1. What is the test that determines land is agricultural land?

The Gujrat HC in CIT v Siddhartha J. Desai 139 ITR 628 (Guj)(1983) has laid down the following tests for determining whether the land is agricultural or not:

a) Whether, the land was classified in the revenue records as agricultural and whether it was subjected to payment of land revenue? [CIT vs. Smt. Debbie Alemao 331 ITR 0059 (Bom) [2011]]

b) Whether, the land was actually or ordinarily used for agricultural purposes at or about the relevant time?

c)  Whether, such user of the land was for a long period or whether it was of temporary character or by way of stop gap arrangement?

d) Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing land?

e) Whether the land, on the relevant date, had ceased to be put to use? If so, whether it was put to an alternative use? Whether such lessor and/ or alternative user was of permanent or temporary nature?

f) Whether the land, though entered in revenue record, had never been actually used for agriculture, i.e., it had never been ploughed or tilled?

g) Whether the owners meant or intended to use it for agricultural purposes?

Some Practical Issues                               

Issue 1 – Issues related to Agricultural Land

  • The use to which the transferee put the land is immaterial and not relevant.
  • What is relevant is that, in the hands of transferor, the land must be agricultural in nature at the time of transfer.
  • If the transferee converts the agricultural land into non agricultural land or divides it into two plots and sells the same as house sites, the transfer of the land would not give rise to capital gains tax in the hands of transferor. [Motibhai Patel v CIT 131 ITR 120 (Guj)(1981)].
  • It was held that the purchaser who had no intention of carrying on agricultural operations, the seller assessee should not loose the benefit as long as he had been using the land for agricultural purposes. [M.S. Srinivasa Naicker V ITO 292 ITR 0481 (Mad)[2007]].
  • If the land was put to agricultural use for a long period and the agricultural operations were temporarily suspended, the land does not cease to be agricultural. [Ranganatha Sastri (M) V CIT 119 ITR 488 (Mad) (1979)].
  • Where agricultural land which is outside the scope as per section 2(14) (iii) is sold along with standing trees, there will be no liability to capital gains tax even in respect of the standing trees. On the other hand, if the standing trees are sold separately after they are cut and removed, they do not partake of the nature of the land and there will be liability to tax on capital gains arising from the sale. [Gokul Rubber and Tea Plantations Ltd. V CIT 172 ITR 197 (Ker)(1 988)].
  • Where land was shown as agricultural land in the revenue records and was never sought to be used for non-agricultural purposes by the assessee till it was sold, it was held that such land has to be treated as agricultural land even though no agricultural income is shown by the assessee as the assessee stated that the agricultural income derived by sale of coconut grown on the land was just enough to maintain the land and there was no surplus. [CIT v Debbie Alemao 46 DTR 341 (Bom.)(2010)]
  • Agricultural land not covered under specified urban areas and therefore not a capital asset. [Ramjibhai P. Chaudhry v DCIT 314 ITR (AT) 0259 ITAT – Ahm.] [2009] .
  • How the distance is to be measured – Distance to be taken by approach road and not as a straight line. [Radhasoami Satsang v. CIT 193 ITR 321 (SC) (1992), CIT v. Satinder Pal Singh 188 Taxmann 54 (P&H)(2010)]
  • Jurisdictional Municipality has to be considered for calculating the distance. [DCIT v. Capital Local Area Bank Ltd 29 SOT 394 (ASR)(2009) & Srinivas Pandit HUF v. ITO 39 SOT 350 (Hyd.)(2010)]

Other Important Case Laws Published on Taxguru Related to Capital Gain on Sale of Agricultural Land

Particulars Details of Case Laws
Capital Gain tax payable on Sale of Land declared as non- Agricultural Virvati Devi Vs CIT (ITAT Delhi)
Capital Gain on Sale of agricultural land Converted into stock of residential plots Mahaveer Yadav Vs ITO (ITAT Jaipur)
Sale of agricultural land does not attract capital gains tax Ramjibhai P. Chaudhry Vs. Deputy Commissioner Of Income Tax (ITAT Ahmedabad)
Profit on sale of Agricultural Land -Business Income or Capital Gain? ACIT Vs. Shri Bhopindersingh R. Arneja (ITAT Nagpur)
No Capital Gain Tax on Income from Compulsory Acquisition of Agricultural Land Anil Plantations Pvt. Ltd. Vs Pr. C.I.T. (ITAT Kolkata)
Agricultural Land is not Capital Asset if not within notified area & no capital gain on transfer of such land Deputy Commissioner of Income-tax Vs Arijit Mitra (ITAT Kolkata)
Tax cannot be levied On Gain from Sale of Agricultural land based on intention of Buyer to use the land for business purpose Principal CIT Vs Heenaben Bhadresh Mehta (Gujarat High Court)
Gain on sale of agricultural land after conversion into plots not exempt from tax Synthite Industrial Ltd. Vs CIT (Kerala High Court)
No Penalty for mere Treatment of Capital Gain on Sale of Agricultural Land as Business Profit by AO PCIT Vs M/s G.K. Properties Private Limited (Andhra Pradesh High Court)
Measurement of Distance to determine if agricultural land is situated within 8 km of municipal limits CIT Vs Vijay Singh Kadan (Delhi High Court)
Income from sale of Agricultural Land after plotting is business Income Ramswaroop Saudagar Vs Income Tax Officer (ITAT Jaipur)
Leasehold right allotted against right of agricultural land cannot be considered as agricultural land Pyaribai K Jain Vs Addl.CIT (ITAT Mumbai)
AO cannot treat Agricultural land as capital Asset on mere assumptions Mohit Suresh Harchandrai Vs. ACIT (ITAT Mumbai)
Agriculture land situated beyond 8 kms is not Capital Asset & Section 50C not applies DCIT Vs Shri Ravjibhai Manibhai Patel (ITAT Ahmedabad)
Profit from Sale of Agricultural Land after conversion into non-agricultural land is taxable Sunil Bansal Vs ACIT (Rajasthan High Court)
Land with no agricultural activities situated within 8 km. of local municipal limits is capital asset Girdhari Lal Vs ITO (ITAT Delhi)
Income on Agricultural land sale cannot be treated as business gain merely for higher volume of sale consideration Shailesh Gangaram Ramani Vs. ITO (ITAT Rajkot)
Income from sale of Agricultural Land to Real Estate Company is Business Income G.K. Properties (P.) Ltd. Vs Income-tax Officer, Ward 2(2) (ITAT Hyderabad)
Amount earned on sale of Agricultural land not for Business is capital receipt DCIT Vs. Kushal Infraproject Industries India Ltd. (ITAT Delhi)
Section 54F exemption available on Residential house constructed on agricultural land Assistant Commissioner of Income-tax Vs Om Prakash Goyal (ITAT Jaipur)
Merely because Agricultural land is declared as industrial land same cannot be held to be a capital asset ITO Vs Meera Thapa Prop (ITAT Delhi)
AO must prove that sale of agricultural land is in the nature of trade to tax gain as business income Pr. CIT Vs Heenaben Bhadresh Mehta (Gujarat High Court)
Conversion of Agricultural land: Section 50C not apply to business income The Income-tax Officer Vs. Smt. Sejal D Shah (ITAT Ahmedabad)
Distance for agricultural land prior to A.Y. 2014-15 is to be measured by approach road & not by straight line/ aerial method : HC The CIT Vs Nitish Rameshchandra Chordia, & Others (Bombay High Court)
Agricultural land purchased without an adventure in the nature of trade is not a capital asset The ACIT Vs M/s Mansi Finance Chennai Ltd (ITAT Chennai)
Sale of agricultural land by converting into plots would attract section 45(2) Rajendra Kumar Dwivedi Vs Commissioner of Income-tax, Kanpur (Allahabad High Court)
Airport Authority isn’t a ‘municipality, Agricultural land situated within its jurisdiction is not a ‘capital asset’ Smt. T. Urmila Vs Income-tax Officer, Ward-6(2) (ITAT Hyderabad)
Land cannot be classified as non-agricultural for mere agricultural activity absence Smt. Chalasani Naga Ratna Kumari Vs ITO, (ITAT Visakhapatnam)
Gain from Transfer of Agricultural Land cannot be taxed despite absence of agricultural operations on such land Shri Kallepu Sharath Chander Vs ACIT (ITAT Hyderabad)
No Tax on Compensation for Compulsory Acquisition of Agricultural Land Sumesh Kumar Vs ITO (ITAT Delhi)
Character of agricultural land not changes merely for Sale of Land within one year GRK Reddy & Sons (HUF) Vs ITO (ITAT Chennai)
Exemption U/s 54B allowable on Jirayat type of agricultural land as it was cultivable land Murtuza Shabbir Jamnagarwala Vs ITO (ITAT Pune)
Interest on enhanced compensation for compulsory acquisition of agricultural land eligible for exemption U/s. 10(37) ITO Vs Shri Basavaraj M Kudarikannur (ITAT Bangalore)
Exemption U/s. 10(37) valid on Compulsory acquisition of agricultural land though Sale price fixed on negotiated settlement ITO Vs. Smt. Girijakumari M (ITAT Cochin)
Tax on Enhanced Compensation for Compulsory Acquisition of Agricultural Land Shri Baldev Singh Vs ITO (ITAT Delhi)
Land within 1 Km from local limits of municipality having population of more than 25,000 is Capital Asset Gurudwara Sahib Patti Dhaliwal Vs CCIT (Delhi High Court)

(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains  written by CA Agarwal Sanjay ‘Voice of CA’ & Team)

Republished with Amendments

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  1. Ajju says:

    When consideration of sale of agriculture land is received in installments.. when will be tax tax liability accrue… at the time of sale or when full payment received?

  2. DEBABROTA ROY says:

    Here i am asking a question about to prove agricultural land as defined in section 2(14)(iii) what documents to be produced before ITO.

  3. abhinav rastogi says:

    If all conditions are satisfied but land is within 8 km than whether it is agriculture or not for claiming exemption under 54B or exempt profit on sale

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May 2021