Agricultural land acquisition compensation exempt only for proved cultivated portion; balance treated as taxable capital gains

Exemption under section 10(37) applies only to compensation for acquired agricultural land that satisfies the statutory conditions, including continuous agricultural use for the two years immediately before transfer. The ITAT noted that the evidence established cultivation only for part of the acquired land, so exemption could not extend to the entire compensation. It confined relief proportionately to the cultivated portion and treated the balance as taxable capital gains, with recomputation directed on a pro rata basis. It also noted that section 54B relief did not survive on the residual taxable portion in the manner claimed. The decision restates that compensation referable to land not proved as qualifying agricultural land remains taxable.

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Issues: (i) Whether the entire compensation received on acquisition of the land was exempt under section 10(37) of the Income-tax Act, 1961. (ii) Whether exemption could be granted only to the extent of the land shown to be under agricultural use for the relevant two-year period, with the balance compensation treated as taxable capital gains. (iii) Whether the assessee was entitled to relief under section 54B of the Income-tax Act, 1961.

Issue (i): Whether the entire compensation received on acquisition of the land was exempt under section 10(37) of the Income-tax Act, 1961.

Analysis: Exemption under section 10(37) is available only where the land is agricultural land situated within the specified urban limits, the transfer is by compulsory acquisition, the consideration is received after the prescribed date, and the land was used for agricultural purposes during the period of two years immediately preceding the date of transfer. The record showed that the land was within the municipal proximity and was acquired compulsorily, but the evidence did not establish that the whole of the acquired land satisfied the continuous two-year agricultural-use requirement.

Conclusion: The entire compensation was not exempt under section 10(37).

Issue (ii): Whether exemption could be granted only to the extent of the land shown to be under agricultural use for the relevant two-year period, with the balance compensation treated as taxable capital gains.

Analysis: The revenue record showed cultivation only in respect of a portion of the acquired land. The Tribunal distinguished between the rate at which compensation was awarded and the statutory condition of actual agricultural use before acquisition. It held that exemption could be confined proportionately to the cultivated portion, while the remaining land retained the character of a capital asset and the corresponding compensation was chargeable to tax. The matter was therefore sent back for recomputation on a pro rata basis.

Conclusion: Exemption was confined to the cultivated portion and the balance compensation was taxable, with the matter remanded for fresh computation.

Issue (iii): Whether the assessee was entitled to relief under section 54B of the Income-tax Act, 1961.

Analysis: Once only part of the land was held to qualify for exemption under section 10(37), the claim under section 54B did not survive on the residual taxable portion in the manner claimed by the assessee.

Conclusion: The assessee was not entitled to section 54B relief.

Final Conclusion: The relief granted by the first appellate authority was modified to a limited extent, exemption was restricted to the cultivated land, and the balance compensation was directed to be taxed after recomputation by the Assessing Officer.

Ratio Decidendi: Exemption under section 10(37) applies only to compensation referable to agricultural land that satisfies the statutory two-year agricultural-use condition, and compensation relatable to land not so proved remains taxable as capital gains.

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