Section 54B of the Income Tax Act provides an exemption from the capital gain arisen on the transfer of agricultural land by acquiring another agricultural land. The present article explains the provisions attached with the exemption available under section 54B of the Income Tax Act.

Some conditions to avail exemption under section 54B

The assessee is required to fulfil following listed conditions in order to avail the exemption under section 54B –

  1. The exemption benefit under section 54B is available only to the Individual or a Hindu Undivided Family (HUF).
  2. The asset transferred should be agricultural land. Here, it is important to note that the agricultural land transferred can be any ‘Long term capital asset’ or ‘Short term capital asset’.
  3. The agricultural land transferred should have been used in the following manner –
Type of transferor Manner of use to avail exemption
An Individual Agricultural land should have been used by the individual or his parents for the agricultural purpose for at least a period of two years immediately before the date of transfer.
A Hindu Undivided Family Agricultural land should have been used by any of the members of the HUF for the agricultural purpose for at least a period of two years immediately before the date of transfer.
  1. The assessee is required to acquire another agricultural land within a period of two years from the date of transfer of the old agricultural land.

Amount of exemption available under section 54B of the Income Tax Act

In case the assessee fulfils all the above conditions and qualifies for the exemption under section 54B, then, the exemption available would be lower of the following –

  • An amount of capital gain arising on sale of agricultural land; or
  • Investment in new agricultural land (which also includes an amount deposited in Capital Gain Deposit Scheme).

Some Practical Issues on Section 54B

1. Whether the assessee would be entitled to get exemption under section 54B for purchase of land in name of his son and daughter-in-law?

The word “assessee” used in the Income Tax Act needs to be given a ‘legal interpretation’ and not a ‘liberal interpretation’, if the word ‘assessee’ is given a liberal interpretation, it would tantamount to give a free hand to the assessee and his legal heirs and it shall curtail the revenue of the Government, which the law does not permit. Consequently, an assessee would not be entitled to get exemption under section 54B for land purchased by him in name of his son and daughter-in-law. [Kalyavs CIT [2012] 22 taxmann.com 67 (Raj.)]

2. Whether the assessee would be entitled to get exemption under section 54B for purchase of land in his name and in name of his only son?

When the purchased land was being used by assessee only for agricultural purpose, merely because in sale deed his only son was also shown as co-owner, assessee could not be denied deduction under section 54B. [CIT vs Gurnam Singh [2008] 170 Taxman 160 (Punj. & Har.)]

3. If no agricultural activities are performed on land in past two years preceeding date of sale of land, the claim for exemption under section 54B allowable?

When as per revenue records no agricultural activity was undertaken on land owned by assessee in past two years preceding date of sale and the assessee failed to prove that land in question was agricultural land, assessee’s claim for exemption under section 54B cannot be accepted.[G. Ramkumar vs DCIT [2012] 20 taxmann.com 522 (Chennai-ITAT)]

4. Is the assessee eligible for exemption under section 54B, where capital gains from sale of agricultural land was invested in purchasing non ­agricultural land?

The land revenue authorities had categorically stated that as per revenue records no crop was cultivated/agricultural activity was undertaken on the land owned by the assessee. No concrete evidence has been brought on record by the assessee to controvert the findings of fact recorded by the lower authorities, except production of statements of neighbours of the assessee. Since the assessee has miserably failed to prove that the land in question was agricultural land and he had cultivated crops in the land, assessee is not eligible for exemption under section 54B.[G.Babuvs ITO [2012] 24 taxmann.com 36 (Chennai-ITAT)]

5. Whether word ‘parent’ as appearing in section 54B includes an ‘uncle’ within its ambit?

The word ‘parent’ does not stand defined in the Act. Once this is so, the general definition of the word ‘parent’ is to be taken into consideration and even the general definition does not include an ‘uncle’. Thus, the land having not been exploited for agricultural purposes by a parent of the assessee, the exemption under section 54B would not accrue to him. [Jarnail Singh vs ITO [2009] 31 SOT 8 (Asr.-ITAT)(URO)]

(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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