Capital Gain on Sale of Agricultural Land – Case Studies

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

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

Republished with Amendments