is a capital receipt whereas, interest awarded under the said act is on account of delayed payment of compensation and is revenue receipt

It was held that interest awarded under Section 28 of Land Acquisition Act is in nature of solatium and an integral part of compensation and receipt of said compensation is a capital receipt whereas, interest awarded under Section 34 of Land Acquisition Act is on account of delayed payment of compensation and is revenue receipt. (Related Assessment Year : 2011-12) – [Dnyanoba Shajirao Jadhav v. (2018) 169 ITD 291 (ITAT Pune)]

It was held that interest awarded on enhanced compensation paid by Government for acquisition of agricultural land of assessee under section 28 of Acquisition Act would partake of

character of compensation and would be eligible for exemption under section 10(37). – [ITO v. Vinayak Hari Palled (2018) 99 taxmann.com 90 (ITAT Bangalore)]

Interest awarded on enhanced compensation paid for compulsory acquisition of agriculture land not taxable

Interest awarded under section 28 of Land Acquisition Act, 1894, on enhanced compensation paid for compulsory acquisition of agricultural land, would be eligible for exemption under section 10(37) –

It is not disputed by the Assessing Officer that the land acquired was agricultural land and the conditions laid down under section 10(37)(i) to (iv) are applicable to the land which is in question which was compulsorily acquired. It is also not in dispute that the interest in question was interest awarded under section 28 of the Land Acquisition Act, 1894. In the given circumstances, the decision of the Gujarat High Court in the case of Movaliya Bhikhubhai Balabhai v. ITO (2016) 388 ITR 343 : 70 taxmann.com 45 /will be applicable to the facts of the present case. [Para 11]

In the light of the aforesaid decision of the High Court and in the light of the admitted factual position in the present case, the Commissioner (Appeals) is fully justified in allowing exemption under section 10(37) on the interest received by the assessee under section 28 of the Land Acquisition Act, 1894. [Para 14] In the result, the revenue’s appeal is dismissed. (Related Assessment Year 2013-14) – [ITO v. Basavaraj M Kudarikannur (2018) 95 taxmann.com 106 (ITAT Bangalore)]

Interest paid under section 28 of the Land Acquisition Act amounts to enhance compensation and is not taxable as interest income

It was held that no income tax is payable on the amount received as enhanced compensation for the compulsory acquisition of the agricultural land under Land Acquisition Act. The bench was hearing an appeal filed against the order of the first appellate authority wherein the authority held that the interest received under section 28 of the Land Acquisition Act in case of compulsory acquisition of agricultural land is in the nature of interest income. The assessee, on second appeal, contended that the above finding is in contravention of the judgment of Hon’ble Supreme Court in case of Union of India & ors v. Hari Singh & Ors and the interest paid under section 28 of the Land Acquisition Act amounts to enhance compensation and is not taxable as interest income. The Tribunal noticed the admitted fact that the assessee has not received interest under section 28 of the Land Acquisition Act, 1894. “This issue has been decided by the Hon’ble Apex Court in case of Union of India v. Hari Singh and ors. (Civil Appeal No. 15041/2017 order dated 15.09.2017) wherein it is held that on agricultural Land no tax is payable when the compensation/enhance compensation is received by the assessee as their land was agricultural land. The compensation was received in respect of agricultural land belonging to the assessee which had been acquired by the state government. Therefore, the same comes under the purview of Section 28 of the Land Acquisition Act,” the Tribunals said. In the light of the judicial decisions, the Tribunal held that the assessee is eligible for the exemption under section 10(37) of the Act in respect of the interest received by the assessee under section  28 of the Land Acquisition Act, 1894. (Related Assessment year : 2013-14)] – [Jagmal Singh v. ITO, Gurgaon – Date of Judgement : 20.09.2018 (ITAT Delhi)]

Capital gains – Interest on enhanced compensation arising on compulsory acquisition of agricultural land – Taxability

Interest earned under section 28 of Land Acquisition Act, 1894, which is on enhanced compensation, is treated as an accretion to the value and therefore, is part of the enhanced compensation or consideration. Therefore, interest on enhanced compensation under section 28 of Land Acquisition Act, 1894, being an integral part of consideration was exempt from capital gains tax under section 10(37). (Related Assessment Years : 2007-08 to 2009-10) – [Satbir & Ors. v. ITO – Date of Judgement : 09.07.2018 (ITAT Chandigarh)

Agricultural land – payment of compensation on agreed terms in respect of the land acquired is entitled for exemption under section 10(37)

The issue in this case was as to whether the payment of compensation on agreed terms in respect of the land acquired would be entitled for exemption under section 10 (37). SC held in favour of the assessee relying on the decision of the SC in Balakrishnan v. Union of India (2017) 391 ITR 178 where it was held that even if the amount of compensation is paid on agreed terms it would not change the character of the acquisition from that of compulsory acquisition to the voluntary sale and the exemption provided under the Income Tax Act would be available. – [UOI v. Infopark Kerala (2017) 297 CTR 219 : 247 Taxman 219 : 154 DTR 99 (SC), CIT v. Greater Hyderabad Municipal Corporation (2017) 297 CTR 219 : 247 Taxman 219 : 154 DTR 99 (SC)

Transfer of agricultural land – The fact that the assessee entered into a settlement with the Collector regarding the compensation amount does not mean that the acquisition was not “compulsory” if the prescribed procedure was followed – Exemption under section 10(37) was allowed

The issue before the Court was “whether, on the facts and in the circumstances of the case, the High Court was justified in denying the claim for exemption under section 10 (37) of the Income – tax Act, 1961 to the appellant” Reversing the judgement of the High Court the Court held that, The fact that the assessee entered into a settlement with the Collector regarding the compensation amount does not mean that the acquisition was not “compulsory” if the prescribed procedure was followed and proceedings under section 148 was quashed. (Related Assessment year : 2009-10) – [Balakrishnan v. UOI (2017) 391 ITR 178 : 294 CTR 6 : 247 Taxman 16 : 149 DTR 137 (SC)

KEY NOTE

Decision of Kerala High Court in Info Park Kerala v. ACIT (2008) 4 KLT 782 (2017) 391 ITR 178 overruled

Interest paid under section 28 of the Land Acquisition Act amounts to enhance compensation and is not taxable as interest income

It was held that on agricultural Land no tax is payable when the compensation/enhance compensation is received by the assessee as their land was agricultural land. The compensation was received in respect of agricultural land belonging to the assessee which had been acquired by the state government. Therefore, the same comes under the purview of Section 28 of the Land Acquisition Act. – [Union of India v. Hari Singh and ors. – Date of judgement : 15.09.2017 (SC)]

Assessee was not liable to pay any tax under the head “Income from other sources” on the interest paid to it under section 28 of the Act of 1894

Tax deduction at source – Under section 194A – Interest payable under section 28 of the Land Acquisition Act, 1894 – Assessee’s agricultural lands came to be acquired under the provisions of the Land Acquisition Act, 1894 for the public purpose of Ozat-2 Irrigation Scheme. The award passed by the Collector came to be challenged by the assessee before the Principal Senior Civil Judge, who, by an order, awarded additional compensation together with other statutory benefits. Pursuant to such award, the Executive Engineer, Irrigation Scheme Division calculated the amount payable to the assessee and in terms of statement showing the amount of compensation to be deposited in the Court, computed certain sum payable to assessee by way of interest under section 28 of the Act of 1894. Assessee made an application under section 197(1) for deciding the tax liability of interest and to issue a certificate as to NIL tax liability. However, the ITO rejected application on the ground that the interest amount on delayed payment of compensation and enhanced value of compensation was taxable as per the provisions of section 57(iv) read with sections 56(2)(viii) and 145A(b). Consequently, Executive Engineer had deducted and deposited amount towards 10 per cent TDS from the total amount of interest. Held: Since interest under section 28 of the Act of 1894 partakes the character of compensation, it would not fall within the ambit of the expression “interest” as contemplated in section 145A. Thus, assessee was not liable to pay any tax under the head “Income from other sources” on the interest paid to it under section 28 of the Act of 1894. Therefore, Assessing Officer was not justified in refusing to grant a certificate under section 197 to the assessee for non deduction of tax at source. Further, the Executive Engineer was not justified in deducting tax at source under section 194A. Accordingly, assessee was entitled to refund of the amount wrongly deducted under section 194A. – [Movaliya Bhikhubhai Balabhai v. ITO (2016) 388 ITR 343 : 290 CTR 303 : 138 DTR 223 (Guj)]

Capital gains – Agricultural land – Land not used for agricultural purposes during two years immediately preceding the date of transfer, would disentitle the Appellant claim benefit of exemption under section 10(37)

The assessee, an individual, purchased certain land in a village in the year 2006. The said land was notified for compulsory acquisition under the provisions of Karnataka Industrial Development Act, 1956. The final agreement for sale was entered into in 2008 in pursuance of the final notification published in 2007. While filing the return of income for the AY 2009-10, the assessee claimed the compensation received thereon as exempt under section 10(37) of the Act. The Assessing Officer denied the exemption on the ground that such land was not used for agricultural purposes during two years immediately preceding the date of transfer and accordingly, the compensation received by the assessee was taxed as short-term capital gains. On appeal, the CIT(A) and Tribunal confirmed the action of the Assessing Officer. On further appeal, the assessee argued that, there were Eucalyptus trees grown on the said land and that Eucalyptus trees would be crop and would be included for agricultural purposes. In this regard, the HC held that plantation of Eucalyptus would be plantation for trees which would not be for agricultural purpose as it does not give any agricultural produce. Further, the HC also observed that, the assessee was not able to produce any evidence such as expenditure incurred and revenue generated from agricultural produce which indicated the fact that, the assessee did not carry on any agricultural activity on the land in question. The HC further observed that, there was a clear finding of fact recorded by all the three lower authorities that the assessee did not carry out any agricultural activity on the plot. Therefore, the assessee would not be entitled to the benefit of Section 10(37) of the Act. (Related Assessment year : 2009-10) – [B. M. Maniraju v. CIT (2015) 126 DTR 348 (2016) 282 CTR 108 (Karn)]