The long term and short term capital gains are taxed under section 50 to 54 in the Income Tax Act, 1961. The amount of such capital gains is generally lump sum and attracts huge tax liability for the assessee and is a important source of revenue for the nation from tax collection. The various assets are taxed at varied rates depending upon the type of the asset and the holding period of such asset in the hands of the assessee and sometimes also includes the holding period of the previous owners in case of a gift or other transfers mentioned in the act.
The assessee is generally over burdened with the heavy tax liability arising on the sale of any asset and tends to adopt malpractices to evade his tax liability. In order to prevent such practice to become a regular trend among the citizens and to divert the flow of such capital gains into nation building and economic development the tax authorities have provided legal means to avoid the heavy tax liability in such a manner that the amount is till used for economic growth and the assesse also earns certain return on the capital gain. This is done by way of the various exemptions mentioned under section 54 (54A,54B,54F,54EC,54D etc)
One such exemption mentioned under section 54B is that the assessee can invest the long term capital gain earned by him during the previous year can be invested in a agricultural rural land i.e. the assessee can purchase an agricultural rural land from the amount of capital gain earned by him within a period of 2 years or if he is unable to do so he can also deposit the amount in Capital Gains Account Scheme (CGAS) within six months of the end of the previous year. The amount so deposited has to be used for the aforesaid purpose within the stipulated time period otherwise it would be treated as long term capital gain and will be taxed accordingly. The other condition to be satisfied to avail this exemption is that the land so purchased from the capital gains must be retained at least for a period of 3 years and if it is sold by the assessee before that the capital gain arising from the sale of the asset will be calculated by considering the cost of acquisition of such asset as nil or the other treatment is that the new asset is taxed in a normal manner and the previously exempt capital gain is taxed subsequently in the current previous year.
The above provisions are well planned to encourage investment in agricultural land in rural areas so as to enable and smoothen the process of economic growth but the fact that capital gains arising from the sale of agricultural land is exempt if the new land so purchased is situated in the areas specified in the section 2(14)(iii). This gives the assessee the leverage to purchase agricultural land from the taxable capital gains but not hold it for the intended period of time. Rather, the assessee can very well sell the property in a few days without bothering about the tax liability as the new capital gain is exempt under the act.
Thus, it is necessary for the Indian Revenue Services officers to look at such minor loopholes in the law and provisions which though they may be aware of but haven’t yet been worked upon or rectified by any amendment for the same.