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Capital gains tax on agricultural land

This query is : Resolved 

12 November 2021 Four legal heirs have decided to sell an agricultural land in a small village away from any Municipality/Corporation (more than 20 Kms). The land was purchased by their ancesstors about 75 to 80 years back. The value of the land is not known as only a patta is available.
1. How will be the capital gains calculated?
2. If the sale proceed are to be equally divided, how will be the capital gains calculated for each leagal heir?
3. One legal heir is willing to forego his share of sale proceed in favour of the other three persons. Now, how will be the capital gains on each of them calculated?

12 November 2021 Check the status of land from revenue office/Tahsildar.
If it is rural agricultural land, then there will not be any capital gain tax liability.
& as such the sale proceeds can be divided without any tax liability.

13 November 2021 Apart from the land being recorded as agricultural land, the same must be used for agriculture, and it should not be barren land in order to be qualified as rural agricultural land which won't be a capital asset for the purpose of capital gain. When the gain is liable to tax then the value as on 01.04.2001 may be taken as its cost and accordingly indexation shall be made to arrive at indexed cost of acquisition.

13 November 2021 The land is a rural agriculture land but left barren for a long time. Hence, please answer my queries.

14 November 2021 You may please refer the following cases and consider your facts.


Smt. Sarifabibi Mohmed Ibrahim ... vs Commissioner Of Income-Tax, 204 ITR 631
Capital Gains—Agricultural land—Determination—Cumulative effect of all the relevant factors has to be considered—Facts on record suggesting that land was not agricultural when it was sold and also that assessee had no intention to cultivate it since 1965-66—Land sold to housing co-operative society—Such land could not be characterised as agricultural income


14 November 2021
Commissioner of Income-Tax v. V.A. Trivedi 172 ITR 95 Bombay High Court To ascertain the true character or nature of the land, it must be seen whether it has been put to use for agricultural purposes for a reasonable span of time prior to the relevant date. It must also be seen whether on the relevant date the land was intended to be put to use for agricultural purposes for a reasonable span of time in the future. That this last criterion is also necessary is indicated by the decisions now mentioned. As against this Mr. Manohar submitted that what had been obtained by the assessee on 8th Aug., 1966, was only an order under s. 115 of the Maharashtra Land Revenue Code and this, by itself, did not make for a conversion of the use to which the Ajni lands could be put. That is correct. It is not suggested that this factor is determinative of the question as to whether or not the Ajni land was agricultural land on the dates of its sale. What is rightly suggested is that the step the assessee took in this behalf is one of the relevant factors to be taken into account in determining the nature or character of the Ajni land. The first of the judgments relied upon in this behalf is in Chhotalal Prabhudas vs. CIT 116 ITR 631 (Guj) . The Tribunal had held that the intention for using the land became clear when the agreement to sell the land for use for non-agricultural purposes was entered into and, therefore, when the land was sold, it was not agricultural land. The Gujarat High Court observed that what it had to consider was not what the purchaser did with the lands or what the purchaser was supposed to do with the land but what was the character of the land at the time when the sale took place. A similar view has taken in Gordhanbhai Kahandas Dalwadi vs. CIT: (1981) 127 ITR 664 (Guj) . The Court said that it had to be borne in mind that the correct test that had to be applied was whether, on the date of the sale, the land was agricultural land or not. That, after the sale, the purchaser was going to put the land to non- agricultural use did not, the Court said, mean that the land had ceased to be agricultural land at the date of sale. The crucial date for the purpose of finding out the character of the land was the date of sale and the question that had to be asked was whether on the date of sale, the land was agricultural land or not. However, what had weighed with the Tribunal, inter alia, was the fact that after the sale, the purchaser was going to use the land for non-agricultural purposes and it was in the light of what was going to happen in further that the Tribunal had held that the land was non-agricultural in character.

16 November 2021 1. The first case law is not relevant here as the deciding factor is not the agricultural income.
2. Second case-law is also not relevant when the land is Rural in character, which is not an capital asset as per sec. 2(14) of IT act.

16 November 2021 Deciding factor in the query is whether the land is Rural agricultural land.
If yes, then the compulsory cultivation factor is not mandatory as per sec. 2(14) of IT act.
Compulsory cultivation is specified in sec. 54B, where the nature of agricultural land is 'Urban'; where by it is capital asset under Sec. 2(14) of IT act.

16 November 2021 Practically, we have encounter number such transactions in Mundra & Mandvi talukas of Kutchh region for last decade & half.
Most of such land was never cultivated due to uncertain monsoon and no irrigation facility in the region. But due to rapid industrialization the farmers in the region encased their not so fertile lands. The investors under the banner of farmers also resold them number of times.
The irony is, the revenue department minted crores under stamp duty act, but IT department hardly earned a penny. Well, none of the ITO ever asked for its cultivation status; but after reading this post, I wonder if any such question be raised in future!!!

16 November 2021 Agreed that the location of the Agricultural Land is the deciding factor as to the land qualifying to be a Capital Asset but still if the Agricultural Land which is not diverted land and recorded in revenue records agricultural land but is barren land may be treated as Capital Asset gain on which may be liable to Capital Gain. All the land which is not diverted to Non-Agricultural Land is by default Agricultural land in revenue records. The assessing officer may take a view that since the said piece of land was never used for agriculture then irrespective of the fact that it is recorded as agricultural land because it is not diverted to Non-Agricultural land, and may proceed to tax the gain arising out of sale of such land.


16 November 2021 UNDER WHICH RULE?

16 November 2021 In the case of Commissioner of Income-tax Vs. Sashiben 288 ITR 319 Honourabl;e Gujarat High Court has held that:

“if the land is recorded as agricultural, it would continue to be agricultural land. If the land is so recorded, and it has not been put to any other use by the holder/owner of the land and even if it remains barren or uncultivated for some time and even grass is raised on the land, it would continue to be agricultural land.”

In this case the Honourable High Court has said if it is not used for agricultural purposes for some time which may lead to a conclusion that if the subject land is not at all used for agricultural purposes by the owner then the land may not qualify to be a Rural Agriultural Land to be out of purview of the definition of Capital Asset.
There is an interesting issue in the case of Maharashtra that if an Agricultural Land irrespective of it being used for agriculture or not is sold to an Individual the guideline value is being Agricultural Land only but if it is being sold to a Company the guideline value is taken as if it is a diverted land though it is not so diverted into Non-Agricultural Land.

So before arriving at any conclusion one must take all aspects into consideration.

16 November 2021 Commissioner of Income-tax Vs. Sashiben 288 ITR 319
IN THIS CASE THERE IS NO ALTERATION IN THE NATURE OF LAND. READ....
Further, it was held by the Hon'ble High Court of Gujarat, in the case of CIT v. Shashiben 288 ITR 319 (Guj), that the fact of non-agricultural user by the buyer will not alter the character of land in the case of the seller. The relevant portion of the decision is extracted hereunder:

"If somebody, thinking that the said land can be put to some other purpose, purchases the land for a higher price and thereafter, changes the use, for the first holder, the property would not change its character so long as he himself does not change the use or put the land to some other use after getting the conversion of use from the competent authority/officer."

16 November 2021 There is an interesting issue in the case of Maharashtra that if an Agricultural Land irrespective of it being used for agriculture or not is sold to an Individual the guideline value is being Agricultural Land only but if it is being sold to a Company the guideline value is taken as if it is a diverted land though it is not so diverted into Non-Agricultural Land.
IN THIS CASE ALSO THERE IS NO LIABILITY OVER SELLER, OF ANY CULTIVATION BEFORE SELL.
FOR COMPANY GUIDELINE VALUE CHANGES AS PER STAMP DUTY ACT.
NO CHANGE IN INTERPRETATION OF SEC. 2(14) IT ACT.

16 November 2021 If the agricultural land happens to be an urban land, in that case if it is sold to a Company then s.50C and s.56(2)(x) get triggered to seller and buyer respectively and both get fastened with additional tax liability besides additional stamp duty payment to state government. Whether such differential valuation based on status of buyer is prevalent in any other state, I am not aware of.

16 November 2021 Dear Mr. Paras,
The basic query here is based on sec. 2(14) of IT act.
Whether it qualifies as Rural agricultural land or not? (as per IT act).
If yes, then it is not capital asset.
If No then it is capital asset, which requires all such more details to be checked.
Here,for rural agricultural land; if land revenue record/Passbook/Tehsildar certificate stating to be agricultural land; and City survey office's record with clear remarks being at the distance (as specifically required under the subsection) from any nearby Municipality/ town/ cantonment zone etc. along with population as per latest census record of the city/town are provided to IT authority; IT authority cannot question any other details which be not in their regime. The question of it being cultivated or not is out of sec. 2(14) of the act.
The question does arise if sec. 54B had been applicable in this case, which is not.
So, simply to say, if the land in question is 'RURAL AGRICULTURAL LAND'; THEN capital gain does not arise BEING 'non-asset' as per sec. 2(14) of the act.
OTHERWISE WE HAVE TO CHECK ALL OTHER VARIATIONS AS SUGGESTED BY YOU.

16 November 2021 I agree that I have travelled beyond the scope of query, but we just discussed other aspects of academic interest. Here, one important provision with regard to measurement of aerial distance of subject land from local limits of municipality etc. is to be considered. There is no prescribed method to measure aerial distance and CBDT is silent till now.

16 November 2021 It is measured on drawing scale, and the measurement can be certified by any architect.
Well out of box, recently read a judgement in favor of assessee, where distance as per approach road was allowed!!!

16 November 2021 Fantastic knowledge exchanges. I am happy that my query provoked very interesting answers. The land in question is rural agricultural land far away from any town/corporation/municipal limits and being sold to an individual for agriculural purposes. Please,answer my third query on how capital gains is calculated if one legal heir foregoes his share of sale proceeds in favour of the other three legal heirs. When there is no capital gains
liability as the land is rural agricultural land will he be liable for gift tax. Here again he is only giving up his share to his own sisters.

17 November 2021 1. As said before, there is no capital gains liability.
2. The gift received by sisters from brother is tax-exempt as per sec. 56(2) of IT act. So no gift tax either.

17 November 2021 Thank you very much. Thought provoking discussion.



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