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    Is Sale Of Agricultural Land For Non-Agricultural Purpose Taxable?

    Section 45 of the Income Tax Act, 1961 provides for chargeability of Capital Gain on transfer of a “Capital Asset”. 

    Capital Gain arises only when a capital asset is transferred. If the asset transferred is not a capital asset, it will not be covered under the head “Capital Gains”. 

    The term “Capital Asset” is defined U/S 2(14) as property of any kind held by the assessee, whether or not connected with his business or profession but does not include interalia agricultural land in rural area.

    Rural area for this purpose is any area which is outside the jurisdiction of municipality or cantonment board having a population2 of 10,000 or more and also which does not fall within distance (measured aerially) given below- 

    • 2 KM from the local limits of municipality or cantonment board- If the population of municipality or cantonment board is more than 10,000 but not more than 1 lakh; 
    • 6 KM from the local limits of municipality or cantonment board- If the population of municipality or cantonment board is more than 1lakh but not more than 10 lakh;
    • 8 KM from the local limits of municipality or cantonment board- If the population of municipality or cantonment board is more than 10lakh.

    (As Amended by FA 2013)

    To attract charge of capital gain, the property transferred must be a capital asset on the date of transfer and it is not necessary that it should have been capital asset also on the date of acquisition by the assesseei.

    If the concerned asset does not fall within the definition of capital asset on the date of transfer, no capital gain can be leviedii

    • Population means population according to the last preceding census of which relevant figures have been published before the first day of the previous year. 

    As the Rural Agricultural Land is not a Capital Asset, capital gain on transfer of the same is not subject to tax. 

    It is the usage of seller of the land that will decide the nature of land.

    Now, the question is whether this contention is valid when the buyer of the agricultural land has intention to use for commercial purpose after the transfer?

    The above question was answered in the following case: 

    Commissioner of Income-tax, Panaji-Goa v. Smt. Debbie Alemao

    The assessee’s were co-owners of the land. They purchased said land for a sum of Rs. 8 lakhs as an agricultural land. Later on, they sold the said land to ‘V’ Ltd. for a sum of Rs. 73 lakhs. The assessee’s filed separate returns of income wherein capital gain arising out of the sale of agricultural land was claimed by each of them to be exempt.

    The Assessing Officer held that the said land had non-agricultural potential and the fact that it was sold at a price which was nearly 10 times the purchase price within two years from its purchase and, moreover, it was purchased for the purpose of a beach resort showed that the said land was not an agricultural land. Consequently, he held that the profit arising out of the sale of the said land was assessable to the tax as capital gain. On appeal, the Commissioner (Appeals) set aside the assessment order. The Tribunal upheld the order of the Commissioner (Appeals). 

    Aggrieved by the decision of the ITAT the revenue preferred appeal to High Court

    Before the High Court:

    The learned Counsel for the appellant contended that the Respondents had not shown any agricultural income during the period of two years from the date of the purchase till the date of the sale, arising out of the said land. This also showed that the land was not an agricultural land.

    The Counsel for the appellant submitted that the Commissioner of Income-tax (Appeals) as well as the ITAT committed a gross error, bordering on perversity, in holding that the said land was an agricultural land.

    The High Court held that the assessing officer has note that the land was noted in the revenue records as agricultural land and ITAT also held that the land was recorded in the revenue records as agricultural land. This fact is not disputed by the revenue. 

    It is however contended that the land was not actually used for agriculture inasmuch as no agricultural income was derived from this land and was not shown by the respondents in their Income-tax return. 

    This was explained by the respondents by saying that there were coconut trees in the land but the agricultural income derived by sale of the coconuts was just enough to maintain the land and there was no actual surplus and hence, no agricultural income was shown from this land.

    The High Court held that if an agricultural operation does not result in generation of surplus that cannot be a ground to say that the land was not used for the agricultural purpose. It is not disputed that the land was shown in the revenue record to be used for agricultural purpose and no permission was ever obtained for non-agricultural use by the respondents.

    The permission for non-agricultural use was obtained for the first time by the Varca Holiday Beach Resort Private Limited the purchaser after it purchased the land.

    Thus, the finding recorded by the two authorities below that the land was used for the purpose of agriculture is based on appreciation of evidence and by application of correct principles of law. As a result the High Court dismissed the appeal.

    Note: The Tribunal has relied upon two unreported decisions of this Court in CIT v. Minguel

    Chandra Pais/ Smt. Maria Leila Tovar Furtado [2006] 282 ITR 618/ [2005] 149 Taxman 131 (Bom.) which involved identical issue. In those appeals, this Court has upheld the order of the Tribunal holding that the land was agricultural land and its sale did not invite the payment of capital gain. 

    Similar view was also expressed by Gujrat High Court in case of Commissioner of Income-tax v. Rajshibhai Meramanbhai Odedra [2014] 42 taxmann.com 497 (Gujarat)

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