As you are aware that Capital Gain Tax is charged on transfer of Capital Assets under provisions of Section 45 to 55A of the Income Tax Act, 1961. The main ingredients of Capital Gain Tax are ;

1. There should be a Capital Assets means property of any kind held by an assessee whether or not connected with his business or profession. Such as land, building, Jewellary, vehicles, Shares, Bonds , Debentures etc.

2. There should be “transfer” of Capital Assets. Transfer defined under Section 47 of the Act, 1961. Transfer generally includes Sale, Leave, Relinquishment, Extinction, Abdonment etc., of Capital Assets.

3. The Sale Consideration must be computable under provisions of Sections 45 and Section 48 of the IT Act, 1961.

The provisions of Section 2(14) also exclude some assets from the definition of Capital Assets such as Stock -in-Trade, Personal effects, Agricultural Land, Some Bonds issued by the Government etc.

In Real Estate Transactions , we generally saw that an owner of an “ Agricultural Land” transfers his land to the real estate developer for development of residential or commercial property. Since Section 2(14)(iii) excludes Agricultural Land from the definition of “ Capital Assets. Provisions of Section 2(14)(iii) has defined the Agricultural Area for inclusion of any Agricultural Land as Capital Assets.

Section 2(14)(iii) has amended by Finance Act, 2013 and Clause 2(14)(iii)(b) has been amended [Old Provision];

“In any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.”

The provisions of Section 2(14)(iii) has been introduced by Finance Act, 1970 earlier any land not situated in any area within jurisdiction of a municipality or cantonment board having population not less than 10,000 or in any area within such distance not exceeding eight kilometres from the local limits of Municipality or Cantonment Board as notified by CBDT keeping in view the urbanisation of area will be considered as “ Agricultural Land”.

From above definition it is clear that “ Urban Agricultural Land” will be considered as Capital Asset and Capital Gain will be charged on transfer of such asset. But not a land satisfying exemption criteria mentioned in Section 2(14)(iii).

The Finance Act, 2013 w.e.f. AY 2014-15 has amended the definition of Capital Asset in the nature of Agricultural Land given under Section 2(14)(iii). As per amendment , are /city wise distance notified earlier as per Notification dated 28th December, 1999 has been down away with and now distance with reference to population of the particular area /city has been prescribed in the definition. 

PLEASE NOTE THAT

1. In case of Sections 10(37) & 54B of the Act, it is necessary for claiming respective exemption that the Agricultural Land under transfer should be used for agricultural purposes during preceding two years from the date of transfer.

2. Any land situated in rural area which is not Agricultural Land or which is a “Banjar Land” or “ Mountain Land” or “Commercial Land” would not be eligible to be classified as Agricultural Land and Capital Gain arise on transfer of such land will be taxable.

3. The distance is to be measured from the end of the limits of the area covered by the Municipality or Cantonment Board towards periphery existing on all sides and not from the place where Municipality Operates or has its office.

4. The limits of 2 Kms, 6 Kms or 8 Kms as the case may be ,is to be measured aerially. The distance can be measured by using modern technology and Google Maps and various software available for distance measuring.

Since the IT Act, 1961 no where define the term “ Agricultural Land” and hence there are a lot of dispute in determining ,which land falls under Agricultural Land.

There are various judicial decisions on the basis of which we shall determine ,which land comes under definition of Agricultural Land.

We have to consider below mentioned questions for determination of nature of a land as Agricultural Land;

1. Whether land on which agricultural operations have actually been carried out may alone be termed as Agricultural Land or the land which is capable of being used for agriculture operations but no such operation were carried out at the time of transfer or two years or more prior to such transfer can also be termed as Agricultural Land? 

It is not requirement of Section 2(14)(iii) that there should be agricultural operations undertaken on the land at the time of transfer or immediately prior to transfer.

But provisions of Section 10(37) & 54B requires that land being used in agricultural operations for a period of two years prior to date of transfer of land. This Section is applicable in case of Compulsory Acquisition of Agricultural Land by Government.

CONDITIONS FOR AVAILING EXEMPTION UNDER SECTION 10(37) The exemption under section 10(37) is available only on account of compulsory acquisition of urban agricultural land. However, all the following conditions are mandatorily required to be satisfied, in order to claim an exemption under section 10(37) of the Income Tax Act–

1. An exemption under section 10(37) is available only to an individual or a Hindu Undivided Family.

2. The exemption is available towards capital gain arisen on the transfer of agricultural land.

3. The said agricultural land should be situated within the area mentioned below-

* The agricultural land should be situated within the jurisdiction of a municipality; municipal corporation; notified area committee or town area committee or town committee having a population of more than 10,000; or

* The agricultural land should be situated within the following distance, measured aerially-

Distance Limit Population
Up to 2 kilometres from local limits of any municipality. More than 10,000 but not exceeding 1 Lakhs.
Up to 6 kilometres from local limits of any municipality. More than 1 Lakhs but not exceeding 10 Lakhs.
Up to 8 kilometres from local limits of any municipality.

More than 10 Lakhs.

 

4. The said agricultural land should have been used, for a period of two years immediately before the date of transfer, for the agricultural purpose by- An individual or his parent; or A Hindu Undivided Family.

5. The transfer of capital gain is on account compulsory acquisition under any law or the transfer consideration for which is determined / approved by the Central Government or the Reserve Bank of India.

6. The consideration or compensation from the transfer should have been received on or after 1st April 2004. In case all the above conditions are fulfilled, the capital gain arising on compulsory acquisition of an urban agricultural land would be exempted under section 10(37) of the Income Tax Act. Amount of exemption available under section 10(37) If all the above-mentioned conditions are satisfied, entire capital gain arising on transfer of urban agricultural land is exempted under section 10(37). There is no maximum limit prescribed under the law. 

Amount of exemption available under section 10(37) If all the above-mentioned conditions are satisfied, entire capital gain arising on transfer of urban agricultural land is exempted under section 10(37). There is no maximum limit prescribed under the law.

2. Whether in a situation when land has been classified as an Agricultural Land is the revenue records but no agricultural operation were carried out on such land for a long period , can such land be treated as Agricultural Land? 

i) Shiv Shankar Lal Vs. CIT[1974] 94 ITR 433-Delhi High Court held that where a land has been put to agricultural use for a long period and the agricultural operations were temporarily suspended, the land does not cease to be an agricultural land. 

ii) Ranchhodbhai Bhaijibhai Patel Vs. CIT[1971]81ITR 446(GUJ)- it was held that if the agricultural use of land has ceased but it is apparent that the land is meant for to be used for agricultural purposes , such land would still continue to an agricultural land. 

iii) CWT Vs. Officer-in-Charge ( Court of Wards)[1976] 105 ITR 133(SC)- in this case the land was never been used for agricultural purposes , in the sense that it had never ploughed or tilled. However the land was capable of being used for agriculture and the land revenue was being assessed and paid in respect of that land.

The Apex Court held that for a land to be agricultural , what is really required to be shown in the connection with an agricultural purpose and user and not mere possibility of user of land, by some possible future owner or processor , for an agricultural purpose. If there is neither anything in its condition , nor anything in evidence to indicate the intention of its owner or possessor , so as to connect it with an agricultural purpose, the land cannot be termed as an “Agricultural Land”. 

iv) State of UP Vs. Nand Kumar [Agrawal AIR 1998] SC 473, 476- it was held that simply because the land is entered in the revenue record would not mean that it is being used mainly for the agricultural purpose.

3. Whether land in revenue records shown as an agricultural land but not agricultural activities were held for a long period of time ,will be considered as an agricultural land?

There are two views on this matter;

i) On one hand , it can be argued that if land is appearing as rural agricultural land in revenue records, such land is capable of being used for agricultural purposes but for some or other reason , agricultural operations could not be carried on such land. Therefore such land would be regarded as Rural Agricultural Land and Capital Gain arising on transfer should be exempt.

ii) On the other hand , it can be argued that any land on which agricultural operations are not carried cannot be treated as agricultural land merely for reason that such land is appearing as agricultural land in the revenue records.

It is generally presumed that if a land is capable of being used for agricultural operations, such operations would be carried on such land. In case agricultural operations are not being carried on such land for fairly long period of time , it may lead to the presumption that such land is not in the nature of agricultural land. 

4. Land originally used for agricultural purpose , later unfit for cultivation but still registered as “ Agricultural Land” in the revenue records. 

In this case we have to check whether

i) Land is unfit for temporary period or

ii) It is unfit for agricultural operations for permanent period.

In case the nature is of temporary , it would nonetheless be treated as an agricultural land.

However in case such nature of land has become permanent and in future such land is not capable for being used for agricultural purposes at all, then such land cannot be treated as agricultural land irrespective of the fact that such land is registered as agricultural land in the Revenue Record.

5. Land registered as Urban Land on which agricultural activity carried out.

Any land which is registered as Urban Land on which agricultural operations are carried out can at best be considered as Urban Agricultural Land , which always be a Capital Assets, for computation of Capital Gain Tax on transfer of such Urban Land. 

CIT Vs. Gemini Pictures Circuit(P)Ltd.[1996] 220 ITR 43(SC)- it was held that land situated within municipality limits, registered as Urban Land, bearing municipal door number and subject to Urban Land Tax ,sold on yardage basis surrounded on all sides by industrial and commercial buildings on which assessee itself constructed two buildings after its purchase , part of such land lying vacant cannot be agricultural land for the mere reason that it was subjected to agricultural operation and hence its sale gave rise to capital gain. 

6. Whether it is necessary to show agricultural income/loss in the income tax return to claim the land as agricultural land? 

It is not necessary to declare income from agriculture in the income tax return of the assessee. 

CIT Vs. Smt. Debie Alemao [2011] 331 ITR 59(BOM)- it was held that land which was shown as agricultural land in revenue records and never sought to be used for agricultural purposes by the assessee till it was sold has to be treated as agricultural land , even though no agricultural income was shown by the assessee from this land and, therefore , no Capital Gain was taxable on sale of said land. 

7. Land sold after plotting but of agricultural nature. 

CWT Vs. Narandas Motilal [1971]80 ITR 39(Guj)- the division bench pointed out that throughout the relevant period the lands had been so situated that they could not have put to any other use except for agriculture. It was further in evidence that neither the assessee nor the person to whom the assessee had sold different plots of land had, at any time , made any attempt to put the land to non-agriculture use. There was absolutely no evidence on the record going to show that even the purchasers had made any attempt to carry on any non-agricultural activities on any of those plots of land.

Taxability of Capital Gain on Transfer of Agricultural Land

On the basis of above facts the Division Bench held that the fact that the lands were plotted out and sold on yardage basis would not be sufficient for changing the nature /character and presumption about the agricultural character of land. 

8. Whether future use of agricultural land by the buyer is of relevance to determine the character of land at the time of transfer? 

Please Note That – the use of land at the time of transfer is relevant to determine the character of land. The future use of an agricultural land by the buyer would not be relevant. The buyer of land may be a real estate developer , buying land for development in future does not change the basis characteristic of land at the time of transfer. 

DLF United Ltd. Vs. CIT[1986] 161 ITR 714(Delhi)- the assessee had acquired agricultural land with object of developing it and selling it as plots for construction of houses but before the assessee could commence any development activity, the land was compulsory acquired by the Government. If was held that the land was of agricultural nature. 

9. Whether acquisition of agricultural land by real estate developer entities per se would alter the character pf such land as non- agricultural land?

Real Estate Developers generally purchase agricultural land and keep them as Stock-In Trade for development of the same land in future. The land may be agricultural or non-agricultural. The nature of land will be change through due process of loss. It is the intention at the time of acquisition of subject land which would be material factor to determine the character of land. 

10. Agricultural land falling within territories of two municipalities. 

It may be possible that an agricultural falls under jurisdiction of two municipalities or one in village and some part of it in a notified area. In this case any agricultural land complying with provisions of Section 2(14)(iii) of IT Act, 1961 will be treated as non- agricultural land and hence whole part of land even though some part of its falls in a village or rural area will be treated as non- agricultural land.

Dy. CIT Vs. Capital Local Area Bank Ltd. [2009] 29 SOT 394 (Amritsar)- it was held that from the local limits of Phagwara in Municipality for purpose of Section 2(14)(iii)(b) , the agricultural land situated in village in Phagwara beyond 2 Kms from the local limit of Phagwara Municipality cannot be treated as a Capital Asset within the meaning of Section 2(14) simply because it is situated within 8 Kms from the local limits of Jalandhar Municipality. The above decision of Tribunal has been reversed by the High Court. 

11. Method of measurement of distance.

The distance should be measured aerially from the periphery limits of the municipality, earlier it was silent on the issue and therefore there used to be dispute as to how the distance is to be measured. 

CIT Vs. Satinder Pal Singh [IT Appeal No. 646 & 647 of 2009] – it was held that the distance of the agricultural land belonging to the assessee within the meaning of Section 2(14)(iii)(b) has to be measured in terms of the approach by road and not by a straight-line distance on horizontal plane or as per Crow’s flight. 

PLEASE NOTE THAT:

In case of Real Estate Developers under taking the activities of purchase and sale of rural agricultural land which is treated as business activity. A question may be raised that since sale and purchase of agricultural land by Real Estate Developer is a business activity , then any gain from such activity should be treated as business income.

1. As per general scheme of taxation any income arising from the business activity is liable to be taxed as business income . However in the case of business activity in purchase and sale of rural agricultural land , income arising from such activity may be treated as exempt income if revenue from sale proceeds of such land will falls within the scope of Section 2(1A)(a) of IT Act, 1961.

Section 2(1A) in The Income- Tax Act, 1995

” agricultural income” means-

(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

2. Gains arising from the sale of agricultural land would be in nature of agricultural income. Agricultural income is exempt under provisions of Section 10 and hence not taxable.

3. In case of Corporate Entity such agricultural income is credited in to P/L Account and it a part of the profit of the company.

4. For purpose of calculation of MAT, the gain credited in the P/L account in sale of agricultural land will be excluded.

5. The Government with retrospective amendment through Finance Act, 1989 with effect from 01/04/1970 inserted an Explanation to Section 2(1A) as follows;

Explanation- for the removal of doubts , it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in Section 2(14)(iii)(a) or (b).

6. The effect of above amendment is that revenue from sale of urban agricultural land would no longer constitute agricultural income falling within the scope of Section 2(1A)(a) . However revenue derived from sale of rural agricultural land is still not covered by the above amendment and therefore the ratio of the decision of Bombay High Court still holds good qua for rural land.

7. Therefor it can be argued that profit arising on transfer of rural agricultural land even when transaction of purchase and sale of rural agricultural land is treated as business activity , shall be in nature of agricultural income and therefore exempt u/s. 10(1).

Agricultural Income [Section 10(1)]

As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax.

Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

(b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.

(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).

Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

AGRICULTURAL LAND HELD AS BUSINESS ASSET

  1. DLF United Ltd. Vs. CIT [1982] 29 CTR (Delhi)– it was held that agricultural land purchased by the assessee for its colonisation business acquired by the Government before taking any step for colonisation , the nature of land does not change and hence capital gain will not be charged on such transfer.

2. DLF United Ltd. Vs. CIT [1986] 161 ITR 714 (Delhi)– it was held that compensation for acquisition of agricultural land which was purchased by the assessee for conversion into building plots. The acquisition of such plot by Government before conversion, , any compensation received by the assessee on such acquisition is not an agricultural income within the meaning of Section 2(1A) of the Act, 1961.

CONCLUSION: the provisions of Section 2(1A) and Section 2(14)(iii) define agricultural income and agricultural assets and gain arising on transfer of any agricultural asset satisfying above mentioned criteria’s is exempt from Capital Gain tax. Since gain arising on transfer of an agricultural land is an agricultural income and same will be exempt under provisions of Section 10(1) of the IT Act, 1961. It should be noted that the agricultural income on sale of agricultural land in case of corporate entity shall not be included ,while calculating MAT liability. It means that gain credited to P/L Account as gain on transfer of agricultural land will not include in profit while calculating MAT.

DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.

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One Comment

  1. KBBBHATIA says:

    Thanks article is very exhaustive informative and useful well supported by judicial decisions
    awaiting more such of articles
    with warm wishes/regards

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