Union Budget 2023-24: Why agricultural land tax needs some attention from government

An agricultural land enjoys certain immunity under the Income-tax Act. For tax purposes, agricultural land is classified into rural and urban agricultural land. Agricultural land is considered rural if it is situated beyond 2 km, 6 km, or 8 km (depending on the population of the municipality or cantonment board) as measured aerially from the local limits of the municipality or cantonment board.

Any gains from the transfer of rural agricultural land get unconditional exemptions. However, the gains from the transfer of urban agricultural land get the exemption under Section 54B if the capital gains are reinvested in new agricultural land.

Section 54B exemption is available to an Individual or HUF on purchasing the agricultural land within 2 years after the date of the transfer. The agricultural land may be located anywhere, in India, outside India, in rural or urban areas. The exemption shall be available only if the agricultural land is purchased after the date of transfer.

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The provision under Section 54B of the Income Tax Act provides for an exemption on capital gains from the transfer of urban agricultural land, but it comes with certain limitations.

One of the key requirements for availing the exemption is that the assessee must purchase agricultural land for the purpose of agriculture after the date of transfer of the original capital asset. Unlike Sections 54 and 54F, Section 54B does not permit the purchase of agricultural land before the date of transfer, which can be seen as a limitation of the provision. This makes it less flexible in comparison to the provisions of Sections 54 and 54F, which allow exemptions for the purchase of residential houses before or after the transfer of the original asset.

The Ahmedabad Tribunal in the case of Paras Chinubhai Jani v. Principal Commissioner of Income-tax, Ahmedabad [2019] 107  taxmann.com 217 held that the provision of Section 54B of the Income Tax Act, which allows for an exemption on capital gains from the transfer of urban agricultural land, clearly states that the land must be acquired after the transfer of the original capital asset in order to be eligible for the exemption.

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The court found that the assessee’s claim for deduction under Section 54B for land acquired before the transfer of the capital asset is in violation of the plain language of the Act and, therefore, not sustainable. The court also noted that the intention of the legislature is clear, as the use of phrases before or after the transfer of the capital asset is used in different sections of the Act. Therefore, the court upheld the Commissioner’s decision to disallow the exemption under Section 54B, as the assessee had purchased the land before the date of transfer of his agricultural land.

Section 54B does not allow for such exemptions if the assessee purchases the new agricultural land before the date of transfer of the old agricultural land. Thus, some differences exist between the provisions of Section 54B and those of Section 54 and 54F.

Hence, it is recommended that the exemption provision in Section 54B should be made consistent with provisions of Section 54 and 54F and allow for exemptions even if the assessee purchases the new agricultural land before selling the original agricultural land. This would provide parity in the exemption provisions and make it easier for individuals and HUFs to take advantage of these exemptions.

The rationalization of the capital gains exemption under Section 54B of the Income Tax Act would bring several benefits for taxpayers. By making the provision more flexible and user-friendly, it would reduce the administrative burden for taxpayers and make it easier for them to take advantage of the exemption. Additionally, it would also ensure that the provision is consistent with the other capital gains exemptions provided in the Income-tax Act, and prevent discrimination between different types of assets.

Naveen Wadhwa and Tarun Kumar are Chartered Accountants at Taxmann. They tweet @taxmannindia. Views expressed are personal.

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