Compulsory acquisition of agricultural land qualifies for tax exemption even when compensation is settled by negotiation.

Compulsory acquisition of agricultural land remained eligible for exemption under section 10(37) of the Income-tax Act, 1961, even though the compensation amount was fixed through a negotiated settlement. The acquisition proceedings were undertaken under the Land Acquisition Act for a seaport project, and the fact that the transfer was documented by sale deed did not change its statutory character. Since the land was treated as agricultural and the acquisition process was compulsory in substance, the assessee was entitled to exemption under section 10(37).

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Issues: Whether the transfer of agricultural land, acquired under land acquisition proceedings but with compensation fixed through negotiated settlement, was entitled to exemption under section 10(37) of the Income-tax Act, 1961.

Analysis: The land was notified for compulsory acquisition for development of the seaport project. The Assessing Officer had accepted the agricultural character of the land by allowing deduction under section 54B of the Income-tax Act, 1961, but denied exemption under section 10(37) on the ground that the transfer was effected by sale deed and not by compulsory acquisition. The acquisition proceedings were nevertheless taken under the Land Acquisition Act, and only the compensation amount was settled by agreement. Where the statutory acquisition process is followed, the mere fact that the consideration is fixed by negotiation does not alter the character of the acquisition from compulsory acquisition to voluntary sale.

Conclusion: The land was compulsorily acquired and the assessee was entitled to exemption under section 10(37) of the Income-tax Act, 1961.

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