Compulsory land acquisition compensation hinges on whether farmland was within 2 km municipal limits on 06.01.1994; re-measure ordered

Whether compensation on compulsory acquisition was taxable as LTCG turned on whether the land was a "capital asset" under s 2(14)(iii)(b). The Tribunal held that, per Explanation 2 to CBDT Notification dated 06.01.1994, municipal limits for distance computation must be taken as they existed on 06.01.1994, and since the Amin's report indicated the land lay beyond 2 km from the municipal border (as against the lower authority's measurement method), the AO was directed to re-measure the distance accordingly; if beyond 2 km and land particulars tally, compensation is treated as agricultural income, failing which it is taxable as LTCG. Appeal partly allowed for statistical purposes.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the land compulsorily acquired was agricultural land excluded from "capital asset" under section 2(14)(iii)(b) on the basis that it was situated beyond 2 kms from the municipal limits as relevant under the applicable Central Government notification.

(ii) Whether the compensation received on compulsory acquisition was to be treated as exempt on the footing that the land was agricultural and had been used for agricultural purposes within the relevant period, in light of the official land classification/crop details and the dispute regarding matching of khata/plot particulars.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether the acquired land was excluded from "capital asset" under section 2(14)(iii)(b) due to distance beyond 2 kms from municipal limits

Legal framework (as discussed by the Court): The Tribunal considered the Central Government notification dated 06.01.1994 prescribing that land situated within 2 kms from the municipal limits of the concerned municipality would fall within section 2(14)(iii)(b). The Tribunal applied the notification's explanation that the "municipal limits" for this purpose are the limits as existing on the date of publication of the notification in the Official Gazette (06.01.1994). The Tribunal noted that the subsequent statutory change dispensing with the notification requirement was effective only from 01.04.2014 and hence did not alter the position for the year under consideration.

Interpretation and reasoning: The Tribunal rejected the Revenue's contention that the 2 km distance should be reckoned with reference to municipal limits as on the date of acquisition. It held that, in terms of the notification's explanation, the relevant municipal limits are those existing on 06.01.1994. Since the land was outside the municipal limits, the determinative enquiry was whether it lay within 2 kms from the municipal border as it existed on 06.01.1994. The Tribunal also treated the Amin's certificate indicating distance beyond 2 kms as material, but noted a measurement dispute (difference between measuring from the starting point of the plot versus from the municipal border line).

Conclusions: The Tribunal held that if, upon fresh measurement, the land is found beyond 2 kms from the border of the municipality as it existed on 06.01.1994, the land would fall within the exclusion from "capital asset" under section 2(14)(iii)(b), and the compensation would be treated as exempt as agricultural income. The matter was remanded to the Assessing Officer to re-measure the distance on the correct basis and apply this test.

Issue (ii): Whether compensation was exempt as agricultural income based on agricultural character/use of land and verification of khata/plot identity

Legal framework (as discussed by the Court): The Tribunal proceeded on the basis that if the land is agricultural (and not a capital asset), compensation on compulsory acquisition would be treated as exempt as agricultural income. In evaluating agricultural nature/use, the Tribunal relied on official revenue records and the Tahasildar's details referred to in the remand report.

Interpretation and reasoning: The Tribunal examined the Tahasildar report indicating that the land kisam was originally "SARADA-II" and was later marked "PATITA", and that paddy was grown up to financial year 2007-08. Since the initial acquisition order was in 2009, the Tribunal treated this as supporting agricultural use within two years prior to acquisition. However, it found a decisive factual uncertainty: the Revenue pointed out that khata and plot numbers appearing in the Tahasildar material differed from those reflected in the assessment order, and the Tribunal found that the identity linkage between the Tahasildar-reported parcels and the assessee's acquired land required verification. The Tribunal therefore made exemption contingent on establishing that the khata/plot particulars in the Tahasildar report corresponded to the assessee's acquired land.

Conclusions: The Tribunal restored the matter to the Assessing Officer to verify whether the khata and plot numbers in the Tahasildar report match the land under acquisition. It directed that if, after verification, they relate to the same land, the compensation is to be treated as exempt as agricultural income. Conversely, it concluded that if either (a) the distance condition fails on correct measurement, or (b) the khata/plot particulars do not tally, the compensation would be taxable as long-term capital gains. The appeal was therefore partly allowed for statistical purposes with remand directions.

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