Exemption under section 54B of the Income Tax (I-T) Act can be claimed in respect of capital gains arising on transfer of agricultural land, provided it has been used for agricultural purpose for at least two years prior to the sale. The capital gains is exempt to the extent such gains is used to buy another agricultural land within three years.
Tax officials point out that it is no longer easy to pass off an income as tax-free agricultural income. Or for that matter, even when a taxpayer claims that a sale is of agricultural land, a range of records – be it land records or, in case of high-value matters, even satellite images – prove handy.
In the case heard by the Chennai ITAT, the taxpayer Keshav Sunderam Rajam was a non-resident. He had invested the capital gains arising from sale of ‘agricultural land’ by parking Rs 2.4 crore in a capital gains account scheme (the sum so deposited needs to be used for purchase of agricultural land within the specified period) and had paid Rs 1.2 crore to his father to acquire agricultural land in Coonoor. He produced ‘adangal’ (local land records) to substantiate the land sold was agricultural. The I-T officer denied the capital gains exemption benefit of Rs 3-odd crore on the grounds that the land sold had not been used for agricultural purposes.
The litigation finally landed at the ITAT bench, which observed that the ‘adangal’ shows that there were a few coconut trees. This does not denote that the taxpayer carried out agricultural operations, particularly when he has not reported any agricultural income. Further, the bench observed that the land sold was adjacent to the sea. To carry out agricultural operations, water is needed. But sea water is not useful to carry out any agricultural activities or raise any crops.
Similarly, in the Pune ITAT, taxpayer Sunil Bagul had claimed a deduction under section 54B of the I-T Act, to the tune of Rs 1.7 crore, against purchase of three plots of agricultural land. In the course of assessment, the I-T officer pointed out, to be eligible for this tax benefit, two conditions need to be fulfilled. First, the land sold should have been used for agricultural purposes for at least two years before the sale. Second, the land purchased should also be used for agriculture. In this case, the first condition was not met as was proven by local land revenue records.
The ITAT bench held that the land revenue records were the clinching evidence that the land sold was not agricultural. The receipts submitted by the taxpayer, which were issued by the Nashik Agricultural Marketing Committee showing sale of tomato and other vegetables, did not establish that agricultural activities were carried out on that particular plot of land.
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