TAX: Homi Mistry

I am the owner of a piece of agricultural land within Bangalore city limits for over 30 years. The property has been notified for acquisition by the Bangalore Development Authority (BDA). Though we raised objections against the acquisition, the property has been included in the final notification for acquisition. These are the options before us:

 

The tax law provides for exemption of capital gain earned by an individual from transfer of agricultural land situated within city limits provided (i) such land was used for agricultural purpose by such transferor during the period of two years immediately preceding the date of transfer, and (ii) such transfer is either by way of compulsory acquisition under any law or consideration for such transfer is determined or approved by the central government or the Reserve Bank of India.

Assuming the agricultural land has been used by you for agricultural purposes during the last two years immediately preceding the compulsory acquisition under any law, there will be no capital gains tax payable since the capital gain on such transfer will be exempt under Section 10(37) of the Income-Tax Act, 1961. It may be noted that there is no stipulation as to the mode of consideration. Accordingly, consideration received partly in kind as residential plots, and partly in cash or fully in cash would not be liable to tax.

However, if the conditions stated above for claiming such exemption are not satisfied, then the capital gain arising from transfer of such agricultural land would be taxed as long-term capital gain (LTCG). LTCG is ordinarily taxable at the rate of 20.6 per cent. The benefit of indexation would be available while computing LTCG.

What will be the nature of income of compensation received for trees?
The issue regarding the taxability of sale proceeds of trees has been a subject matter of controversy. If the trees did not grow spontaneously, but were planted and human labour and efforts were involved in planting, growing and maintaining trees, then it can be argued that the compensation received for the trees is agricultural income and, hence, could be claimed as exempt from tax. However, agricultural income will be considered as a part of the total income for rate purposes only.

What will be the nature of income of compensation received for structures?
Assuming that the structures are permanent ones qualifying as capital assets, the gains ensuing from the compensation received for the structures will be taxable as capital gains.

What will be the nature of compensatory income received for improvements?
It is not clear as to the nature of improvements on the land. Generally, compensation for improvement of the land will be considered to be a part of the total compensation received for the land, and the tax treatment will be similar to what is stated above.

Homi Mistry is tax partner at Deloitte, Haskins and Sells.

Send your queries at yourmoney@bsmail.in

• Accept a cash compensation as fixed by BDA.
• Accept 22 per cent of the area acquired as residential plots. The plots need not be in the same block of acquired land, it could be anywhere in the layout proposed. Fractional area will be compensated by cash.
• BDA will compensate me for trees, structures on the property and improvement of the property.

My queries are:
Is there any capital gains tax to be paid, in case I accept residential sites in lieu of the land acquired? How the capital gains tax will be calculated in case of fractional compensation received in cash?