Agricultural land acquisition exemption applies when statutory conditions are met, even if the land lies within municipal limits.

Compensation for compulsory acquisition of agricultural land was treated as exempt because the land retained its agricultural character, was acquired compulsorily for rehabilitation purposes, and the statutory conditions for exemption were otherwise satisfied. Location within municipal limits did not by itself defeat relief, as the exemption depends on the land's use, the nature of transfer, and the timing of compensation. On that basis, the reliance on capital gains taxation under section 45(5) was rejected, and the compensation fell within section 10(37).

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Issues: Whether compensation received for compulsory acquisition of agricultural land situated within municipal limits was exempt under section 10(37) of the Income-tax Act, 1961, or taxable as capital gains under section 45(5) of the Income-tax Act, 1961.

Analysis: The land was found to be agricultural in nature and compulsorily acquired for rehabilitation purposes. The statutory exemption under section 10(37) applies where the land is situated in the specified urban area, was used for agricultural purposes during the relevant preceding period, was transferred by compulsory acquisition, and compensation was received on or after 1 April 2004. The fact that the land fell within municipal limits did not by itself defeat the exemption. The record, including the revenue authorities' findings and the final award, supported the conclusion that the assessee satisfied the conditions for exemption. The reliance on section 45(5) was therefore misplaced.

Conclusion: The compensation was exempt under section 10(37) of the Income-tax Act, 1961 and not taxable as capital gains under section 45(5) of the Income-tax Act, 1961.

Ratio Decidendi: For compulsory acquisition of agricultural land, the exemption under section 10(37) turns on the statutory conditions governing the character and use of the land and the mode and timing of compensation, not merely on the land's location within municipal limits.

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