NO INCOME TAX ON COMPULSARY ACQUISITION OF LAND BY GOVERNMENT
- S 2(14) of the ITA, 1961 defines Capital Asset by exempting only the Agricultural Land, that too located not in the defined 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 expanded the exemption by including compulsorily acquired land without any limitation on area as well the classification of land
- Introduction:
- The Ministry of Finance through Circular No. 36/2016 has cleared a cloud of doubt clarifying the issue whether compensation obtained for compulsory acquisition of land is excluded 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.
- As the RFCTLAAR Act came into force in 2014, when the provisions of the Income Tax Act were enacted in 2004, the required changes were not made to the provisions of the RFCTLAAR Act.
- The ambiguity that existed under ITA's current laws is that an agricultural land is not a capital asset, even if it is not situated in an urban area. As, a result, capital gain tax, on sale of agricultural land situated in the stated and non-agricultural land situated elsewhere 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 enacted Section 10(37) of the Act to grant a limited exception to capital gains resulting from the compulsory purchase of agricultural land within a designated urban limit, subject to certain conditions.
- “(37) in the case of an assessee, being an person 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 span of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or person or a parent of his;
- iii) such transfer is by way of compulsory acquisition under any statute, or a transfer the reason for which is decided or authorised 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;
- RFCTLARR ACT:
- The misunderstanding began when the RFCTLARR Act came into force on 1st January, 2014. Section 96 of the Act says that income tax shall not be imposed on any award or arrangement rendered under this Act. Therefore, compensation obtained for compulsory purchase of land under this Act is exempted from the levy of Income tax.
- Exception:
- 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 designated individual 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 needed, he shall file an application with the District Collector notifying him of-
- (A) targeted purchase;
- (b) reason for which such purchase is being made;
- (C) property information to buy.
- 2. The Collector 's responsibility is to refer the matter to the Commissioner for the fulfillment of all applicable rehabilitation and resettlement provisions under this Act.
- 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 reform shall be allowed if restoration and relocation 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:
- Given that the appropriate Government can 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 individual on or after the 5th day of September, 2011, which is more than certain 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 fee received for these land obtained shall be shared with the original land owners.
- Explanation. – For this section, the phrase-
- (A) 'Original landowner' applies to the landowner on 5 September 2011;
- (b) “ specified persons ” includes any person other than-
- I Appropriate Government;
- (ii) State corporation;
- (iii) Union of individuals or trust or community as registered under the Societies Registration Act, 1860, fully or partially aided by the appropriate Government or regulated by the appropriate Government . ”
- Issue:
- As no distinction, has been made between compensation obtained 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 granted under section 96 of the RFCTLARR Act is broader in scope than the tax-exemption given under the current provisions of Income-tax Act, 1961. This has generated confusion in the matter of taxability of compensation obtained on compulsory acquisition of property, particularly those relating to acquisition of non-agricultural property.
- Solution:
- 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.
- Conclusion:
- 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.