Rajesh Srinivasan, Rohit Kumar S
The Finance Bill, 2013 has proposed to amend the definition of agricultural land. Here is an attempt to analyse the impact of such changes from a capital gains tax perspective.
Agricultural land – definition
Any profit arising from sale of a capital asset would be chargeable to income tax under the head ‘capital gains’ and shall be deemed to be the income of the year in which the transfer took place. Therefore, capital gains would arise only on sale of capital asset. As per Section 2(14) of the Income Tax Act 1961 ‘capital asset’ excludes ‘agricultural land’ situated outside the specified area. If the land is situated outside the specified area, then the land would be considered as “agricultural land” and hence would not be considered as “capital asset” for purpose of computation of capital gains.
Agricultural land was earlier defined to mean land not situated in any area within the jurisdiction of a municipality or cantonment board having population of not less than ten thousand or in any area within such distance not exceeding eight kilometers from the local limits of any municipality or cantonment board as notified. For that purpose, the Central Government had issued notification no SO – 9447 dated 06/01/1994. In that notification more than 400 cities have been listed and corresponding relevant distances have been mentioned. Any transfer of agricultural land falling within the relevant distance of the cities mentioned in the notification would be subject to capital gains tax.
Proposed changes
It is to be noted that earlier only notified areas were covered under the scope of agricultural land, now however the definition covers all areas whether notified or not. Moreover various limits are proposed for land to qualify as agricultural land. A land will be considered as an “agricultural land” if it is not situated in any area within the distance, measured aerially of not being more than:
1. two kilometers, from the local limits of any municipality or cantonment board and which has a population of more than ten thousand but not exceeding one lakh; or
2. six kilometers, from the local limits of any municipality or cantonment board and which has a population of more than one lakh but not exceeding ten lakh; or
3. eight kilometers, from the local limits of any municipality or cantonment board and which has a population of more than ten lakh
Current disputes
As per the existing provisions of the Income tax Act measurement of distance from the nearest municipality is a grey area as the tax payers would face challenges in the below scenarios
• By road the distance may be more but by rail route the distance may be less
• The distance measured by road or by rail route is more but aerial route is less
• In certain territories, e.g., the island territories, it may not be possible to measure distance by the road route or by the rail route because they may be non-existent there.
• In hilly areas where it is possible that distance by road would be significantly more but by aerial route it would generally be less.
The measurement of distance from nearest municipality was also a subject matter of dispute in many an assessment (e.g. CIT v. Lal Singh [2010] 195 Taxman 420 (Pun & Har.) / CIT v. Satinder Pal Singh [2010] 188 Taxman 54 (Pun & Har.) / Laukik Developers v. Dy. CIT [2007] 105 ITD 657 (Mumbai)). The principle of measuring distance had been settled in the above cases wherein the distance of the agricultural land belonging to the assessee had to be measured in terms of the approach by road and not by a straight line distance on a horizontal plane or as per crow flight distance.
It is now clarified that the distance has to be measured aerially. The term aerially generally means the shortest distance by air. Measuring aerial distance is not a challenge with tools such as satellite images and Google Maps now being available to measure the shortest aerial distance.
Earlier there also existed diverse views on the definition of population, however now the term population is defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the financial year. The details of population can be obtained from the website censusindia.gov.in which details the population of all cities and villages in India. The above provision will come into effect from the assessment year 2014-2015 which means that any transfer of agricultural land falling within the above provisions after 31 March 2013 will attract capital gains tax.
Future Impact
By making the above changes the finance minister has made an attempt to remove administrative difficulties; however, the finance minister has also widened the taxation net by covering more areas under non-agricultural land as earlier only notified areas were covered. The seller may have to shell out long term capital gains tax of 20% or short term capital gains tax at 30% in case the land does not qualify to be an agricultural land.
Impact on Wealth Tax
The term agricultural land is not defined in Wealth tax act. However, it is defined in Section 2(14) of the Income tax Act. The definition for non-urban land and agricultural land is similar. Hence the above analysis will also be applicable for the purpose of determination of net wealth as per the wealth tax act. Thus a person owning land will need to re-assess on whether the land owned by him will qualify for exemption from wealth tax or not.
These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to assessment year 2014-15 and subsequent assessment years.
About the Authors
Rajesh Srinivasan is a Partner at Deloitte Haskins & Sells.
Rohit Kumar S is a Deputy Manager at Deloitte Haskins & Sells.
Aerial distance upto 2kms from the municipal or cant board limits but the population is less than ten k then land shall be treated as agricultural land
Aerial distance upto 6kms from the municipal or cant. Board limits but the population is less than one lac then land shall be treated as agricultural land
Aerial distance upto 8 kms. from the municipal or cant. Board limits but the population is less than 10 lacs then land shall be treated as agricultural land
Aerial distance more than 8 kms.all land shall be treated as agricultural land.
The definition of agricultural land taken on the basis of aerial route does not have any justification particularly when all the agricultural activities are performed taking only land route and it is being performed for so many years when our taxation system was not in existance. If at all the agricultural land has to be subjected to tax then it should be on the basis very big land holdings and the limit may be fixed to tax the income generated from such agricultural land and not by making it capital assets for the purpose of imposing capital gain tax in which case a small farmer who is forced to raise the money for the life’s necessities by selling his land may not find it helpful and he may be forced to sell more of his land holdings to arrange the required finances. I hope my concern for small farmers is taken positively by the concerned if my interpretation is not appropriate pl. Notify me. Thanking all
Defintion of capital assets
Tax liability on sell of ancestaral agricultural land
The three conditions mentioned ,to qualify the land as agricultural land , are separated by’ or’ which means that any one of the three conditions is required to satisfy the test. This needs clarification because the aerial route may cover the land within the definition of capital assets but for seller (farmer) who to satify his needs if wants to sell the land may not find it comfortable because he never enjoyed the luxury of aerial route to bring the necessary inputs to cultivate his land from the city which is more than eight km. and is approachable by road only but the tax approach him via aerial route when he is forced to sell it for meeting the family requirement. I hope the Govt. will consider the facts. Pl. convey and correct the facts if misread by me.
Thank you