ISSUES in Sec. 10(37) r. w. CIRCULAR 36/2016, DT. 25-10-2016

CA Anilkumar ShahThe CBDT has issued a clarificatory circular no. 36 or 2016 dt. 25-10-2016 for exempting capital gain on acquisition of non-agricultural lands by the Government. CA Anilkumar Shah has studied the Circular and the law on the subject and explained various important issues arising therefrom

1. Provisions under The Income Tax Act, 1961

Sec. 10(37) was inserted by Finance (No.2) Act 2004 w. e. f. 1-4-2005 i.e. AY 2005-06 and onwards. The section reads as under-

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(37)  in the case of an assessee, being an individual or a Hindu undivided family, any income chargeable under the head “Capital gains” arising from the transfer of agricultural land, where—

(i)  such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2;

(ii)  such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his;

(iii)  such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India;

(iv)  such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004.

Explanation — For the purposes of this clause, the expression “compensation or consideration” includes the compensation or consideration enhanced or further enhanced by any court, tribunal or other authority;

Circular No. 5, July 15, 2005, 276 ITR (St.) 151, explains the background and intention of the Govt. as follows-

Providing for exemption on capital gains arising from compulsory acquisition of agricultural land situated within specified urban limits Section 10 of the Income-tax Act, 1961, relates to incomes which do not form part of total income.

In order to provide relief to the farmers, a new clause (37) has been inserted in section 10 providing exemption on capital gains arising to a Hindu undivided family or to an individual from the transfer of agricultural land [being capital asset within the meaning of clause (14) of section 2] by way of compulsory acquisition under any law or under a transfer of such land, the consideration for which is determined or approved by the Central Government or the Reserve Bank of India. Such exemption shall be available where the compensation/enhanced compensation/enhanced consideration or consideration has been received on or after 1st April, 2004, and such land, during the period of two years immediately preceding the date of transfer was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his.

This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years. [Section 5(h) of the Finance (No.2) Act 2004] – Circular No. 5, July 15, 2005, 276 ITR (St.) 151

The exemption was much needed especially on the background of ever expanding residential areas of any town or city and crunching the agricultural land area on one hand and the need to raise infrastructures in view of increasing urban population on the other. This was a result of opening up of the Indian economy in view of globalisation. The agricultural land beyond the specified limits was always exempt from the capital gain. But, the urban agricultural land was taxable and the compulsory acquisition posed hardship and discrimination for the owners. The exemption under this new provision brought both rural and urban agricultural land owners at par, as far as capital gain under Income Tax Act was concerned.

The wordings of the section are plain, simple and straight forward. Hence, not much litigation arose in the same, except the issues of whether the land was agricultural or not and interest on enhanced compensation etc.

2. Provisions under the Land Acquisition Act 1894

This law, as the year denotes, is quite old and was enacted in the British era. Except this Act, there was no national law on the issue of acquisitions and corresponding compensations. As the need to acquire more and more land for public purpose arose, the hue and cry and heightened public concern on the Land acquisitions increased tremendously. It is an apathy of the Central Govt. to enact laws for modern India which leaves the people of India bleeding over many issues of their livelihood. The Britishers had enacted the law naturally in favour of the establishments. Even after many amendments the law more or less remained the same.

In 1956 the National Highway Act was brought on the statute books. However, it took us 119 years after the Land Acquisition Act and 66 years after the freedom, to enact a comprehensive national law on the subject.  In 2013 The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 was enacted. (RFCTLRR Act).

This Act is a comprehensive Act taking care not only of the acquisition and fair compensation but, the most important rehabilitation and resettlement after the acquisitions. The later aspect was always neglected and there was no law to protect the land owners displaced due to acquisitions of their lands.

3. Provisions under RFCTLRR Act, 2013

This Act is a special Act and as per established principles of law, overrides any general law.

Sec. 96 of the RFCTLRR Act, inter alia provides that income-tax shall not be levied on any award or agreement made (except those made u/s 46- which specifies the compensation decided by other than RBI and/or Cent. Govt.) under RFCTLRR Act. It reads as under-

96. Exemption from Income-tax, stamp duty and fees

No income tax or stamp duty shall be levied on any award or agreement made under this Act, except u/s 40 and no person claiming under any such award or agreement shall be liable to pay any fee for a copy of the same.

Thus, the special law on the subject does not make any distinction between the compensation for acquisition of an agricultural land and any other land. All are exempted from income tax, stamp duty and any fees for any copy under that act.

4. Circular no. 36 of 2016

The issues under Income Tax Act, 1961 arose due to the compensations awarded on acquisitions under the new law and its wordings, especially to exempt from the Direct Taxes.

The issue was conveyed to the authorities under the Income Tax Act. On recognising the discrimination created under the Income Tax Act, 1961, a clarificatory circular no. 36 or 2016 dt. 25-10-2016 (F.No. 225/88/2016-ITA.II) is issued. Para 3 of the circular reads as under-

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.

Thus, even if there is no specific provision under the Income Tax Act, 1961, the capital gain arising out of compensation under section 96 of the RFCTLARR Act shall be exempt.

5. Issues arising after the Circular 36 of 2016

First issue arises for the applicability. It is obvious that the circular is clarificatory in nature and hence, has to be treated retrospective in effect. We leave this point in discussion for a later part.

Come to returns filed treating the capital gain as taxable and taxes paid on the same. In a live case the return was filed before the issue of circular i.e. before 25-10-2016 for the AY 2016-17. The return was a belated return i.e. filed beyond the due date specified u/s 139(1) but within the time permissible u/s 139(4).

The assessee came to know about the exemption and filed a revised return. The CPC did not process the same. In reply to eNivaran grievance, it replied that,

“Dear Taxpayer, original return has been filed after the due date u/s 139(1). Hence, revised return is treated as invalid as per the Income Tax Act.” 

Noting this the assessee tried to upload a rectification return. This was blocked by the e-filing portal giving reason,

“Gross Total Income does not match with original filed.”

Let us keep the issues arising for denial of the revised return processing and blockage of rectified return aside.

But, this is another glaring example of how the system is denying legal rights of an assessee.

It is obvious that, all the assessees, where the capital gain is treated taxable for the compensation received for acquisition of land other than the agricultural lands, are legally eligible to get refunds of excess tax paid.    

In all such cases it is a need that, the e-filing system has to provide a mechanism, without going to revision or appeal. Nobody can deny that this is possible.

The principles of unjust enriching as well as no tax can be collected without the authority of the law, are also applicable

6. Clarifications issued under the RFCTLRR Act

To complete the discussion an important and major development under this new act, although incidental, must be discussed.

The RFCTLRR Act came into effect in 2013 making it applicable w. e. f. 1-1-2014.

An issue arose about the cases under the National Highway Act 1956. The award is normally so low under that Act that practically every case travels the corridors of various courts agitating the same. 

Section 105 of the RFCTLRR Act excludes 13 Acts specified in Schedule IV of that act, to which the new act will not apply. The National Highway Act, 1956 was mentioned at Sr. No. 7 of Sch. IV and was excluded. 

However, Sec. 105(3) states that Central Govt. shall by notification within 1 year from the date of commencement of this Act, direct that any of the provisions of the new act relating to determination of compensation in accordance with the First Schedule of the new act and resettlement as specified in Sch. II and III being beneficial to affected families shall apply.

Accordingly, Ministry of Rural Development of the Central Govt. has issued order dt. 28-8-2015 in exercise of powers under section 113(1) of the new act and published in The Gazette of India, Regd. No. D.L. 33004/99, Extraordinary Part-II-Section3-Subsection-(ii) No. 1834, order no. S.O. 2368(E) dt. 28-8-2015.

Relevant para provides that –

“The provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, relating to the determination of compensation in accordance with the First Schedule, rehabilitation and resettlement in accordance with the Second Schedule and infrastructure amenities in accordance with the Third Schedule shall apply to all cases of land acquisition under the enactments specified in Fourth Schedule to the said Act.”

The order dt. 28-8-2015 has cleared the clouds and has made the new act applicable to all the cases under all the laws mentioned in Schedule IV of that act including the National Highway Act, 1956. This means for all the pending cases which are decided or are going to be decided will also get the benefit of compensation at the rates specified in the new RFCTLRR Act. The order has in effect nullified the Schedule IV of the said act, making all the compensations for acquisition of land subject to the new law.

Consequently, this also means that the exemption given by circular no. 36 of 2016 to the capital gain on compensation for acquisition of non-agricultural lands under all those Acts is also extended without any ambiguity, subject to fulfilment of conditions.  

However, the order is not applicable to the cases in which compensation has reached finality.

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One comment on “ISSUES in Sec. 10(37) r. w. CIRCULAR 36/2016, DT. 25-10-2016
  1. MAYUR K JAIN says:

    Sir, whether exemption is applicable to partnership firm who had purchased a piece of land for construction business and later on the land is being acquired by Government under National Highway Act, 1956? Does exemption relate to capital gains only or it should be applicable to business income too?

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