CAPITAL GAIN EXEMPTION FOR INVESTMENT IN AGRICULTURAL LAND

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CAPITAL GAIN EXEMPTION FOR INVESTMENT IN AGRICULTURAL LAND

CONDITIONS PRECEDENT FOR EXEMPTION U/S 54B

The conditions necessary for grant of exemption under section 54B are :

(i) capital gain should arise on transfer of agricultural land by the assessee;

(ii) such land should have be use for agricultural purpose by the assessee or a parent of his. In the two years immediately preceding the date of transfer; and

(iii) the assessee should have purchase, within a period of two years from the date of transfer. Any other land (new asset) for being use for agricultural purposes.

When all the conditions mentioned above are fulfill, then following consequences would follow :

(i) where the amount of capital gain is greater than the cost of new asset, then

(a) difference between the two amounts would be subject to tax under section 45 as income of the previous year,

(b) as regards new asset, if it is transfer within three years of its purchase. Its cost of acquisition would be take at nil in the computation of capital gains on such transfer.

(ii) where the amount of the capital gain is equal to or less than the cost of new asset, then

(a) the capital gain arising from the transfer shall not be charge; and

(b) as regards new asset, if it is transfer within three years of its purchase. Then in the computation of capital gains on this transfer. The cost of new asset shall be reduce by the amount of capital gain on former transfer.

In view of Explanation below section 53, which was operative upto asst. yr. 1992-93, references to capital gain in section 54B are to be construed as references to amount of capital gain as computed under section 48(1)(a).

SECTION NOT APPLICABLE TO HUF

The expression “assessee” has be use in section 54B and it is not specifically mention that the assessee should be an individual. However, one of the conditions for applicability of the section is such that it can be apply only if the assessee is an individual and cannot apply if the assessee is an HUF. That condition is that land should have be use for agricultural purposes either by the assessee or by a parent of his. There can be no parent in relation to an HUF. It can only be in relation to an individual.

This question came up for consideration before the Madras High Court in CIT vs. G.K. Devarajulu (1991) 92 CTR (Mad) 184 : (1991) 191 ITR 211 (Mad) : TC22R.276 in which it was observed that in interpreting the words, the Court has not only to look at the words but also at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances and as such the word “assessee” in section 54B must be interpreted to mean assessee who is an individual in view of the fact that word “assessee” has been associated with “a parent of his”. See also Darapaneni Chenna Krishnayya (HUF) vs. CIT (2007) 291 ITR 98 (AP) in which it has been held that an HUF was not entitled to exemption under s. 54B.

It may be mentioned that the expression “assessee or a parent of his” had been used in section 54 (as it stood upto asst. yr. 1982-83) also and there are large number of decisions in which that expression has be interpret to mean an individual assessee and his parent and it has be hold that HUF would stand exclud. Those decisions have been discuss in the commentary on section 54. Subsequently, section 54 has been amended w.e.f. 1st April, 1988 so as to include HUF but no similar amendment has be make in section 54B. Hence section 54B would not apply in those cases where the assessee is an HUF. It would apply only to cases in which the assessee is an individual.

In CIT vs. Gurnam Singh (2008) 218 CTR (P&H) 674, it was held that assessee having invested sale proceeds of his agricultural land in purchasing another agricultural land in joint names of himself and his only son who was bachelor and dependent upon him, was eligible for exemption under s. 54B.

(SUB TOPIC) D1. SECTION NOT APPLICABLE IF NEW ASSET IS PURCHASE IN THE NAME OF THIRD PARTY.

In Jai Narayan vs. ITO (2009) 221 CTR (P&H) 255 : (2008) 306 ITR 335 (P&H), it has been held that Purchase of agricultural land by the assessee in the name of his son or grandson does not qualify for exemption under s. 54B.

USER FOR AGRICULTURAL PURPOSES FOR TWO YEARS PRIOR TO DATE OF TRANSFER

The condition in section 54B that the land in question, in the two years immediately preceding the date on which transfer took place, was being used by the assessee or a parent of his for agricultural purchases” is similar to the condition in section 54 as originally enacted which was to the effect that the building in question “in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his own or the parent’s own residence”.

This condition was subsequently deleted from section 54 but when it was in force its interpretation had given rise to judicial controversy. That controversy was whether this condition envisaged continuous user, without any break, for a period of two years, for the purpose of residence. The majority of High Courts held that continuous user was necessary while some High Courts held that this was not necessary. This controversy has been discussed in section 54.

In CIT vs. T. Narayanswamy (1985) 156 ITR 194 (Mad) : TC22R.347A the agricultural land in question originally belonged to the HUF of which the assessee was a coparcener and this land came to the share of the assessee at the partition of the properties of HUF and the Government acquired this land within one year of the date on which the land was allotted to the assessee in the partition. The assessee claim exemption under section 54B on the ground that capital gain had be investe in purchase of new lands for agricultural purposes within the prescribe period.

The Department’s contention that the condition of user for agricultural purposes for two years immediately. Preceding the date of transfer was not satisfy because of the fact that the land was allott to assessee. In the partition only one year before was reject and it was observe that admittedly the assessee himself had be. In possession of the acquire lands for a period of one year and prior to that the joint family was in possession. For agricultural purposes and in law the possession by the HUF should be take also to be the possession by a coparcener and as such assessee should regard to have use the land for agricultural purposes during the period of two years immediately before the date of transfer.

In CIT vs. Bolla Rammiah & Ors. (1966) 59 ITR 145 (Ker) : TC20R.529 the agricultural lands of the assessee were first requisitioned by the Government for defence purposes and subsequently they were acquired by the Government for which the assessee received compensation and out of the compensation amount the assessee purchased agricultural lands within prescribed period and claimed exemption under section 54B. It was held that since the lands in question were in possession of the Government for more than two years from the date of requisition to the date of acquisition, the assessee could not be say to have used the land for agricultural purposes for the period of two years immediately preceding the date of acquisition and hence this condition for applicability of section 54B was not satisfy and as such exemption there under was not available.

See also Handicraft Industries vs. CIT (1995) 216 ITR 522 (All)

In CIT vs. Late Janardhan Dass Through L/H Shyam Sunder (2008) 299 ITR 210 (All) it has been held that period of two years for the purpose of making reinvestment in agricultural land for claiming exemption under s. 54B commences from the date of receipt of compensation and not from the date of acquisition of the agricultural land; assessee having receive the initial compensation for compulsory acquisition of land on 12th July, 1977, and invest the same in agricultural land on 15th June, 1979, he is entitle to benefit of s. 54B; tubewell and trees being part of the agricultural land purchase by the assessee, their value could not be deduct from the total investment make by the assessee in the purchases of agricultural land.

In Asha George Vs. Income Tax Officer (2013) 84 CCH 144 KerHC : (2013) 351 ITR 123 (Ker) Ita No. It is not necessary that land which is transfer, must be an agricultural land as such. Fact that the land is locate in an urban area, cannot by itself be relevant to deny benefit u/s 54B. Requirement of Section 54B is that assessee must establish that land was being use for agricultural purpose for a period of two years prior to date of transfer. At any rate, there can be no basis for invoking Section 54B for deducting value of land purchased.

PURCHASE BETWEEN AGREEMENT OF SALE AND EXECUTION OF SALE DEED

Section 54B contemplates purchase of new agricultural lands. Within two years after the date of transfer of old agricultural lands for enabling. The assessee to claim exemption in respect of capital gains arising from old agricultural lands. It do not envisage purchase of new agricultural land before the date of transfer of the old agricultural lands. Although the new lands might have been purchase from consideration receive. In advance in relation to transfer to be effect of the old agricultural lands.

In CIT vs. Jayalakshmi Rajendran (1987) 61 CTR (Mad) 230 : (1985) 152 ITR 744 (Mad) : TC22R.349, the assessee had purchased new agricultural lands after execution of agreement of sale but before execution of conveyance deed in respect of old agricultural lands and claimed exemption under section 54B on the ground that purchase of new lands had been made out of consideration for transfer of old lands and that execution of agreement of sale imposed restriction on his right of alienation and this was sufficient to attract those provisions.

This submission was reject and it was observ that agreement of sale. Would give only a right to sue for transfer of property and that itself. Would not amount to transfer and that the section contemplate outright. Sale of land in the first instance and subsequent to such sale, purchase of land with the aid of consideration. Receive thereunder to enable the assessee to claim exemption for the purpose of computing income-tax on income-tax.

It is to be noted that in section 54, there is provision for purchase of new asset before as well as after the transfer of old asset for enabling to claim exemption while in section 54B the provision is for purchase of new asset only after the transfer of old asset.

(SS TOPIC)Computation of period of two years for the purpose of reinvestment

In CIT vs. Late Janardhan Dass, Through L/H Shyam Sunder (2008) 218 CTR (All) 404, it was held that period of two years for the purpose of making reinvestment in agricultural land for claiming exemption under s. 54B commences from the date of receipt of compensation and not from the date of acquisition of the agricultural land; tubewell and trees being part of the agricultural land purchase by the assessee, their value could not be deduct from the total investment make by the assessee in the purchases of agricultural land.

DEPOSIT OF SALE CONSIDERATION-SUB-S. (2)

Sub-section (2) of section 54B inserted w.e.f. 1st April, 1988 is similar to sub-section (2) of section 54. Under the provision as it exist prior to 1st April, 1988. Long- term capital gains arising from the transfer of land use for agricultural purposes. Were exempt from income-tax if such gains were reinveste in purchase of another agricultural land. (new asset) Within the time allow for that purpose with the result that original assessment require rectification. Whenever the assessee faile to acquire new asset. With a view to dispense. With rectification of assessment the new sub-section (2) laid down a new scheme for deposit of amounts meant for reinvestment in the new asset. The scheme is identical with that made under section 54, section 54D and section 54F [For further comments, see discussion on sub-section (2) of section 54].

WITHDRAWAL OF EXEMPTION UNDER PROVISO TO S. 54B(2)

Assessees claimed exemption under s. 54B(2) on sale of agricultural land in asst. yr. 1991-92. However, they did not purchase agricultural land within the period of two years by utilising the capital gain in terms of the declaration furnished for the asst. yr. 1991-92 and therefore, they became liable to pay tax on such capital gains under s. 54B(2) for the asst. yr. 1993-94. Contention that the assessees are entitle to computation of capital gain by availing deduction of index cost of acquisition and index cost of improvement by virtue of amendment of s. 48 w.e.f. 1st April, 1993, cannot be accept. As per cl. (i) of proviso to s. 54B(2),

if the assessee do not utilise the capital gain in respect of which exemption was claim in the year in which it was assessable, the same has to be treat as income chargeable to tax under s. 45. No computation or recomputation of capital gain is require to be make in the year in which it is assessable by virtue of proviso (i) to s. 54B(2). What is require is only to assess and demand tax on the capital gain which the assessee has failed to utilise for acquisition of agricultural land. Therefore, there is no question of recomputation of capital gain on the basis of amended provisions. [CIT vs. Thomy P. Chakola (Decd.) Through LR & Ors. (2011) 237 CTR (Ker) 375]

SECTION 54B AND RECTIFICATION UNDER SECTION 155(9) AND SECTION 155(9A)

Sub-ss. (9) and (9A) of section 155 enabled the relief under section 54B being granted in certain circumstances by way of rectification. Hence, they are reproduce below :

“(9) Where in the assessment for any year. A capital gain arising from the transfer of any such capital asset as is refers to in section 54B. Is charge to tax and within a period of two years after the date of the transfer. The assessee purchases any other land for being use for agricultural purposes. The Assessing Officer shall amend. The order of assessment so as to exclude the amount of the capital gain not chargeable to tax under the provisions of sub-section (1) of section 54B; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specify in sub-section (7) of that section being reckon from the end of the financial year in which the assessment was make.

(9A) Where in the assessment for any year. a capital gain arising from the transfer by way of compulsory acquisition under. Any law of any such capital asset as is refer to in section 54B is charge to tax and if the compensation for such acquisition is enhance. Or further enhance, as the case may be, by any Court, tribunal or other authority. And within a period of two years after the receipt of the additional compensation. The assessee purchases any land for being use for agricultural purposes,

the Assessing Officer shall amend the order of assessment so as to exclude the amount of capital gain not chargeable to tax under the provisions of sub-section (2) of section 54B; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub- section (7) of that section being reckoned from the end of the previous year in which the additional compensation was received by the assessee.”

Sub-section (9), which was operative upto 31st March. 1992 apply to a case where in the assessment order relating to previous year in which transfer of agricultural land took place. Capital gains were bring  to tax and in subsequent year on purchase of new agricultural land. The assessee became entitle to claim exemption in respect of capital gains tax already charge. Sub-section (9), in such a situation, enable the Assessing Officer to rectify the original assessment order so as to exclude the capital gains from the computation. For this purpose period of limitation of four years under section 154(7) was to be reckoned from the end of financial year in which the assessment was made.

Sub-section (9A) inserted w.e.f. 1st April, 1974, enjoined upon the Assessing Officer to amend the order of assessment which had already been rectified by having recourse to provisions of section 155(7A), by excluding the amount of capital gain not chargeable to tax under section 54B(2), if the assessee purchased within two years after the receipt of the additional compensation, any land for being used for agricultural purposes. The period of four years for such amendment is to be reckon from the end of the previous year in which additional compensation was receive by the assessee.

With the introduction of new scheme for deposits in respect of exemptions from capital gains. The need for any rectification would not arise and hence sub-ss. (9) and (9A) of section 155 were omitted w.e.f. 1st April, 1992.

QUESTION OF FACT OR LAW

Where the Tribunal find that the land had not be use for agricultural purposes and therefore exemption under s. 54B was not available, no question of law arose for reference [Handicraft Industries vs. CIT (1995) 216 ITR 522 (All).

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