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 only if it exceeds a prescribed limit.
• D. It is taxable as business income.

Hint:

Whenever you see the words ``compulsory acquisition of agricultural land'', immediately think of Section 10(37) and the possibility of a capital gains exemption.

Answer 1

The Correct Option is B

Step 1: Understand the facts.
A person gets compensation when his agricultural land is compulsorily acquired. The land was being farmed by him before the acquisition. We must find the correct tax position under Section 10(37) of the Income-tax Act, 1961.

Step 2: Know the normal rule.
Normally, profit (capital gain) from selling a capital asset is taxed. But for farmers losing land to forced acquisition, Parliament gave a special relief.

Step 3: Understand compulsory acquisition.
The government may take private land for public projects like highways, railways, or industry, and pays compensation. The owner does not sell by choice.

Step 4: Apply the conditions of Section 10(37).
The relief applies when the owner is an individual or HUF, the land is agricultural, it was used for farming during the period before acquisition, the transfer is by compulsory acquisition under a law, and compensation is received for it. If these are met, the capital gain is exempt.

Step 5: Understand the reason for relief.
Farm land is often the main livelihood, the loss is involuntary, and public projects should not load extra tax on affected farmers.

Step 6: Check the options and answer.
It is not always taxable, it does not depend on a money limit, and it is not business income. The correct view is that it is exempt if the prescribed conditions are met.

\[ \boxed{\text{It is exempt, subject to fulfilment of prescribed conditions.}} \]