Capital Gains on Income From Sale of Agricultural Land

1. Sections relevant to the Income Tax on sale of lands

Section 2(14) : Definition of Capital Asset.

Section 10(37) : Exemption from Capital Gains on transfer of Agricultural Lands on acquisition.

Sections relating to business income if the land is held as stock- in-trade

Section 45 : Charging section for Capital Gains.

Section 54B : Exemption from Capital Gains on transfer of Agricultural Lands in certain cases.

Section 194LA : TDS on compensation payment for acquisition of Lands other than agricultural Lands.

Section 50C : Capital Gains in cases of understated consideration on sale/ transfer of lands

Sale of land can result in two kinds of incomes. If the land is held as stock in trade then the sale of such lands results in business income. Whereas if the land is held as investment then the income on the sale of the land results in Capital Gain.

2. Sale of land resulting in business income

The first and most important issue to be determined is whether the land is held as investment or stock in trade. If the agricultural land is held as stock in trade then the sale of such lands is taxable as business income and no exemption under the Act is provided in this regard.

2.1 In certain cases when the assessee claims that he is not a dealer in land but holding the same as investment then it is worth looking at the following:

a) The frequency of transactions

b) Capacity of the person making the investment

c) Period of holding of the assets

d) treatment of the asset in the books of accounts etc.

These points become especially relevant in the areas which are notified for acquisition. Many speculators who are privy to the information before hand indulge in frequent buying and selling of land in the area to be acquired. In such cases it is worthwhile to determine whether the transaction is that of capital gains or is an adventure in the nature of trade. Reference in this regard is made to the decision of Hon’ble Supreme Court in the following cases to determine whether the sale is taxable as capital gains or business income.

(i) Raja Bahadur Kamakhya Narayan Singh vs. CIT 77 ITR 253 (SC)

(ii) CIT vs. Holck Larsen 160 ITR 67 (SC)

Once it is decided that the land is stock in trade, the sale of the same is business income whether the land is agricultural land or not.

3. Sale of Land held as investment

In case, the land is an investment and not stock in trade then it becomes necessary to establish after thorough investigation whether the lands sold are agricultural lands or not. This is most important because as per Section 2(14) of the I.T. Act, agricultural land which are not situated in specified areas are not Capital assets and sale of such land does not give rise to capital gains.

Section 2(14) which defines Capital Asset reads as under:

“capital asset” means—

(a) property of any kind held by an assessee, whether or not connected with his business or profession;

(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),

but does not include—

……

(ii) ………

(iii) agricultural land in India, not being land situate—

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or

(b) in any area within the distance, measured aerially,—

(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.

3.1 Further exemption from Capital gains is provided in Section 10(37) of the Act from sale of Agricultural lands arising to individual assesses or to HUF even if the lands are situated within the area specified in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2.

3.2 Section 10(37) reads as under:

(37) 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 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;

4. Agricultural land

Agricultural land is a land on which agricultural activities are carried out. Agricultural activity has been held to be an activity where human effort has resulted in growing crops. The decision of the Supreme Court in the case of CIT vs. Raja Benoy Kumar Sahas Roy reported in 32 ITR 466 (SC) deals exhaustively with the issue as to what constitutes “agriculture”. Spontaneous growth, such as wild growth of trees in a forest, do not constitute agricultural activity. The hon’ble Supreme Court in the case of Ramkrishna Deo reported in 35 ITR 312(SC) has upheld the above proposition. However, growing fruit trees does constitute agricultural activity as held in the case of Vajulal Chunilal (HUF) reported in 120 ITR 21.

Agricultural land may cease to be agricultural because it was lying fallow for some years and the land in the neighborhood was under development as non-agricultural land as was decided by the Supreme Court in the case of Sarifabibi Mohmed Ibrahim vs. CIT [1993] 204 ITR 631 (SC), where such land was held to be non-agricultural because it was sold for non-agricultural purposes to a co-operative housing society with construction following the sale. In the case of Gemini Pictures Circuit Pvt. Ltd. reported in 220 ITR 43 (SC) the Supreme Court held that where certain lands were located in most important and busiest thoroughfare in city and the land was surrounded on all sides by industrial and commercial buildings and no agricultural operations were being carried on any land nearby, the mere fact that vegetables were being raised thereon at the time of sale or for some years prior thereto, could not change the nature and character of the land from non-agricultural to agricultural.

Where the land is agricultural and has been put to agricultural use, exemption cannot be denied merely because a hospital was coming up close to assessee’s land. It would still continue to be treated as agricultural, notwithstanding such development. It was so held in CWT vs. E. Udaynarayan [2006] 284 ITR 511 (Mad.)

Where the price of land had escalated, the Assessing Officer inferred that it no longer retains the character of agricultural land. The High Court in CWT v. Shashiben [2007] 288 ITR 319 (Guj.) found, that though the land was uncultivated for some time with grass alone being raised, it does not cease to be agricultural merely with reference to the price of the land.

4.1 Once it is held that the land is agricultural then one of the major legal issue arising in the treatment of capital gain is whether the land is situate within the area specified in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2. The distance of not more than 8 km. mentioned in the Section 2(14) of the I.T. Act whether it is the road distance or distance as crow flies? Several judicial pronouncements have now established that distance of 8 km. is to be reckoned by the shortest motorable road which leads to the land and not the distance as the crow flies.

It is worth mentioning that the distance mentioned in the item (b) is not more than 8 kms. The AO should refer to Notification No. [SO 9447] (File No. 164/3/87ITA.I)], dated. 6-1-1994, wherein the exact distance in respect of every area is specified. It would also be worthwhile to see what is the nearest urban area because the land may be located in the vicinity of several areas mentioned in the notification. If the land falls within anyone of the areas then it becomes a “Capital Asset” within the meaning of the Act.

4.2 The AO has to be careful in determining the distance of 8 kms. In the case of CIT v. Lal Singh [2010] 325 ITR 588 (P&H) the Punjab and Haryana High Court held that the decision of the Tribunal could not be characterized as “perverse, illegal or contrary to the evidence available on the records.” The physical location of a property could probably be ascertained precisely, since it is a matter of fact and not law. In that case the Assessing Officer had relied upon an inspector’s report for the inference that it was within the notified periphery of eight kilometers of the Gurgaon municipal limits, while the assessee relied upon a certificate from the Tehsildar that it was outside the limit. The Tribunal had accepted the Tehsildar’s certificate as having relevance and not that of the inspector. The High Court found that if the Assessing Officer had doubt about the correctness of the Tehsildar’s certificate, further enquiry with reference to the records of the Public Works Department and the land survey records should give a more satisfactory solution to such problems than merely going by the certificate of revenue authorities and much less of on an Inspector’s report. Thus it was decided that between the certificate of revenue authorities and the Inspector’s report without any objective facts, it is the former which should prevail. In view of this decision the AO must take effective steps to disprove any certificate of revenue authorities if he really doubts the certificate about the location of the lands.

Once it is established that the land in question is agricultural land and is not land situate in any area referred to in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2, then no Capital Gain can arise out of the Transfer of such lands. However if the land is situated in any area referred to in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2 then the following issues may be relevant.

5. Compensation received for the breach of agreement for sale

Another major issue arising out of the transfer of lands is the Compensation received for the breach of agreement for sale. The Gujarat High Court in CIT v. Hiralal Manilal Mody [1981] 131 ITR 421 (Guj) has held that the mere right to sue for specific performance is not a right which can be transferred under Section 6(e) of the Transfer of Property Act. It is also a proprietary personal right exempt under the definition of capital asset. At any rate, there is no transfer so as to justify liability for capital gains. The Calcutta High Court in the case of CIT v. Dhanraj Dugar [1982] 137 ITR 350 (Cal) held that the amount was neither revenue nor was there liability for capital gains on such capital receipt. The High Court held that since there is no transfer and, hence, no liability to capital gains tax following the view taken earlier by the same High Court in CIT v. Ashoka Marketing Ltd. [1987] 164 ITR 664 (Cal).

However the other High Courts have taken a different view. Right to specific performance, which the assessee had under the agreement for sale was found to be a capital asset and since the amount received was for the surrender of such right, charging of capital gains on such receipt was upheld in the case of K.R. Srinath v. Asst. CIT [2004] 268 ITR 436 (Mad). In coming to the conclusion, the High Court followed the decision of the Bombay High Court in the case of CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bom). A similar view had been taken by the Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom) and CIT v. Sterling Investment Corporation [1980] 123 ITR 441 (Bom).

The proposition that compensation for giving up the right to specific performance for such contractual right relating to capital asset would be liable for capital gains tax was accepted in the case of CIT v. Smt. Laxmidevi Ratani [2008] 296 ITR 363 (MP). The amount received as compensation for relinquishment of right under agreement of sale was held taxable in the case of J.K. Kashyap v. Asst. CIT [2008] 302 ITR 255 (Delhi).

The issue has not yet been finally settled as no decision of the Supreme Court is yet available on the issue. However for the state of Gujarat there being a decision of the Jurisdictional High Court the same is binding.

6. Compensation and interest received on Acquisition of agricultural lands

a. Year of taxability

Section 45(5) says, where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, such transfer will be taxable in the year when the whole or part of original compensation is received. Enhanced compensation shall be taxable in the year of receipt(that is, as and when received). However when any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which the final order of such court, Tribunal or other authority is made..

Extract of Section 45(5):

Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :—

(a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as income under the head “Capital gains” of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received; and

(b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which such amount is received by the assessee :

Provided that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which the final order of such court, Tribunal or other authority is made;

(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration.

Explanation.—For the purposes of this sub-section,—

(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;

(ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head “Capital gains”, of such other person.

The Supreme Court in CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 accepted revenue’s contention with reference to the provisions under Section 155(15) providing for refund of excess tax. After this provision, it found no reason for postponing the liability for the amount received by the assessee. The Supreme Court in Ghanshyam’s case [2009] 315 ITR 1 did not make any distinction as regards liability in respect of compensation received before and after the insertion of sub-section (15) of Section 155 with effect from June 1, 2002, though the dispute decided by this common judgement related also to cases prior to the date of amendment.

The Supreme Court in this case also held that interest under Section 28 of the Land Acquisition Act will form part of the enhanced value of land, while interest under Section 34 of the I.T. Act will be construed as interest simpliciter for delay in payment, so that it would be governed by law relating to assessment of interest on such delay being on accrual basis. However, by the Finance (No.2) Act, 2009 to Section 145A has been amended to make interest payable under Section 34 of the Land Acquisition Act on enhanced compensation taxable in the year of receipt.

The decision of the Supreme Court in the case of CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC) which was followed in the case of Chief CIT v. Smt. Shantavva [2004] 267 ITR 67 (Karn) finding no difference even after Section 45(5) is no longer valid.

b. Treatment of Solatium

Many a times a person whose property is acquired under the Land Acquisition Act is not only awarded compensation with reference to the market value of the land but also damages on various counts apart from 15 per cent extra amount over and above the market value in view of the compulsory nature of the acquisition. Such extra amount is described as solatium though the statute itself does not use the word. The claim that this amount being consideration for the property acquired could not be treated as part of sale proceeds for purposes of capital gains has been rejected by the Gujarat High Court in the case of Vadilal Soda Ice Factory v. CIT [1971] 80 ITR 711.Similar view has been taken by the Punjab and Haryana High Court in the case of CIT v. K.C. Mahajan [1998] 234 ITR 235 (P&H) and the Kerala High Court in the case of Karvalves Ltd. v. CIT [1992] 197 ITR 95 and the Bombay High Court in R.R. Todiwalla v. CIT [1994] 208 ITR 65.

c. Treatment of extra CompensationAn additional compensation is provided for compulsory acquisition under the Land Acquisition Act, 1894, when part of a property is acquired, and such acquisition injuries the right to use of the remaining property. The Supreme Court in Smt. P. Mahalakshmi v. CIT [2002] 255 ITR 647 held that though the amount refers to the injury of the unacquired part of the property, it arises because of the acquisition of the acquired property, so that it has to be treated as part of the compensation liable to tax.

d. On compulsory requisition before acquisitionWhere a property was requisitioned for some period, but later converted into acquisition, the dispute was whether the amount attributable to requisition could be treated as compensation liable for capital gains. Section 45(5), which requires compensation for transfer covered by compulsory acquisition under any law, may not cover requisition cases. Section 45(5) only determines years of taxation as the year in which the compensation is received.

The Supreme Court has decided in the case of P. Mariappa Gounder v. CIT [1998] 232 ITR 2 (SC) that mesne profits are table as profits enjoyed by the person in possession depriving the owner of possession. The Supreme Court has decided that it will be taxable only in the year in which it is quantified and not earlier to the same. In light of this decision it can be held that the income from loss of possession accrues on the date on which the compensation was quantified and paid in the same year, so as to be taxable in that year.

7. Application of Section 50C

50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer :

Provided that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of agreement may be taken for the purposes of computing full value of consideration for such transfer:

Provided further that the first proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of the agreement for transfer.]

Following third proviso shall be inserted after the second proviso to sub-section (1) of section 50C by the Finance Act, 2018, w.e.f. 1-4-2019 :

Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.

(2) Without prejudice to the provisions of sub-section (1), where—

(a) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;

(b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

Explanation 1.—For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).

Explanation 2.—For the purposes of this section, the expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.

(3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.

The AO should gather the information about the jantri rates prevailing in the area while ascertaining the Capital Gains on sale of lands. In cases of sale consideration being less than the Jantri rates he should apply the Jantri rates to compute the Capital Gains by applying Section 50C of the IT Act.

8. Deduction under Section 54B from Capital Gains arising out of sale of agricultural land

The agricultural land is situate in the area specified in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2 is a capital asset. However, deduction under Section 54B of the I.T. Act provided from the capital gains arising from sale of such agricultural land, provided agricultural operations are carried out on such land for two years preceding the year in which the land is sold and the cost of new agricultural land purchased within two years of sale of such land is more than the capital gain. Lesser deductions are provided if the cost of the agricultural land purchased within 2 years of sale of the original agricultural land is less than the capital gains arising to the assessee.

9. Some of the other debatable issues are:

(i) Whether AOP would be eligible to claim exemption under Section 10(37)?

(ii) Status of the confirming parties in such transactions?

(iii) Does the inclusion of confirming parties result in making the individual’s share indeterminate in the AOP?

(iv) Whether the onus lies on the agriculturist alone to prove that the agricultural activity was actually carried out on the land in question for claiming exemption under Section 10(37) or deduction under Section 54B

(v) Whether notice under Section 148 can be issued for escapement of Capital Gains to the recipient of compensation only on the ground that agricultural land falls in the area referred to in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2.

(vi) The status of land falling in the vicinity of several notified areas.

10. Levy of Tax and interest under Section 201/201(1A) in case of default under Section 194LA

The important part is to determine whether the land acquired is agricultural land or not and whether agricultural operations were carried on the land or not? Once it is found that Capital Gains was chargeable on the acquisition of such lands then orders should be passed levying Tax under Section 201 and interest under Section 201(1A)

The Department should continuously monitor Acquisition Notifications published in the Newspapers and Gazette etc.

Field Surveys may be carried out by visits to the lands proposed to be acquired in the current year to confirm the actual agricultural activities. Reports of the District Collector may be called for in order to ascertain the status of the lands.

11. Suggested information to be gathered by the AO

Most of the other issues in this regard, are factual issues in order to establish whether the land sold is agricultural land within the meaning of the Act or not.

The Assessing Officer may collect the following information in respect of the agricultural land which may be useful in computing the capital gains and also to determine the true nature of land.

(i) Purchase deed and sale deed of the sale of the land.

(ii) 7/12 certificate issue showing the characterization of land.

(iii) The certificate of Talati regarding crops grown whether the land is irrigated or not and the income from the land as shown in the land revenue records.

(iv) Jantri rates prevailing in the area.

(v) Evidences of income arising from agricultural operations in the form of sale bills etc.

(vi) Evidences of expenditure having been incurred on agricultural operations by calculating bills of expenditure etc.

(vii) Distance of the land from the areas specified in Section 2(14)(iii)(a) & (b) of the I.T. Act.

(viii) Any permission has been obtained from the revenue authorities to convert the land use to non agriculture. Whether the permission has been obtained by the vendor or vendee.

(ix) Whether land itself was developed by plotting and provided with roads and other facilities.

(x) The land use in the surrounding area to indicate whether the land was agricultural or not?

(xi) Whether there were any previous sales of portions of the land for non-agricultural use?

12. A new section 45(5A) was inserted by Finance Act, 2017,

where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset :

However, the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of the said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.

Author :- Ravindra Kumar – CIT(Appeals)-I, Ahmedabad

(Republished With Amendments)