Taxability on Sale of Agricultural Land

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Taxability on sale of Agricultural Land

How to determine whether a land is agricultural land or not?

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ƒ˜ Agriculture income and sale of Agricultural Land

Considering the effect of combined reading of the section 2 (1A) and 2 (14), the High Court has observed that capital gains arising from sale of land used for agricultural purposes would be revenue derived from such land and therefore, agricultural income within the definition under section 2 (1A) with the result that the parliament would have no competence to tax such agricultural income. On appeal, the Supreme Court held, reversing the High Court decision, that the retrospective insertion of the explanation to section 2 (1A), with effect from 1/4/1970 had superseded the view of the High Court and the declaratory retrospective amendment would apply during the pendency of this appeal.[1] In view of the said explanation, income arising from the lands referred to in clause (a) and clause (b) of Section 2 (14) (iii) could not be treated as agricultural income. Thus, the income derived from sale of such agricultural lands could not be treated as ‘agricultural income.’[2]

ƒ˜ The definition of Capital Asset and Agricultural Land

Section 2 (14) defines capital asset. Section 2 (14) (iii)[3] defines agricultural land. Agricultural Land prescribed in provision (a) and (b) of section 2 (14) (iii) are to be considered as ‘Capital Asset’ and inevitably the capital gain coming out of transfer of such land would be taxable. Therefore, capital asset comprised of lands situated within municipality or cantonment having a population of not less than ten thousand according to relevant census.[4] Just as agricultural income is exempt from tax under section 10 (1), capital gain arising from the transfer of agriculture land in India was exempt from tax in all the cases prior to 1970. However, this sub clause was amended by the Finance Act, 1970 with effect from the assessment year situate in the urban and semi-urban areas specified in the sub-clause or in their vicinity notified by the Central Government. At the same time clause (viii) was inserted in section 47 to exempt from capital gains tax any transfer of agricultural land in India affected before 1970, March 1.[5] Punjab and Hariyana High Court has held that by the 1970m amendment of section 2 (14) (iii), certain specified field lands situated in urban areas or semi-urban areas were brought within the definition of ‘capital asset’. Hence, Capital Gains arising on sale of such agricultural lands were liable to be taxed under section 45.[6] Exemptions:

ƒ˜ Applicability of Section 10 (37):-

If the below mentioned conditions are satisfied then Section 10 (37) would be applicable and sale of agricultural land would be exempted from tax under the head Capital Gains.

  1. The Assessee is an Individual or a Hindu Undivided family.
  2. He or It owns an agricultural land situated in urban area mentioned in Section 2 (14) (iii) (a) or (b).
  3. There is a transfer of the agricultural land by way of compulsory acquisition or the consideration for the transfer is approved or determined by the Central Government (not by a State Government) or RBI.
  4. The Agriculture land was used by the assessee (and/or his parents if the land was owned by an individual) for agriculture purpose during 2 years immediately prior to the date of transfer.
  5. The asset may be long term capital asset or short term capital asset.
  6. Capital gain arises from compensation (and/ or additional compensation) or consideration which is received by the assessee after March 31, 2004.[7]

ƒ˜ Applicability of Section 54B:- (Exemption)

  1. Who can claim the exemption: Only an Individual is eligible to claim exemption under this section.[8] A Hindu Undivided Family cannot claim exemption under section 54B.[9]
  2. Which specific asset is eligible for exemption: Any short term or long term capital asset (being agricultural land), if it was used by the individual (or his parents) or by Hindu Undivided Family, for agricultural purposes at least 2 years immediately before the transfer.
  3. Which asset the taxpayer should acquire to get the benefit of the exemption: Agricultural land (may be in rural area or urban area).[10]
  4. What is the time limit of acquiring the new asset: within 2 years from the date of the transfer.[11]
  5. How much is exempt: investment in the new asset or capital gain, whichever is lower
  6. Is it possible to revoke the exemption: if the new asset is sold within 3 years of its acquisition, exemption will be taken back. For calculating capital gain n transfer of new asset, cost of acquisition will be calculated.[12]

ƒ˜ The subjective test to determine agricultural land is taxable or not

The expression ‘agricultural land’ is not defined either in constitution or in the Income Tax Act. it, therefore, must be given the meaning which it ordinarily bears in English language and as understood as common parlance.[13] What really needs to be shown is the connection with the agricultural purpose and user, and not the mere possibility of the user of the land, by some possible future owner. It is not the mere potentiality, but the actual condition and intended user. The intention of the owner has to be shown related to intended agricultural use.[14] Gujrat High Court gave numerous tests in this aspect:

  1. Whether the land was classified in the revenue record as agricultural and whether it was subject to the payment of land revenue?
  2. Whether the land was actually or ordinarily used for agricultural purposes at or about relevant time?
  3. Whether, such user of the land was for a long period or whether it was of a temporary character or by way of a stopgap arrangement?
  4. Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land?
  5. Whether the land on the relevant date had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether the cesser or the alternative user was of permanent or temporary nature?
  6. Whether the land, though entered in revenue record, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes?
  7. Whether the land was situated in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in adjoining area were such as would indicate that the land was agricultural?
  8. Whether the land itself was developed by plotting and providing roads and other facilities?
  9. Whether there were any previous sales of portions of the land for non-agricultural use?
  10. Whether an agriculturalist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have sold the land valuing it as a property yielding agricultural produce on the basis of its yield?[15]

Other tests are:

  1. Classification and assessment of the land to land revenue;
  2. Whether agricultural operations are carried on;
  3. Intention of the owner [a temporary user of the land either for agricultural or non-agricultural purpose is not important, the real intention of the owner is to be ascertained];
  4. Character of the adjoining lands. If the character of the adjoining lands are agricultural then the presumption would be in favour of holding that the land is in question was also an agricultural land.[16]

In the above case, it was also suggested that the application of one or more criteria by itself will not be a safe guide for determination of the question. It will depend upon all the facts and circumstances of the case and an overall view of the situation pertaining to the land in question.[17] The mere presence of the trees on the land will not make it agricultural, especially when it is situated in the heart of the town and is surrounded by residential buildings. The question whether a land is agricultural or not, does not only depend upon the intention of the owner to use the land or on the fluctuating or ambulatory intention of the owner. The criterion must be more definite and more objective, something related to the nature and character of the land. On the facts of the case, the Tribunal was held justified in holding that the land in question was not an agricultural land.[18]

ƒ˜ Burden of proof

The burden of proof that a particular area is an agricultural land and does not fall within the contours of Section 2 (14) (iii) (a) / (b) is on the assessee.[19] The assessee must prove that the land in question was an agricultural land at the time of transfer.[20] Where the assessee has produced cogent evidence to support his contention that the land concerned was agricultural land and the department wants to controvert the contention then the department has to lead convincing evidence on this point.[21] Where an agricultural land was sold for non-agricultural purposes and the permission for the non-agricultural use was granted to the purchaser a couple of months after the purchase and the purchases had paid potential non-agriculture value of the land. The Gujrat High Court held that the presumption was that the land was of agricultural nature. Hence there was o capital gain.[22]

ƒ˜ Presumption of agricultural land

Once the assessee establishes that the land in question was continuously used for the agricultural purposes, a prima facie presumption arising from such user is that that the land in question continues to be agricultural land. The price paid or received and/or the situations of the particular land in a well developed area do not displace that presumption. The presumption can only be rebutted by showing that the land was not an agricultural land and the current agricultural user of the land was a stop-gap arrangement pending some other user.[23] If the agricultural operations are carried on on any land when land is transferred, and further, if the entries in the revenue records show that the land is agricultural land, then a presumption arises that the land is agricultural in character. Now unless that presumption is rebutted by evidence led by revenue, it must be held that the land was agricultural in nature at the time when it was transferred.[24] Where the area surrounding the land in question was developed as housing colonies and agricultural operations were stopped on that land, it was held that the resumption of agricultural operations on the land could not make the land agricultural land and hence, the land in question was non-agricultural land.[25] Where a land (i) situated within Municipal Limits, (ii) included in a proposed town planning scheme, (iii) and allowed to be sold for residential purposes, but (a) since its purchase in 1939 till its sale in 1967, the land was cultivated with the aid of tractor for agricultural purposes and (b) there was no regular road to the land. It was held that the land in question was an agricultural land and the potential non-agricultural value attached to the land could not interfere with its agricultural character at the time of sale. Therefore, the land was held to be agricultural in nature and character. Hence, no capital gain would be leviable.[26]

Æ’Ëœ Forest lands – whether agricultural

Forest lands covered by trees of spontaneous growth cannot be termed as agricultural lands unless there is some evidence to show that such land had been, in some way, set apart or earmarked for or linked up with an agricultural purpose by its owners or occupiers.[27] In another case, the assessee was the owner of the rubber plantations, purchased some forest lands for extending its plantations. Subsequently, the part of the land was sold. The Tribunal observed that the assessee used the land merely to extract timber and had not planted any trees. The tribunal held that the land was not an agricultural land.[28]

ƒ˜ Trees on agricultural land do not form part of land

The principle that what is attached to land belongs to land is not applicable to India.[29] Thus, trees which stand on agricultural land are not part of “agricultural land in India” within the meaning of Section 2 (14) (iii). These are capital assets and profits arising from their sale are assessable as capital gains and do not constitute agricultural income.[30]

[1] 1 K B Bhatnagar, Direct Tax Digest (1922-2011), (9th ed. 2011) 155 [2] Union of India v. S. Muthayam Reddy, (1999) 240 ITR 341 (SC) [3] Income Tax Act, 1961 [4] Singhai v. UOI, 247 ITR 150 (SC) [5] 1 Kanga & Palkhivala, The Law and Practice of Income tax, (10 ed. 2014) p. 86 [6] CIT v. Shiv Chand Satnam Paul, (1998) 231 ITR 663 (P&H) [7] Dr. Vinod K. Singhania & Dr. Monica Singhania, Student’s Guide to Income Tax, (50th ed. 2014-15) 403 [8] Darapeni Chenna Krishnayya v. CIT, (2007) 291 ITR 98, 104 (AP) [9] CIT v. Deverajulu, (1992) Tax LR 791 [10] 2 K B Bhatnagar, Direct Tax Digest (1922-2011), (9th ed. 2011) 3084 [11] Jai Narayan v. ITO, (2008) 306 ITR 335, 339 (Punj) [12] Section 54B, Dr. Vinod K. Singhania & Dr. Monica Singhania, Student’s Guide to Income Tax, (50th ed. 2014-15) 444 [13] 1 K B Bhatnagar, Direct Tax Digest (1922-2011), (9th ed. 2011) 275 [14] CWT v. Officere in Charge (Court of wards) (1976) 105 ITR 133 [15] CIT v. Siddharth J. Desai, (1983) 139 ITR 628, 638-39 (Guj) [16] Addl. CIT v. Tarachand Jain, (1980) 123 ITR 567 (Pat) [17] id [18] Syed Rafiqur Rahman v. CWT, (1970) 75 ITR 318 (Pat) [19] CED v. V. Venugopal Verma Rajah, (1976) 105 ITR 593s [20] Kalpetta Estates Ltd. v. CIT, (1990) 185 ITR 318, 322 (Ker) [21] CWT v. Officer in Charge, (1976) 105 ITR 133 [22] Maganlal Morarbhai v. CIT, (1979) 118 ITR 224 (Gu)j [23] Gemini Pictures Circuit p. Ltd. v. CIT, (1981) 130 ITR 686 (Mad) [24] Motibhai D. Patel v. CIT, (1981) 127 ITR 671, 675 (Guj) [25] Yashwanti R. Bhatt v. CWT, (1978) 114 ITR 318 (Guj) [26] CIT v. Manilal Somnath, (1977) 106 ITR 917 (Guj) [27] CED v. V. Venugopal Verma Rajah, (1976) 105 ITR 593, 599 (SC) [28] Kalpetta Estates Ltd. v. CIT, (1990) 185 ITR 318 [29] Vallbhadas Narainji v. Development Officer, AIR 1929 PC 163 [30] Travencore tea estate co. ltd. v. CIT, (1974) 93 ITR 314 (Ker)

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Taxability on Sale of Agricultural Land. (2017, Jun 26). Retrieved March 20, 2023 , from

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