Gain arising on sale of agricultural land – Few Interesting Issues
Profit from sale of agricultural land is tax free provided that
- Land held as investment and not as stock in trade
- It is not a capital assets (i.e., the land is a rural agricultural land and not urban agricultural land)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 professio
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.
If 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 would arise from sale 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 amount will be subject to capital gain tax.
One more exception to above taxability rule is Section 10(37) of the I.T. Act -1961 which provides that capital gains from compulsory acquisition of Agricultural lands arising to individuals or HUF shall be tax free 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 i.e., even if the agricultural land is in urban area.
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;
The most important question which emerges for above provision is “what is agricultural land”? One must note that agricultural land is one on which agricultural activities are carried out. It is held in number of cases that agricultural activity is one wherein where there is some human effort in cultivation or growing of crops.
The decision of the Supreme Court in the case of CIT vs. Raja Benoy Kumar Sahas Roy in 32 ITR 466 (SC) has aptly elaborated as to what constitutes “agriculture activity”.
However, exemption cannot be denied for the simple reason that hospital was coming up close to assessee’s land if assessee is using his agricultural for agricultural use – CWT vs. E. Udaynarayan [2006] 284 ITR 511 (Mad.)
It is held that spontaneous growth such as wild growth of trees in a forests do not constitute agricultural activity. Further, apex court in CIT Vs. Ramkrishna Deo 35 ITR 312(SC) has confirmed the same view of Raja Benoy Kumar Sahas.
However, growing fruit trees does constitute agricultural activity as held in the case of Vajulal Chunilal (HUF) in 120 ITR 21.
In one case, SC has held that even if vegetables were grown prior to sale even then it could not change the nature and character of the land from non-agricultural to agricultural if land was located in most important and busiest thoroughfare in city which is further surrounded on all sides by industrial and commercial buildings and no agricultural operations were being carried on any land nearby. – Gemini Pictures Circuit Pvt. Ltd. reported in 220 ITR 43 (SC)
In few cases it is held that Agricultural land may cease to be agricultural if it remains uncultivated for few years and in surrounding part of the land is under development as non-agricultural land. Supreme court in Sarifabibi Mohmed Ibrahim vs. CIT [1993] 204 ITR 631 (SC) it was held that the land is non-agricultural as it is sold for non-agricultural purposes to a co-operative housing society with construction following the sale.
Gujarat HC in CWT v. Shashiben [2007] 288 ITR 319 (Guj.) have aptly order 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 for which the land is sold.
