S 2(14) of the ITA, 1961 defines Capital Asset by exempting only the Agricultural Land, that too located not in the specified urban area without any reference to the compulsory acquisition u/s 96 of RFCTLAAR Act. However, vide Circular No 36/2016 date 25th Oct 2016 the CBDT has extended the exemption by including compulsorily acquired land without any restriction on area as well the classification of land
The Ministry of Finance vide Circular No. 36/2016 has cleared a cloud of doubt clarifying the issue if compensation received for compulsory acquisition of land is exempt under Income Tax Act as well as Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLAAR Act).
The RFCTLAAR Act is exempting all the acquisitions except the acquisition u/s 46 of the Act from levy of Income Tax.
The ITA, 1961 is exempting only the agricultural land not situtated in the specified area.
Since the RFCTLAAR Act was brought into force in 2014 while the provisions of Income Tax Act was introduced in 2004, the necessary amendments were not made by giving effect of the intention of the legislation with respect to provisions of RFCTLAAR Act
The confusion which existed under the existing provisions of the ITA is that an agricultural land is not a capital asset, only when it not situated in specified urban area. As, a result, capital gain tax, on sale of agricultural land situated in the specified and non-agricultural land situated anywhere were demanded even when it was not a sale and it was compulsory acquisition under the RFCTLAAR Act
Amendment of Finance Act, 2004:
Finance (No.2) Act, 2004 inserted Section 10 (37) in the Act 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.
“(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;”
The confusion started when the RFCTLARR Act came into effect on 1st January, 2014. Section 96 of the Act says that income tax shall not be levied on any award or agreement made under this Act. Therefore, compensation received for compulsory acquisition of land under this Act is exempted from the levy of Income tax.
While Sec 96 of RFCTLAAR Act allows exemption from levy of tax under Income Tax Act, in the case of any award or any agreement made under this Act, it also gives as an exception for the transactions covered u/s 46 of the Act.
1. Where any person other than a specified person is purchasing land through private negotiations for an area equal to more than such limits, as may be notified by the appropriate Government, considering the relevant State specific factors and circumstances, for which the payment of Rehabilitation and Resettlement Costs under this Act is required, he shall file an application with the District Collector notifying him of-
(a) intent to purchase;
(b) purpose for which such purchase is being made;
(c) particulars of lands to be purchased.
2. It shall be the duty of the Collector to refer the matter to the Commissioner for the satisfaction of all relevant provisions under this Act related to rehabilitation and resettlement.
3. Based upon the Rehabilitation and Resettlement Scheme approved by the Commissioner as per the provisions of this Act, the Collector shall pass individual awards covering Rehabilitation and Resettlement entitlements as per the provisions of this Act.
4. No land use change shall be permitted if rehabilitation and resettlement is not complied with in full.
5. Any purchase of land by a person other than specified persons without complying with the provisions of Rehabilitation and Resettlement Scheme shall be void ab initio:
Provided that the appropriate Government may provide for rehabilitation and resettlement provisions on sale or purchase of land in its State and shall also fix the limits or ceiling for the said purpose.
6. If any land has been purchased through private negotiations by a person on or after the 5th day of September, 2011, which is more than such limits referred to in sub-section (1) and, if the same land is acquired within three years from the date of commencement of this Act, then, forty per cent. of the compensation paid for such land acquired shall be shared with the original land owners.
Explanation. – For the purpose of this section, the expression-
(a) “original land owner” refers to the owner of the land as on the 5th day of September, 2011;
(b) “specified persons” includes any person other than-
(i) Appropriate Government;
(ii) Government company;
(iii) Association of persons or trust or society as registered under the Societies Registration Act, 1860, wholly or partially aided by the appropriate Government or controlled by the appropriate Government.”
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 was 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 circular issued by the Finance Ministry has definitely brought clarity to the issue that all compensation are exempt irrespective of the fact if the land is classified as agricultural or non-agricultural under Income Tax Act as well as RFCTLARR Act