Reversal of exemption taken u/s 54b

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Querist : Anonymous

Querist : Anonymous (Querist)

25 January 2013 I sold a land in AY 2010-11, the gain was invested in an agriculture land in same assessment year for claiming exemption u/s 54B. Now i have sold this agriculture land in FY 2011-12. So my question is (1) for which year taxability arise, the year of original sale (AY 2010-11) or the year in which new land is sold (AY 2012-13) (2) Agri Land is not capital asset, so if i reduce COA of new asset by amount of exemption taken (say any amount), the gain should not be taxable because it is not a capital asset (2) if diversion for question 2 then under which head of income calculation of tax shall be made..

Eagerly waiting for reply.

kunal

kunal (Expert)
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25 January 2013 sale of RURAL agricultural land is exempt from income tax because it is not a capital asset..

Querist : Anonymous

Querist : Anonymous (Querist)

25 January 2013 Yes that is what my question is. So we can say that the condition to hold new agriculture land for three year has practically no impact ? because words used for withdrawal of exemption are " to reduce cost of new asset by amount of exemption taken" but by whatever amount we reduce the coa of new asset result shall be same as the difference is not chargeable to capita gain tax because it is not a capital asset by virtue if section 2(14). under any other head of income can this be taxable ???

Querist : Anonymous

Querist : Anonymous (Querist)

25 January 2013 guys it is open for debate.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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25 January 2013 The query is really debatable. In my view the capital gains tax liability can arise in the AY 2010-11 itself unless the query is modified.
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1. There is no provision in the law which says that exemption can be availed by purchasing agriculture land U/s 54B against Sale of LAND. If you sale land and buy agriculture land I think 54B is not available. In Ay 2010-11 you have to pay tax on long term capital Gains on transfer of Land.
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Querist : Anonymous

Querist : Anonymous (Querist)

26 January 2013 Sir, appreciate your participation, assume the land originally sold is an agriculture land and exemption u/s 54B is allowable.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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26 January 2013 In the original query it has not been mentioned that the new asset is rural agriculture land. If the facts are not properly stated, the issue of debate may turn into another direction.
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Considering the clarifications submitted later....the reply to your subsequent query is supporting your view.
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The Income arising from sale of new asset is not taxable under any head of income. Since the Agriculture land is not a capital asset.
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Querist : Anonymous

Querist : Anonymous (Querist)

26 January 2013 Sale of any land used for agriculture purpose in previous two years is eligible to claim exemption under section 54B

HUZAIFA HUSSAIN

HUZAIFA HUSSAIN (Expert)
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26 January 2013 IF U R TELLING THAT THE AGRICULTURE LAND WHICH WAS SOLD WAS NOT A CAPITAL ASSET THAN THE QUESTION OF CLAIMING 54B EXEMPTION
DOES NOT ARISE AT ALL.

Querist : Anonymous

Querist : Anonymous (Querist)

26 January 2013 I think we are diverting from main query. Sir the quesrion is for taxability of reversal of exemption already claimed u/s 54B where the new land is sold within three years of its purchade.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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22 July 2025 You're absolutely right to focus back on the core issue — what happens to the Section 54B exemption when the new agricultural land is sold within 3 years of purchase.

Let’s resolve your question step-by-step with clarity and references.

🧾 Legal Framework of Section 54B – In Brief
Section 54B allows exemption of capital gain from sale of agricultural land if:

The land sold was used for agricultural purposes in the 2 preceding years.

The capital gain is invested in purchase of another agricultural land within 2 years.

The new land must not be transferred within 3 years from the date of purchase.

If the new agricultural land is transferred within 3 years, Section 54B(2) gets triggered.

❗ Your Situation:
Original Sale: Agricultural land sold in AY 2010–11 (FY 2009–10)

Exemption claimed u/s 54B: by buying new agricultural land in the same year

New land sold: in FY 2011–12 (i.e., within 3 years of purchase)

New land is RURAL agricultural land (i.e., not a capital asset u/s 2(14))

✅ Answers to Your Questions
🔹 Q1: In which year does the tax liability arise — AY 2010–11 or AY 2012–13?
Answer: The tax liability arises in AY 2012–13, i.e., the year in which the new asset is sold within 3 years.

As per Section 54B(2):

If the new asset is transferred within 3 years, then the cost of acquisition of the new asset shall be reduced by the amount of capital gain exempted earlier, and capital gain shall be recomputed in the year of sale.

✅ So the capital gain that was previously exempted becomes taxable again, but only in the year the new land is sold.

🔹 Q2: Since rural agricultural land is not a capital asset, how can any gain be taxed — even after reducing cost of acquisition?
You’ve hit a very interesting legal nuance here.

Rural agricultural land is not a capital asset as per Section 2(14).

Hence, any gain on its sale is not taxable under ‘Capital Gains’ at all.

So even if you reduce its cost of acquisition under Section 54B(2), it still won’t result in a taxable capital gain.

✅ Effectively, the exemption under Section 54B becomes permanent — because the subsequent asset (rural land) is itself exempt from capital gains taxation.

🔹 Q3: Can the withdrawn exemption be taxed under any other head?
No. There is no enabling provision under any other head (like income from other sources) to tax the withdrawn exemption from Section 54B.

The logic:

Section 54B(2) only mandates adjusting the cost of acquisition of the new asset.

If after such adjustment, the resulting gain is still not taxable (because the asset is not a capital asset), then no tax arises.

There’s no deeming provision that says “the earlier exempted amount becomes income under other heads” (unlike Section 10(23C) or 41(1) scenarios).

🧠 Final Conclusion
Question Answer
Year of taxability AY 2012–13 (year of new asset’s sale)
Is rural land sale taxable? ❌ No, not a capital asset u/s 2(14)
Can tax be levied under other heads? ❌ No such provision exists
Is exemption u/s 54B effectively retained? ✅ Yes, in such a case it is

🔁 Practical Takeaway
If you invest in rural agricultural land after selling urban agricultural land, and then sell that rural land within 3 years — the condition of reversal under Section 54B becomes ineffective, because the new asset is not taxable anyway.

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