No Capital Gains on Agricultural Land Under Section 2(14): Key Legal Position Explained

Overview

Section 2(14)(iii) of the Income-tax Act, 1961 (corresponding to Section 2(22) of the Income-tax Act, 2025) excludes specified agricultural land in India from the definition of a "capital asset." As a result, gains arising from the sale of such agricultural land are not chargeable to capital gains tax.

Importantly, the law does not prescribe that the land must be actively used for agricultural operations or that the owner must have earned agricultural income from it. The determining factors are the land's legal character and location. If the land continues to be recorded as agricultural land in the revenue records, has not been converted to non-agricultural use, and is situated beyond the prescribed municipal limits under Section 2(14)(iii), it retains its status as agricultural land irrespective of whether farming activities were actually carried out.

This principle was reaffirmed by the Ahmedabad Bench of the Income Tax Appellate Tribunal in ITO, Ward-2(1)(4), Ahmedabad v. Meghdeep Farms Pvt. Ltd. , where the Tribunal held that the exemption cannot be denied merely because the assessee did not undertake agricultural operations or purchased the land with the intention of selling it for profit.

A related issue often raised is whether profits from the sale of such agricultural land can be taxed under any other head of income. The answer is generally no . Since qualifying agricultural land is not a capital asset, the surplus on its sale does not constitute capital gains. It is not a case of exempt income; rather, such receipts fall outside the scope of taxable income itself. Consequently, profits from the sale of qualifying agricultural land are generally not required to be reported in the income tax return as taxable income.

Section 2(14)(iii) of The Income tax Act provides that "Agricultural Land" would not be considered as a capital asset and states as under –

".. (iii) agricultural land in India, not being land situated-

(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 47[***]; 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.

Explanation.-For the purposes of this sub-clause, "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year"
No criterion has been mentioned that for holding a land to be "agricultural land", agricultural produce must be done on such land and agricultural income should have been derived from such land. Where the land had been shown as agricultural land in Revenue records, there was no application made for conversion of aforesaid agricultural land to non-agricultural land, the agriculture land under consideration was situated beyond 8 km from the municipal limits and other conditions for claiming the said land as agricultural land are satisfied, then the claim u/s 2(14)(iii) cannot be denied on the grounds that the assessee had not performed any agricultural activity on the said land or that the assessee had purchased the said property with the sole intention to sell the same for profit. The same was held in the case of THE ITO, WARD-2(1)(4), AHMEDABAD Vs M/s MEGHDEEP FARMS PVT, LTD [2023-VIL-477-ITAT-AHM].

A question may be asked that when agricultural land is not a ‘capital asset’ itself, can the profit on sale of the land be taxed under any other head.. It is to be noted that that there is difference between a receipt not being an income and the same being an exempt income under the tax laws. So any profits made on sale of agricultural land, which is not a capital asset, is not an income at all for tax purpose. Such profit made on sale of such agricultural land is not required to be disclosed in the ITR.