Compulsory acquisition of agricultural land qualifies for capital gains exemption where statutory conditions are met despite municipal-limit location.

Compensation for compulsorily acquired agricultural land qualifies for exemption where the statutory conditions of section 10(37) are satisfied, and the land's location within municipal limits does not by itself defeat relief. The acquisition remained compulsory and for rehabilitation purposes, so the later award and payment of compensation did not change the character of the transaction into a voluntary sale or make the receipt taxable as capital gains. The exemption claim was upheld and the Revenue's attempt to tax the compensation failed.

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Issues: Whether compensation received for land compulsorily acquired by the State qualified for exemption under section 10(37) of the Income-tax Act, 1961, or was taxable as capital gains under section 45(5) of that Act.

Analysis: The land was found to be agricultural land and the record showed that it had been acquired for rehabilitation purposes through compulsory acquisition. The fact that the land fell within municipal limits did not, by itself, defeat the exemption where the statutory conditions of section 10(37) were otherwise satisfied. The character of the acquisition remained compulsory, and the later award and payment of compensation did not convert the transaction into a voluntary sale or alter the nature of the underlying land for the purpose of the exemption.

Conclusion: The compensation was held exempt under section 10(37) and the Revenue's attempt to tax it as capital gains was rejected.

Final Conclusion: The assessment order was unsustainable on the facts and in law, and the exemption claim was upheld.

Ratio Decidendi: Where agricultural land is compulsorily acquired and the statutory conditions for exemption are fulfilled, compensation received for such acquisition is not taxable as capital gains merely because the land falls within municipal limits.

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