Question

According to Section 10(37), of the Income-tax Act, 1961, compensation is received by an individual on compulsory acquisition of agricultural land which had been used for agricultural purposes by him prior to acquisition. What is the correct legal position?

• A. It is always taxable under the Act.
• B. It is exempt, subject to fulfilment of prescribed conditions.
• C. It is taxable as business income.
• D. It is taxable only if it exceeds a prescribed limit.

Hint:

Section 10(37) = Agricultural Land Exemption. If the land is "urban" but was used for "farming" for 2+ years before it was compulsorily taken, the tax man won't touch the capital gains!

Answer 1

The Correct Option is B

Step 1: Understand the situation.
A person owned agricultural land and used it for farming. The government compulsorily acquired this land and paid compensation. The question asks how this compensation is treated under Section 10(37) of the Income-tax Act, 1961.

Step 2: Know what Section 10(37) does.
Section 10(37) gives a special exemption. It says that capital gains from the compulsory acquisition of urban agricultural land can be free from tax, but only if certain conditions are met.

Step 3: Learn the conditions.
The main conditions are that the land was used for farming by the person or his parents for at least two years before the transfer, and the transfer is a compulsory acquisition under a law, with compensation approved by the government or RBI.

Step 4: Apply it here.
Since the person used the land for agriculture before the acquisition, and the acquisition is compulsory, the gain can qualify for the exemption, provided all the prescribed conditions are fulfilled.

Step 5: Remove the wrong options.
Saying it is always taxable (option 1) ignores the exemption. Saying it is business income (option 3) is wrong because this is a capital matter, not business. Saying it is taxable only above a limit (option 4) is not what Section 10(37) provides.

Step 6: State the answer.
So the compensation is exempt, subject to the prescribed conditions being satisfied. \[ \boxed{\text{It is exempt, subject to fulfilment of prescribed conditions.}} \]