Taxation on Sale of Agricultural Land in India: A Short Overview

 

No Income Tax is Payable on sale of Agricultural Land in India. But, we need to understand the facts and laws behind it.

There are two sections in the Income Tax Act – 1961 which play a crucial role in determining IT liability on sale of a Agricultural Land in India. The same is as under:

1.  Section. 2(14):

One must note that, to impose the capital gain tax in India, two specific conditions need to be assessed. One is the asset sold must be a Capital Asset. And there must be a “Transfer” of that capital Asset.

This section 2(14) excludes few assets from the Capital Gain Tax.
Clause – iii of this section particularly deals with exclusion of Agricultural Land from the definition of “Capital Asset”.

The clause iii of section 2(14) define the “Agricultural Land and exclusion as under:

a. Land situated within the jurisdiction of any municipality/notified area/town area committee, corporation or cantonment board which has population less than 10,000 means any land must be Agricultural Land and it must be situated in any Town committee area etc where population is less than 10k.

OR

b) If such Agricultural Land is situated Out of the above Jurisdiction, then Aerial Distance of the Land + Population criteria both must be fulfilled.

i. If “Aerial distance from the Boundaries” of the concerned Town committee/municipality/cantonment board etc is up-to 2 Km and Population is less than One Lakh

ii. 2-6 km + Population is not more than ten lakhs

iii. 6-8 km + Population more than 10 Lakhs.

iv. More than 8k – Population need not to be considered.

However, even if your Land is fulfilling any one of the above criteria, it should be Agricultural Land.

Smt. Sarifabibi Mohmed Ibrahim 204 ITR 631 (SC)  is the landmark judgement which states various tests/criteria should be fulfilled for the land to be reckoned as Agricultural Land, in spite of the fact that the “Agricultural Land is not specifically defined in the Income Tax Act 1961. Urban Agricultural Land seems to be excluded from the clause iii of sec 2(14) hence sale of such land is liable for Capital Gain Tax.

The second Important section is section 54B. This is an exemption section of the Income Tax Act-1961 almost similar to other exemption sections like 54, 54F, 54EC etc. The section states that The Land sold by the assessee (Irrespective of its Location/ urban or rural) if cultivated for 2 years “Prior to its sales” and the assessee has purchased another agricultural land within 2 years from the date of the sale of the original land, then the assessee may avail deduction u/s 54B. Here, the land should have been cultivated, proof of cultivation, seed, saplings bills, 7/12 revenue record updating is compulsory. Merely, as per the zone certificate etc the land is Agricultural land is not sufficient compliance to avail benefit of sec. 54B.
Therefore, one must comply with the above provisions of the IT Act – 1961.