Section 10(37) Exemption towards Capital Gain arising on Compulsory

Acquisition of Urban Agricultural Land by  CA Sandeep Kanoi


Section 10(37) Exemption Towards Capital Gain Arising on Compulsory
Acquisition of Urban Agricultural Land
Provisions of section 10(37) of the Income Tax Act lays down certain conditions
which need to be satisfied in order to avail exemption towards capital gain arising on
account of compulsory acquisition of an urban agricultural land.
The present article tries to explain the said exemption provisions of section 10(37).
Conditions for availing exemption under section 10(37)
The exemption under section 10(37) is available only on account of compulsory
acquisition of urban agricultural land. However, all the following conditions are
mandatorily required to be satisfied, in order to claim an exemption under section
10(37) of the Income Tax Act–
1. An exemption under section 10(37) is available only to an individual or a Hindu
Undivided Family.
2. The exemption is available towards capital gain arisen on the transfer of
agricultural land.
3. The said agricultural land should be situated within the area mentioned below-

o The agricultural land should be situated within the jurisdiction of a
municipality; municipal corporation; notified area committee or town area committee or
town committee having a population of more than 10,000; or
o The agricultural land should be situated within the following distance,
measured aerially-

Distance limit Population limit

Up to 2 kilometers from local limits of any More than 10,000 but not exceeding 1 Lakhs
municipality

Up to 6 kilometers from local limits of any More than 1 Lakhs but not exceeding 10 Lakhs
municipality

Up to 8 kilometers from local limits of any More than 10 Lakhs

municipality
4. The said agricultural land should have been used, for a period of two years
immediately before the date of transfer, for the agricultural purpose by-

o An individual or his parent; or
o A Hindu Undivided Family.
5. The transfer of capital gain is on account compulsory acquisition under any law or
the transfer consideration for which is determined / approved by the Central
Government or the Reserve Bank of India.
 6. The consideration or compensation from the transfer should have been received
on or after 1st April 2004.
In case all the above conditions are fulfilled, the capital gain arising on compulsory
acquisition of an urban agricultural land would be exempted under section 10(37) of
the Income Tax Act.
Amount of exemption available under section 10(37)
If all the above mentioned conditions are satisfied, entire capital gain arising on
transfer of urban agricultural land is exempted under section 10(37). There is no
maximum limit prescribed under the law.

Capital Gain Exemption on Sale of

Agricultural land
I have sold our ancestral agricultural land in Punjab recently.

1. We have been told that it is within 8Kms of municipal limits and hence
categorised as urban land, which is taxable for the purpose of CG (rural land is tax
free).
2. Further research indicated that proceeds from agricultural land may either be
re-invested in purchase of another agricultural land or a residential property in
order to be eligible for Capital gain rebate under income tax.
3. Investment in Commercial property is not eligible for any rebate.
4. Also, if I buy residential property will I get the benefit of cost indexing as I
will get if I re-invest in agricultural land?
5. I do not intend to purchase another agricultural land, therefore, the only
option left for me in to buy residential land. BUT, now I find out that since I
already own a residential property in India, I cannot claim capital gain rebate on
that newproperty I may be planning to buy. Is CG rebate not eligible on the second
residential property. I learned that there was an amendment to this section
sometime back and second house is eligible.
6. how can I get the benefit of the CG rebates aside putting money in capital
bonds for 3 years?
G walia
griculture Land: agriculture land in rural area is not covered in definition of Capital asset hence no
capital gain is applicable in case of sale of agriculture land in rural area .However capital gain tax is
applicable if land is situated in urban area.

Investment in Agriculture Land:yes you are correct that reinvestment in agriculture land can save
 tax on capital gain but there are some conditions to it ,as given in section 54 B of the income Tax
act,But as you have given you are not Interested in it we are not going to these details .further It is
true that
Investment in commercial property will not give you any exemption /deduction
from capital gain.
Investment In Residential property : with Investment in residential property you
can save tax u/s 54 F .But not same as agriculture land can .the difference between
both the option are that in case of section 54 B (Investment in agriculture land) the
amount to be invested only the amount of capital gain but in case section 54 F
(investment in new residential house) net sale proceed is to be invested in the new
Residential house.
Purchase of residential house: Purchase of residential house option is left with
you ,because as section this option can be opted if
-there is long term capital gain.
-gain should be from sale of asset other than residential house.
You are fulfilling both the condition as you have sold ancestral agriculture land
which is long term non residential house property.
Now the question is that whether you can save tax even if you have a other
house on date of transfer of agriculture land ?
The News is good ,you can invest in residential property and can save tax on long
term capital gain tax on sale of agriculture land even you already have a residential
property with you.Means if you have a house already with you even then you can
save tax under section 54 F .
Capital gain calculation : To calculate Holding period for the purpose of capital
gain ,the period of holding of your father ,grand father ,.........will also be included
means it is LONG term property.But the Cost of indexation will be available to
you only from when it is being transferred to you.Cost of land of previous owner
will be taken and if purchased before 01.01.1981 then cost price or market value as
on 1.4.1981 which ever is higher will be cost of that land . On this cost ,Indexation
will be given .
Amount of Investment : U/s 54 F ,the net receipt from the sale of Land in the
question has to be invested in a residential house property by Purchase of new
house before one year and with in two years from the transfer of above Land .
 Construction of new house with 3 years from date of transfer.if amount
invested in house is less then net receipt from land then exemption will be
available on pro-rata basis.
Capital gain scheme:If amount of capital gain arising from the sale of old
asset(land here)is not used as per point above before the due date of furnishing of
 income tax return or furnishing of return which ever is earlier than the balance
unused amount should be deposited in designated banks under capital gain account
scheme 1988 .

if capital gain amount unused has not been deposited under the scheme then the
amount of capital gain will be taxable in the previous year as long term capital gain
it self no matter it is actually used by the assessee for the purpose with the period
explained above .if the amount deposited in capital gain scheme , wholly or partly
has not been used with in the three year from the date of transfer of old asset and
purpose given above then the unused amount will be taxable in the hand of
the assessee in the previous year in which three years expires from date of transfer
of old asset as long term capital gain.

Exemption withdrawal : after availing above exemption ,

 if new house will be sold with in 3 years from purchase/construction of the
house or
 if you purchases another house other then new house with 2 year from
transfer of old house or construct another house with in 3 years from date of
transfer of old house then amount exempted on purchase of new residential House
will Be taxable in your hand as Long term capital gain in year in which above any
of the above two happens.

Exemption through Investment in Bonds : You are also eligible to save tax u/s
54EC byinvesting in Bonds .Unlike residential House u/s 54 F ,In bonds Only
capital gain amount is required to be invested.No need to invest net receipt.suppose
yo have sold land at Rs 100/- and capital gain after indexation is 45 then in case of
section 54F (residential House) you have to invest 100 where as in Bonds only 45
is required to be deposited to claim full capital gain tax exemption.Lock in period
is Just Three Years but maximum amount that can be invested in bonds is limited
to 50 lakhs.You can opt for this option with in 6 months from date of transfer of
the land

laimed under section 54B?

A. Exemption under section 54B can only be claimed by an individual. So
1) You can claim this exemption only if urban agricultural land transferred is used by
you or your parents for agricultural purpose during 2 years immediately before the
date of transfer of such agricultural land. And
2) You have purchased another agricultural land whether rural or urban to be used
for agricultural purpose within 2 years from the date of transfer of original agricultural
land.
The amount of exemption is equal to the amount invested in the purchase of new
agricultural land subject to the amount of capital gain.
Under the provisions contained in the Income-tax Act 1961, capital gains tax is payable
whenever profit is derived on selling a capital asset. However, agricultural land in India
under certain facts and circumstances is not treated as capital asset as per the definition
contained in section 2(14) of the Income-tax Act 1961.

The simple theme is if an item which is sold is not considered as a capital asset. In that
situation any gain arising therefrom will not be subjected to income-tax.

A very interesting matter came up before the Punjab and Haryana High Court and it was
decided in the judgment of CIT v. Lal Singh and Others 325 ITR 588 that where a
certificate is produced from the Tehsildar that the land sold by the assessee was beyond
8 kms from the municipal limits, hence such sale of agricultural land will be outside the
purview of capital asset as per the definition contained in the Income-tax Act and as such
the gain arising on sale of such agricultural land which is beyond 8 kms from the
municipality limits will not be subjected to income-tax.

The brief facts in this case were that during the Financial Year 1995-96 relevant to the
Assessment Year 1996-97 late Pusha Devi, wife of Jug Lal had sold her agricultural land
situated in Village Fazilpur, Jharsa for a sum of Rs. 89,75,000. After her death, notices
under section 148 were issued to her legal heirs. In response to that, a return was filed
showing the net taxable income of Rs. 37,000.

In the said return, the long-term capital gain was shown as nil. In order to claim that the
agricultural land owned and sold by the assessee did not fall in the definition of “capital
assets” as defined in section 2(14)(iii) of the Income-tax Act, 1961, the assessee produced
a certificate from the Tehsildar, Gurgaon to the effect that the land of the assessee was
situated beyond 8 kms from the Gurgaon municipal limits. The Assessing Officer, while
not accepting the said report and while relying upon the report given by the inspector,
did not accept the assessee’s contention of exemption under section 54B and determined
the capital gain to the tune of Rs. 86,65,900 in the assessment order. Against the said
order,theassesseefiledanappeal.

When the matter came up before the Commissioner of Income-tax (Appeals), the
Commissioner allowed the stand of the assessee by observing the following
observations:-

I have carefully considered the facts and submissions made. I have also verified the
assessment records. I find that the assessee’s contention is correct that the Assessing
Officer had written to the Tehsildar, Gurgaon vide his letter dated January 9, 2004,
requesting the Tehsildar to furnish the distance certificate of the land from the nearest
municipal limits of Gurgaon. The Tehsildar had reported on January 16, 2004, that the
land was at a distance of 8.2 kms. The above copy of the letter as well as the Tehsildar’s
report are available in the assessment records. A copy of this letter with the report of the
Tehsildar is also furnished by the assessee at page 5 of the paper book. It is not
understood why this fact does not find mention in the assessment order. The Assessing
Officer has not given any reason why he considered this report not to be adequate and
directed the inspector to submit the report regarding the distance of the land (the
direction of the Assessing Officer is available in the order sheet entry dated January 21,
2004).

It is a well-established fact that it is the Tehsildar working under the State Government,
who is competent to measure the distance of the land, more competent to measure the
distance of the land, more competent than the Inspector of the Department. In fact, in
almost all the similar cases, the Department has accepted the Tehsildar’s report
regarding the measurement of the distance of the land. If the Assessing Officer was not
satisfied as to the distance certificate, he should have recorded the reasons and requested
the higher authorities to the Tehsildar of the State Government for measurement of the
same.

The Revenue filed an appeal against the order of CIT (Appeals) before the Income-tax
Appellate Tribunal. The Income-tax Appellate Tribunal also disposed the appeal with the
following observations:-

We have heard the rival submissions. We have also perused the record. We are of the
opinion that the Assessing Officer erred in computing the long-term capital gain on the
basis of the report of the inspector and he did not believe the report of the Tehsildar. We
agree with the opinion of the learned Commissioner of Income-tax (Appeals) that he
should have requested the higher authorities of the said Government if he did not believe
his report to be correct or he could have summoned the Tehsildar under section 131 of
the Income-tax Act in order to verify the veracity of the report. He was not justified in
brushing aside the report of the Revenue official who is competent to measure the
distance of the land.

The Commissioner of Income-tax (Appeals) observed that the Tehsildar is more

competent than the inspector of the Department to measure the distance of the land.
Thus, we do not find any infirmity in the order of the Commissioner of Income-tax
(Appeals) and the same is sustained for the reasons given therein.

Finally when the matter came up before the Punjab and Haryana High Court, the
Honourable judges of the High Court after listening carefully to the arguments placed by
the assessee as well as by the Department opined that the Income-tax Appellate Tribunal
after appreciating the material, have recorded a pure finding of fact about the distance of
land of the assessee from this municipal limit. This finding of the report of the Tehsildar
was dated 16th January 2004. The said report was given on the application made by the
assessee in which it is certified that the land of the assessee was almost 8 km. away from
the municipal limit.

In one of the reports certified by the Tehsildar it was mentioned that the land of the
assessee was situated at a distance of 8.2 km. away from the municipal limit. Finally the
Honourable judges came to the conclusion that according to their view the
Commissioner of Income-tax (Appeals) had rightly not accepted the aforesaid report of
the inspector and in particular in the said report neither the Khasra number of the land
of the assessee was given nor has it been explained how the distance of the said land with
the municipal limits was measured. Even otherwise, without the help of the Revenue
officials, it is difficult for a person to identify the land and then to measure the distance
of the said land with the municipal limits.

On the other hand, the Commissioner of Income-tax (Appeals) has rightly relied upon
the report dated January 16, 2004, given by the Tehsildar on the application of the
Assessing Officer himself and the same cannot be discarded. Therefore, there was no
justification for ignoring the said report. Further, except the report dated January 16,
2004 given by the Tehsildar, which was relied upon by the Revenue to show that the
distance of the land of the assessee from the municipal limits was less than 8 kms., there
is no other material on the record contrary to the said report. Finally the Honourable
judges came to clear cut conclusion that in view of the report of the Tehsildar which
stated that the land which was sold was more than 8 kms away from the municipal
limits. Hence, the amount received was not assessable as capital gain.

Subhash Lakhotia, Tax and Investment Consultant