My client's agricultural land inside the municipal limits has been compulsorily acquired. Section 2(14)(iii) does not help because the land is urban. What exactly must he prove under section 10(37)?
Section 10(37) exempts capital gain on the transfer of agricultural land where four conditions are ALL satisfied. The assessee must be an individual or a Hindu undivided family. The land must be situated in an area referred to in item (a) or item (b) of s.2(14)(iii) — that is, it must be the urban agricultural land which IS a capital asset. The land must, during the period of TWO YEARS immediately preceding the date of transfer, have been used for agricultural purposes by that Hindu undivided family or individual, or by a parent of his. The transfer must be 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. And the income must have arisen from compensation or consideration received on or after 1 April 2004. An Explanation provides that "compensation or consideration" includes compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2005-04-01, reported as Section 10(37) of the Income-tax Act, 1961, as reproduced at para 11.2 of the judgment of the Karnataka High Court in L. Venkataramana Raju v. Union of India (21 April 2022) and, in part, in ITA No. 104/Asr/2020 (ITAT Amritsar, 28 February 2023); insertion attributed to the Finance (No. 2) Act, 2004 from 1 April 2005 by CBDT Circular No. 36/2016 dated 25 October 2016 as reproduced at para 11.1 of the same judgment. It bears on section 10(37), section 2(14)(iii), section 45, section 194-IA, section 194LA, section 10(1) of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and TDS Defaults matters.
The clause is the mirror image of s.2(14)(iii): it is needed only where the land IS a capital asset, so the first thing to establish is that the land falls inside item (a) or item (b) of that sub-clause. Three conditions then do the work. The two-year use condition is the one most often lost — it requires actual use for agricultural purposes throughout the two years immediately preceding the date of transfer, and it can be satisfied by the use of a PARENT of the individual, which is what saves inherited land that the assessee himself never farmed. The transfer condition covers two distinct things: compulsory acquisition under any law, and a transfer whose consideration is determined or approved by the Central Government or the RBI — the second limb is what brings a negotiated or consent price within the clause where the price was so determined or approved. The date condition ties the exemption to receipt of the compensation, not to the date of acquisition, and the Explanation extends it to enhanced and further enhanced compensation awarded later by a court, Tribunal or other authority. A separate and wider route exists outside the Income-tax Act: section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 exempts income-tax on any award or agreement made under that Act (except one under its section 46), and the Central Board of Direct Taxes has accepted in Circular No. 36/2016 dated 25 October 2016 that this is wider than section 10(37) because it draws no distinction between agricultural and non-agricultural land.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Clause (37), as reproduced by the Karnataka High Court, reads: "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 a 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;". CBDT Circular No. 36/2016 dated 25 October 2016, reproduced in the same judgment, records that "Finance (No.2) Act, 2004 inserted Sec.10(37) in the Act from 01.04.2005 to provide specific exemption to the capital gains arising to an Individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban-limit subject to fulfillment of certain conditions", and that the exemption in section 96 of the RFCTLARR Act, 2013 "is wider in scope than the tax exemption provided under the existing provisions of Income-tax Act, 1961" because no distinction is made there between agricultural and non-agricultural land.
Not a judgment. The statutory position is that the exemption in clause (37) is available only to an individual or a Hindu undivided family, only for urban agricultural land within item (a) or item (b) of s.2(14)(iii), only where that land was used for agricultural purposes by the assessee or a parent of his throughout the two years immediately preceding the date of transfer, only on a compulsory acquisition or a transfer whose consideration was determined or approved by the Central Government or the Reserve Bank of India, and only where the compensation or consideration was received on or after 1 April 2004; enhanced and further enhanced compensation awarded by a court, Tribunal or other authority is within the same words.
Not a judgment; no judicial reasoning is stated for the clause as such. On the relationship with the RFCTLARR Act, the Central Board of Direct Taxes reasoned in Circular No. 36/2016 that because no distinction has been made in section 96 of that Act between compensation for compulsory acquisition of agricultural land and of non-agricultural land, that exemption is wider than the Income-tax Act's, and clarified that compensation in respect of an award or agreement exempted by section 96 shall also not be taxable under the Income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act.
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;
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Handle my notice → Ask a CA on WhatsAppSection 10(37) exempts capital gain on the transfer of agricultural land where four conditions are ALL satisfied. The assessee must be an individual or a Hindu undivided family. The land must be situated in an area referred to in item (a) or item (b) of s.2(14)(iii) — that is, it must be the urban agricultural land which IS a capital asset. The land must, during the period of TWO YEARS immediately preceding the date of transfer, have been used for agricultural purposes by that Hindu undivided family or individual, or by a parent of his. The transfer must be 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. And the income must have arisen from compensation or consideration received on or after 1 April 2004. An Explanation provides that "compensation or consideration" includes compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(37), section 2(14)(iii), section 45, section 194-IA, section 194LA, section 10(1) of the Income Tax Act 1961. It is reported as Section 10(37) of the Income-tax Act, 1961, as reproduced at para 11.2 of the judgment of the Karnataka High Court in L. Venkataramana Raju v. Union of India (21 April 2022) and, in part, in ITA No. 104/Asr/2020 (ITAT Amritsar, 28 February 2023); insertion attributed to the Finance (No. 2) Act, 2004 from 1 April 2005 by CBDT Circular No. 36/2016 dated 25 October 2016 as reproduced at para 11.1 of the same judgment. The clause is the mirror image of s.2(14)(iii): it is needed only where the land IS a capital asset, so the first thing to establish is that the land falls inside item (a) or item (b) of that sub-clause. Three conditions then do the work. The two-year use condition is the one most often lost — it requires actual use for agricultural purposes throughout the two years immediately preceding the date of transfer, and it can be satisfied by the use of a PARENT of the individual, which is what saves inherited land that the assessee himself never farmed. The transfer condition covers two distinct things: compulsory acquisition under any law, and a transfer whose consideration is determined or approved by the Central Government or the RBI — the second limb is what brings a negotiated or consent price within the clause where the price was so determined or approved. The date condition ties the exemption to receipt of the compensation, not to the date of acquisition, and the Explanation extends it to enhanced and further enhanced compensation awarded later by a court, Tribunal or other authority. A separate and wider route exists outside the Income-tax Act: section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 exempts income-tax on any award or agreement made under that Act (except one under its section 46), and the Central Board of Direct Taxes has accepted in Circular No. 36/2016 dated 25 October 2016 that this is wider than section 10(37) because it draws no distinction between agricultural and non-agricultural land. If it applies to you, the first step is this: Check first whether the land is outside s.2(14)(iii) altogether. If it is rural agricultural land there is no capital asset and you do not need s.10(37) at all.
Clause (37), as reproduced by the Karnataka High Court, reads: "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 a 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;". CBDT Circular No. 36/2016 dated 25 October 2016, reproduced in the same judgment, records that "Finance (No.2) Act, 2004 inserted Sec.10(37) in the Act from 01.04.2005 to provide specific exemption to the capital gains arising to an Individual or a HUF from compulsory acquisition of an agricultural land situated in specified urban-limit subject to fulfillment of certain conditions", and that the exemption in section 96 of the RFCTLARR Act, 2013 "is wider in scope than the tax exemption provided under the existing provisions of Income-tax Act, 1961" because no distinction is made there between agricultural and non-agricultural land. The matter was decided on 2005-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that the exemption in clause (37) is available only to an individual or a Hindu undivided family, only for urban agricultural land within item (a) or item (b) of s.2(14)(iii), only where that land was used for agricultural purposes by the assessee or a parent of his throughout the two years immediately preceding the date of transfer, only on a compulsory acquisition or a transfer whose consideration was determined or approved by the Central Government or the Reserve Bank of India, and only where the compensation or consideration was received on or after 1 April 2004; enhanced and further enhanced compensation awarded by a court, Tribunal or other authority is within the same words.
Not a judgment; no judicial reasoning is stated for the clause as such. On the relationship with the RFCTLARR Act, the Central Board of Direct Taxes reasoned in Circular No. 36/2016 that because no distinction has been made in section 96 of that Act between compensation for compulsory acquisition of agricultural land and of non-agricultural land, that exemption is wider than the Income-tax Act's, and clarified that compensation in respect of an award or agreement exempted by section 96 shall also not be taxable under the Income-tax Act, 1961 even if there is no specific provision of exemption for such compensation in the Income-tax Act. In the words reproduced by the source cited on this page: "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;"
It was decided by the CBDT Circulars & Instructions on 2005-04-01 and is reported as Section 10(37) of the Income-tax Act, 1961, as reproduced at para 11.2 of the judgment of the Karnataka High Court in L. Venkataramana Raju v. Union of India (21 April 2022) and, in part, in ITA No. 104/Asr/2020 (ITAT Amritsar, 28 February 2023); insertion attributed to the Finance (No. 2) Act, 2004 from 1 April 2005 by CBDT Circular No. 36/2016 dated 25 October 2016 as reproduced at para 11.1 of the same judgment. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(37), section 2(14)(iii), section 45, section 194-IA, section 194LA, section 10(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that the exemption in clause (37) is available only to an individual or a Hindu undivided family, only for urban agricultural land within item (a) or item (b) of s.2(14)(iii), only where that land was used for agricultural purposes by the assessee or a parent of his throughout the two years immediately preceding the date of transfer, only on a compulsory acquisition or a transfer whose consideration was determined or approved by the Central Government or the Reserve Bank of India, and only where the compensation or consideration was received on or after 1 April 2004; enhanced and further enhanced compensation awarded by a court, Tribunal or other authority is within the same words. It arises in Capital Gains, Capital Gains Exemptions and TDS Defaults matters, on section 10(37), section 2(14)(iii), section 45, section 194-IA, section 194LA, section 10(1) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the two-year use evidence before you file: revenue records, crop records, sale receipts for produce, and where you are relying on a parent's use, the proof of that use and of the relationship. Identify which limb of the transfer condition you are on — compulsory acquisition under a law, or a consideration determined or approved by the Central Government or the RBI — and produce the notification, award or approval that establishes it. Date the receipt of compensation, not the acquisition. For enhanced compensation received later, rely on the Explanation, which brings enhanced and further enhanced compensation within the same words. Where the acquisition is under, or is required to be under, the RFCTLARR Act, 2013, take section 96 of that Act and CBDT Circular No. 36/2016 as a separate and wider ground, and use them to resist tax deduction at source as well as the charge.
Searched for later treatment; none was found. That is not the same as a source affirming it. No instrument amending clause (37) of section 10 has been found. The clause still could not be read in a consolidated text: the published versions of section 10 stop long before it, and the department's list of tax-free incomes likewise stops short. The Board's Circular No. 36/2016 dated 25 October 2016, on the taxability of compensation for land acquired under the RFCTLARR Act, 2013, is indexed on the department's own site under that title, which confirms that the circular this entry relies on exists and is departmental; its text has not been opened. Nothing was found withdrawing it or amending the clause. This states the law under the 1961 Act, which governs up to AY 2026-27 and the disputes arising out of those years. Two qualifications. The clause is stated here from judicial reproductions rather than from the statute book, so a reader who intends to quote it in a proceeding should take the words from the Act itself. And nothing here decides how clause (37) stands with section 96 of the RFCTLARR Act, which is a different instrument with a wider reach and is the provision on which most compensation disputes are now fought. The circular the entry relies on is the Board's own treatment of that question, and it should be read in full before the point is argued either way. Nor has any decision construing clause (37) itself been examined for this entry beyond the two judgments from which its text is taken. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Clause (37) could not be read in a consolidated text of section 10; the published versions stop well short of it. The text above is therefore taken from two judicial reproductions: the Karnataka High Court in L. Venkataramana Raju v. Union of India (W.P. Nos. 43206/2018 and 53718/2017, 21 April 2022), which sets out clause (37) in full including the Explanation at its paragraph 11.2, and the ITAT Amritsar in ITO, Ward-2(1), Jammu v. Shri Mohd Aslam Baggar (ITA No. 104/Asr/2020, 28 February 2023), which sets out the opening words and sub-clauses (i) to (iv) but not the Explanation, and paraphrases parts of (iii) and (iv). Two textual blemishes in the Karnataka High Court's reproduction should be noted rather than silently corrected: it prints "during the period of two years immediately preceding, the date of transfer" with a stray comma, and "received by such assessee on or a after the 1st day of April, 2004". Those look like slips in the report and not in the statute. The insertion date of clause (37) — Finance (No. 2) Act, 2004, from 1 April 2005 — comes from CBDT Circular No. 36/2016 dated 25 October 2016, which the Karnataka High Court reproduces in full at paragraph 11.1. No second independent source for that date has been obtained and it should be verified before it is relied on. Note that the insertion date (1 April 2005, that is assessment year 2005-06) and the receipt condition in sub-clause (iv), compensation received on or after 1 April 2004, are different dates and are not to be conflated. Clause (37A) has not been read at all and nothing is stated about it. The "decided_on" value of 1 April 2005 is the commencement date of clause (37) as that circular states it ("Finance (No.2) Act, 2004 inserted Sec.10(37) in the Act from 01.04.2005"), and not a decision date; this is a statutory entry and there is no decision behind it. That commencement rests on the single source recorded above and must be confirmed against the Finance (No. 2) Act, 2004. One point of substance to carry. The exemption depends on all four sub-clauses, and the one most often overlooked is the use condition: the land must have been used for agricultural purposes during the two years immediately preceding the transfer. Deduction at source is a separate question — s.194LA turns on compensation for compulsory acquisition and s.194-IA on a transfer by agreement — and neither settles chargeability, which is fixed by s.45 read with the definition in s.2(14)(iii), agricultural income itself being exempt under s.10(1). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that the exemption in clause (37) is available only to an individual or a Hindu undivided family, only for urban agricultural land within item (a) or item (b) of s.2(14)(iii), only where that land was used for agricultural purposes by the assessee or a parent of his throughout the two years immediately preceding the date of transfer, only on a compulsory acquisition or a transfer whose consideration was determined or approved by the Central Government or the Reserve Bank of India, and only where the compensation or consideration was received on or after 1 April 2004; enhanced and further enhanced compensation awarded by a court, Tribunal or other authority is within the same words.
TaxSphere, “Statutory position — s.10(37): the four cumulative conditions for exempting capital gain on the compulsory acquisition of urban agricultural land”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-10-37-capital-gain-on-compulsory-acquisition-of-urban-agricultural-land-four-conditions/ (validity last checked 2026-09-09)
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