Compensation on compulsory acquisition of land is tax free
Compensation on compulsory acquisition of land is tax free. The amount would be tax free even if
- The compensation pertains to land which is not an agricultural land
- The TDS has been done at the time of making the payment.
It may be noted that there is no specific provision under the Income Tax Act, 1961 whereby the capital gain arising out of compensation shall be exempt from tax. However, there is a provision in other Act which has an overriding effect over the Income Tax Act-1961. Let us know about the provisions which exempt the amount.
First of all, it may be noted that there is provision inthe form of section 10(37) in the Income Tax Act- 1961. Section 10(37) was inserted by Finance (No.2) Act, 2004 w. e. f. 1-4-2005 (AY 2005-06 and onwards). Section 10(37) reads as under-
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 consideration enhanced or further enhanced by any court, tribunal or other authority;
To clarify the intent of section 10(37), Circular No. 5, July 15, 2005, 276 ITR (St.) 151 was issued which provides as under:
Providing for exemption on capital gains arising from compulsory acquisition of agricultural land situated within specified urban limits Section 10 of the Income-tax Act, 1961, relates to incomes which do not form part of total income.
In order to provide relief to the farmers, a new clause (37) has been inserted in section 10 providing exemption on capital gains arising to a Hindu undivided family or to an individual from the transfer of agricultural land [being capital asset within the meaning of clause (14) of section 2] by way of compulsory acquisition under any law or under a transfer of such land, the consideration for which is determined or approved by the Central Government or the Reserve Bank of India. Such exemption shall be available where the compensation/enhanced compensation/enhanced consideration or consideration has been received on or after 1st April, 2004, and 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.
This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years. [Section 5(h) of the Finance (No.2) Act 2004] – Circular No. 5, July 15, 2005, 276 ITR (St.) 151
It may be noted that rural agriculutrual land is not a capital assets and hence not liable for capital gain otherwise also. However, sale of urban agricultural land is liable for capital gain tax and so section 10(37) only deal with urban agricultural land.
Land Acquisition Act 1894 & the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013
In 2013, The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 was enacted which has almost replaced the old Land Acquisition Act. RTFCTLARR is a comprehensive Act taking care not only of the acquisition and fair compensation but also related to rehabilitation and resettlement after the acquisitions. Section 96 of the RFCTLRR Act provides that income-tax shall not be levied on any award or agreement made (except those made u/s 46- which specifies the compensation decided by other than RBI and/or Cent. Govt.) under RFCTLRR Act.
The relevant part of section 96 reads as under-
- Exemption from Income-tax, stamp duty and fees
No income tax or stamp duty shall be levied on any award or agreement made under this Act, except u/s 40 and no person claiming under any such award or agreement shall be liable to pay any fee for a copy of the same.
Thus, the special law on the subject does not make any distinction between the compensation for acquisition of an agricultural land and any other land. All are exempted from income tax, stamp duty and any fees for any copy under that act.
CBDT has issued Circular No. 36 of 2016 Dated 25-10-2016 for exempting capital gain on acquisition of non-agricultural lands by the Government. The said circular reads as under:
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
ITA.II division, North Block, New Delhi,
Circular No. 36/2016
Dated: 25th of October, 2016
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’)-reg.-
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).
- 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.
- 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.
- The above may be brought to the notice of all concerned.
- Hindi version of the order shall follow.
Deputy Secretary to the Government of India
One may note that above circular is clarification in nature and hence may be considered as having a retrospective effect.
The question arises, whether the exemption as provided by section 96 is available to partnership firms and companies also? Whether the exemption shall be available to builder also if they have received amount on acquisition of stock in trade and not capital assets?
In my view,
- Section 10(37) of the Income Tax Act-1961 is applicable to Individual and HUF only. However, provisions of Section 96 of RTFCLAAR don’t have any such restrictions and limitations.
- As a result, exemption covered by Circular no. 36 of 2016 or section 96 of RTFCTLARR shall be available to all the categories of taxpayers without any ambiguity, subject to fulfilment of conditions.
- Further, exemption covered by Circular no. 36 of 2016 or section 96 of RTFCLARR don’t distinguish between capital assets and stock in trade. In short, acquisition of stock in trade of builders will also be exempt pursuant to above circular & section.
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