With India on a huge infra push in the name of very ambitious projects such as Bharatmala, Metro/Mono Rail projects in various cities, expansion of existing infrastructure to name a few, the Government is on a roll in acquiring private property in key areas. In this blog post, we look into the implications of taxation on the compulsory acquisition of private properties and where to look for respite with respect to Income Tax implications.
Capital Assets as defined by the Income Tax Act, 1961, includes all types of land except rural agriculture land for which detailed explanations have been provided by the Act in order to establish the qualification of rural agriculture land. Compulsory acquisition or not, rural agricultural land are unaffected. Coming to lands used for agriculture by individuals or HUFs which are situated within urban limits, the Government through Finance Act, 2004 inserted Section 10(37); wherein it stated that lands situated within urban limits which are being used for agricultural purposes and the same is being acquired by Central Government or is approved by RBI on or after 01.04.2004 and the compensation including any enhanced compensation as awarded is received post that period is eligible for exemption under the aforesaid section.
What about other lands within urban limits which are not being used for agricultural purposes?
In comes "The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013" shortly known as RFCTLARR Act, which came into effect from 01.01.2014. Section 96 of the RFCTLARR Act states that "No Income Tax" or Stamp Duty shall be levied on any award or agreement made under RFCTLARR Act when lands are being acquired by appropriate Government (including Government companies and trusts/AOPs/societies controlled by Government), except under Section 46. Section 46 deals with land purchase by non-government/private parties through RFCTLARR Act . This caused immense confusion among stakeholders as the Income Tax Act has not reciprocated this benefit.
Almost 3 years later, The Central Board of Direct Taxes vide its circular numbered 36 of 2016 dated 25.10.2016 clarified the aforementioned matter which has caused a lot of uncertainty. Extract from the circular is as follows -
"As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing exemption from income-tax under the RFCTLARR Act, the exemption provided under section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act, 1961."
This clarification was most welcome by stakeholders given the hardships they ought to go through when put under this situation. It is to be noted that benefit under both Income Tax Act and RFCTLARR Act relates only to land; any structure which is existing above the said land would be taxable in the hands of the person as per normal provisions of the Income Tax Act.
On a concluding note, when subjected to compulsory acquisition by Government -
Rural agricultural land not being a capital asset is fully tax free
Urban agricultural land subject to certain conditions are exempt from tax
Lands other than above when compulsorily acquired under RFCTLARR Act by appropriate Government are not subject to Income Tax and Stamp Duty
Disclaimer - It is to be noted that all reasonable care has been taken by the author to avoid errors. The author accepts no responsibility for any error crept in any manner and shall not bear any kinds of losses/damages incurred by a reader on account of such errors. This article should be treated only for informational and knowledge gain purposes only. The author shall not accept any responsibility for any loss occurred by anyone on acting on this article.
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