Compulsory acquisition of agricultural land allowed exemption for capital gains under section 10(37), making the addition unsustainable.

Capital gain from transfer of agricultural land qualified for exemption under section 10(37) because the land was treated as compulsorily acquired rather than sold voluntarily. The record showed reservation of the land for a public project, initiation of acquisition proceedings, and municipal correspondence describing the payment as compensation for compulsory acquisition. Relying on its coordinate bench ruling on identical facts, as affirmed by the jurisdictional HC, and on the principle that an agreed compensation amount does not change the character of a compulsory acquisition, the ITAT concluded that the statutory conditions were met. The addition relating to long-term capital gain was therefore unsustainable.

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Issues: Whether capital gain arising from transfer of agricultural land was eligible for exemption under section 10(37) of the Income-tax Act, 1961 on the footing that the land was acquired by compulsory acquisition and not by voluntary sale.

Analysis: The record showed that the land was kept under reservation for a public project, proceedings for acquisition had been initiated, and the municipal authority's correspondence described the payment as relating to compulsory acquisition. The Tribunal followed its coordinate bench decision on identical facts, as affirmed by the jurisdictional High Court, and also relied on the principle that an agreed amount of compensation does not alter the character of an acquisition that has otherwise proceeded under compulsory acquisition. On that basis, the Tribunal held that the land was compulsorily acquired and that the statutory conditions for exemption were satisfied.

Conclusion: The assessee was entitled to exemption under section 10(37) of the Income-tax Act, 1961, and the addition made on account of long-term capital gain was not sustainable.

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