CBDT has clarified the taxability of compensation on compulsory acquisition of Agriculture & Non Agriculture land

CBDT Issued a Circular No.36/2016 [F.NO.225/88/2016-ITA.II], dated 25-10-2016 to clarify taxability of compensation and enhanced compensation received by Land Owners for agriculture and non agriculture land acquired under RFCTLARR Act.

According to the provisions of the Income-tax Act, 1961, agricultural land not situated in specified urban area is not regarded as a capital asset. Therefore, Capital Gain arising from transfer or compulsory acquisition of such agricultural land is not taxable.

However, as per section 10(37), Capital Gain arising from transfer of agricultural land would not be taxable in case of an individual or HUF subject to fulfillment of following conditions:

         i.            Such land is situated:

        ii.            (a)     in any area which is comprised within the jurisdiction of a municipality (whether known as a 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; or

(b)    in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.”

      iii.            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 received by such assessee on or after the 1st day of April, 2004.

The RFCTLAAR Act was brought into force in 2014 but Income Tax Act for Agriculture Land was amended in 2004. As per Section 96 of the RFCTLARR Act income-tax shall not be levied on any award or agreement made (except those made under section 46) so compensation received for compulsory acquisition of land except those made under section 46 of RFCTLARR Act, is exempted from the levy of income-tax. Since no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land, the CBDT has issued this circular to clarify the uncertainty created by RFCTLAAR by providing exemption of tax under section 96 of the RFCTLARR Act.

CBDT has 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.