Agriculture Land & Capital Gains Provisions- Some Issues

CA Pramod Shingte, Pune

1) Agricultural land situated outside the prescribed limit is sold, 7/12 extracts shows
following entry under the head crops taken, what will be tax implication of the
same;

a. PAD
b. GAVATPAD
c. KHARVATPAD
d. VASTIPAD
e. VIHIRPAD
f. KHADAKPAD
g. DONGAR

2) Agricultural land is classified as non-irrigated, whether it disqualifies for

exemption?

3) Agricultural land crops are shown in the 7/12 extracts, but in the return of income
no agricultural income is disclosed in any of the years, whether it will have any
implication?

4) Agricultural land is situated outside prescribed limit but that zone is declared as
Industrial zone, what is the implication?

5) The buyer of the agricultural land intends to buy the land for industrial purpose,
whether such intention will have any bearing on seller’s eligibility to claim
exemption?

6) The land in forest zone sold by the owner, having naturally grown trees, and
admittedly no agricultural operations are carried out by the owner for growing
these trees, whether such land will qualify as Agricultural land?
7) The agricultural land which is not cultivable, owner uses the land for Poly- house
activity, whether he is eligible to claim it as Agricultural land?

8) On Agricultural land there is a farmhouse, a well, owner has rented out

farmhouse and also getting money for use of water from well by others, this
income has been shown as agricultural income, for last several years, and
accepted by the department, admittedly no cultivation is carried out in the said
land for years together, owner sells this land along with farm house, well etc, can
he claim exemption.

9) Agriculturist has sold the agricultural land in past, but retained the easement right
from the said land, as well as retained the use of water right from well, after five
years the entire land is acquired, and agriculturist gets the compensation for
surrender of the said rights, What will be the tax implication?

10) Owner has made an application for converting the land for Non agricultural use,
but before he gets the permission he sell the land, whether exemption is lost?

11) Assessee owns a land in an area which comes under the jurisdiction of Gram
Panchayat, however the population of this village is admittedly more than 10000,
as per last census, whether exemption is lost?

12) What is criterion for applying the test of distance of 8 kms, whether it shall be
road distance, crow flying distance (radial distance) or anything else?

13) For the purpose of distance whose certificate is valid?

14) Assessee has sold agricultural land situated in prescribed limit, which is
admittedly under cultivation, however new agricultural land which was purchased
is not immediately cultivable due to the reason that currently it is kept as hallow
land for some period, whether assessee will get the exemption u/s 54B? What
happens in reverse situation?
 15) Assessee has availed the exemption u/s.54B however due to certain exigencies
he has to sell the new land within one year of purchase, whether exemption will
be withdrawn? (The new land is out side the prescribed limit)

16) Assessee’s land is admittedly a agricultural land, and it has been cultivated all
these years, however due to nearby Industrial park, assessee realized that if he
sells the land by doing plotting of the total land, and if he sells the same as
Agricultural land, whether exemption is available?

Reference material :

1. Sec. 2 (14) “capital asset” means property42 of any kind held by an assessee,
whether or not connected with his business or profession, but does not include—

[(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 according to the last
preceding census of which the relevant figures have been published before the
first day of the previous year ; or

(b) 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;]
2. [Capital gain on transfer of land used for agricultural purposes not to be
charged in certain cases.

Sec. 54B. [(1)] [Subject to the provisions of sub-section (2), where the capital
gain arises] from the transfer of a capital asset being land which, 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 for agricultural purposes 17 [(hereinafter
referred to as the original asset)], and the assessee has, within a period of two
years after that date, purchased any other land for being used for agricultural
purposes, then, instead of the capital gain being charged to income-tax as
income of the previous year in which the transfer took place, it shall be dealt with
in accordance with the following provisions of this section, that is to say,—

(i) if the amount of the capital gain is greater than the cost of the land so
purchased (hereinafter referred to as the new asset), the difference between the
amount of the capital gain and the cost of the new asset shall be charged under
section 45 as the income of the previous year; and for the purpose of computing
in respect of the new asset any capital gain arising from its transfer within a
period of three years of its purchase, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new
asset, the capital gain shall not be charged under section 45; and for the purpose
of computing in respect of the new asset any capital gain arising from its transfer
within a period of three years of its purchase, the cost shall be reduced, by the
amount of the capital gain.]

[(2) The amount of the capital gain which is not utilised by the assessee for the
purchase of the new asset before the date of furnishing the return of income
under section 139, shall be deposited by him before furnishing such return [such
deposit being made in any case not later than the due date applicable in the case
of the assessee for furnishing the return of income under sub-section (1) of
section 139] in an account in any such bank or institution as may be specified in,
and utilised in accordance with, any scheme 19 which the Central Government
may, by notification in the Official Gazette, frame in this behalf and such return
shall be accompanied by proof of such deposit; and, for the purposes of sub-
section (1), the amount, if any, already utilised by the assessee for the purchase
of the new asset together with the amount so deposited shall be deemed to be
the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised
wholly or partly for the purchase of the new asset within the period specified in
sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the
income of the previous year in which the period of two years from the date of the
transfer of the original asset expires; and
 (ii) the assessee shall be entitled to withdraw such amount in accordance
with the scheme aforesaid.

3. Notification issued in connection with Section 2(14)(iii)(b) can be accessed at

following link :

http://www.scribd.com/doc/24805465/Notification-No-9447-Dt-6-1-1994

4. Agricultural Land :

Word not defined in Act;

Different meanings assigned to the terms: WIKIPEDIA :

• Agricultural land (also agricultural area) denotes the land suitable for
agricultural production, both crops and livestock. It is one of the main resources
in agriculture. The standard classification (used, e.g., by FAO — Food and
Agriculture Organization of the United Nations) divides agricultural land into the
following components:[1][2]

• Arable land — land under annual crops, such as cereals, cotton, other technical
crops, potatoes, vegetables, and melons; also includes land left temporarily
fallow.

• Orchards and vineyards — land under permanent crops (e.g., fruit plantations).

• Meadows and pastures — areas for natural grasses and grazing of livestock.

• The first two components — arable land and land in permanent crops —
constitute so-called cultivable land. The part of arable land actually under crops
is called sown land or cropped land. The term farmland is ambiguous in the
sense that it may refer, on the one hand, to agricultural land and, on the other
hand, to cultivable or even only arable land.

• Depending on the use of artificial irrigation, agricultural land is divided into

irrigated and non-irrigated land. In arid and semi-arid countries agriculture is
often confined to irrigated land, with very little farming possible in non-irrigated or
rainfed areas.

OECD

Agricultural land is land including arable land, land under permanent crops and
land under permanent meadows and pastures.
Circular No. 2(WT) of 1968 dt. 16/03/1968

A land may be treated as Agricultural land if the following conditions are satisfied;

1. Land Revenue/Agricultural cess is paid.

2. Agricultural operations are carried out from year to year.

3. It has not been put to non-agricultural use.

4. Courts view :

The first decision of Hon’ble Supreme Court which considered the meaning of
the expression 'agricultural land' is in CIT v . Raja Benoy Kumar Sahas
Roy [1957] 32 ITR 466 . But the question there was whether the income from
forest land derived from sal and piyasal trees, 'not grown by human skill and
labour' constitutes agricultural income?

Held, that the income actually derived from the trees planted by the assessee
was agricultural income within the meaning of 2(1) of the Indian Income-tax
Act

Under the Wealth-tax Act, 1957 is in CWT v. Officer-in-charge ( Court of

Wards) [1976] 105 ITR 133 (SC) (hereinafter referred to as the Begumpet
Palace case). It was an appeal from a Full Bench decision of the Andhra
Pradesh High Court. The Full Bench of the Andhra Pradesh High Court
evolved the following eight indicators to determine whether a land is an
agricultural land, viz.,:

"(1) The words 'agricultural land' occurring in section 2(e)( i) of the Wealth-tax
Act should be given the same meaning as the said expression bears in entry
86 of List I and given the widest meaning;

(2) the said expression not having been defined in the Constitution, it must be
given the meaning which it ordinarily bears in the English language and as
understood in ordinary parlance;

(3) the actual user of the land for agriculture is one of the indicia for
determining the character of the land as agricultural land;

(4) land which is left barren but which is capable of being cultivated can also
be 'agricultural land' unless the said land is actually put to some other non-
agricultural purpose, like construction of buildings or an aerodrome, runway,
etc., thereon, which alters the physical character of the land rendering it unfit
for immediate cultivation;

(5) if land is assessed to land revenue as agricultural land under the State
Revenue Law, it is a strong piece of evidence of its character as agricultural
land;
 (6) mere enclosure of the land does not by itself render it a non-agricultural
land;

(7) the character of the land is not determined by the nature of the products
raised, so long as the land is used or can be used for raising valuable plants
or crops or trees or for any other purpose of husbandry;

(8) the situation of the land in a village or in an urban area is not by itself
determinative of its character." (p. 139)

The Hon’ble Supeme Court characterised the indicator Nos. 6,7 and 8 as
merely negative in character. It disagreed with (1) and (4) and observed that
only the fifth indicator was a relevant one though not conclusive. There was
no controversy regarding indicator No. 3. Inasmuch as the matter was not
examined from the correct point of view, it was remitted to the High Court for
a fresh decision.

Smt. Sarifabibi Mohmed Ibrahim v. Commissioner of Income-tax : (1993)

204 ITR 631(SC)

Hon’ble Supreme Court has evolved the following 13 factors/indicators applying

which the question has to be answered. The 13 factors are the following :

(1) Whether the land was classified in the revenue records 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 the 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 stop-gap 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 permission under section 65 of the Bombay Land Revenue
Code was obtained for the non-agricultural use of the land? If so, when and by
whom (the vendor or the vendee)? Whether such permission was in respect of
the whole or a portion of the land? If the permission was in respect of a portion of
the land and if it was obtained in the past, what was the nature of the user of the
said portion of the land on the material date?

(6) 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 such cesser and/or
alternative user was of a permanent or temporary nature?

(7) Whether the land, though entered in revenue records, 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?

(8) Whether the land was situate in a developed area? Whether its physical
characteristics, surrounding situation and use of the lands in the adjoining area
were such as would indicate that the land was agricultural?

(9) Whether the land itself was developed by plotting and providing roads and
other facilities?

(10) Whether there were any previous sales of portions of the land for non-
agricultural use?

(11) Whether permission under section 63 of the Bombay Tenancy and

Agricultural Lands Act, 1948, was obtained because the sale or intended sale
was in favour of a non-agriculturist? If so, whether the sale or intended sale to
such non-agriculturist was for non-agricultural or agricultural user?

(12) Whether the land was sold on yardage or on acreage basis?

(13) Whether an agriculturist would purchase the land for agricultural purposes at
the price at which the land was sold and whether the owner would have ever sold
the land valuing it as a property yielding agricultural produce on the basis of its
yield?

It is further clarified that not all of these factors would be present or absent in any
case and that in each case one or more of those factors may make appearance
and that the ultimate decision will have to be reached on a balanced
consideration of the totality of circumstances.