Recently, the Income Tax Appellate Tribunal (ITAT) disallowed capital gains tax exemptions on the sale of land in two separate cases heard by its Chennai and Pune benches. The cause was that no agricultural work had been done.
A capital gain on the transfer of agricultural land may be exempt from taxation under section 54B of the Income Tax (I-T) Act if the land has been utilized exclusively for agricultural purposes for at least two years prior to the sale. As long as the capital gains are used to purchase more agricultural property within three years, they are exempt.
Tax officials draw attention to the fact that claiming revenue as tax-free agricultural income is becoming more difficult. Yet even when a taxpayer asserts that a sale involved agricultural property, a variety of documents—including land records and, in cases involving high-value issues, even satellite images—prove useful.
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Keshav Sunderam Rajam, the taxpayer in the case heard by the Chennai ITAT, was a non-resident. He paid his father Rs 1.2 crore to purchase agricultural land in Coonoor, investing the capital gains from the sale of “agricultural land” by parking Rs 2.4 crore in a capital gains account scheme (the amount so deposited needs to be used for purchasing agricultural land within the specified period). To prove that the land sold was agricultural, he created “Adangal” (local land records). On the basis that the land sold had not been used for agricultural purposes, the I-T officer rejected the capital gains exemption advantage of Rs. 3-odd crore.
The ITAT bench, which eventually heard the case, noted that the “Adangal” indicates that there were a few coconut trees. Given that the taxpayer has not disclosed any agricultural revenue, this does not imply that he engaged in agricultural operations. The bench also noted that the auctioned acreage was close to the water. Water is required for agricultural operations. Yet, there is no agricultural activity or crop-raising application for seawater.
Similar to this, in the Pune ITAT, taxpayer Sunil Bagul sought a deduction of Rs 1.7 crore under section 54B of the I-T Act for the acquisition of three agricultural land plots. The I-T officer made two points during the assessment that needed to be satisfied in order to qualify for this tax advantage. First, the property sold must have been utilized for farming for a minimum of two years prior to the sale. Second, farming should be done on the bought property as well. Local land revenue records provided evidence that the first criterion was not satisfied in this particular situation.
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The ITAT bench concluded that the land income records provided irrefutable proof that the auctioned land was not suitable for agriculture. The Nashik Agricultural Marketing Committee invoices that the taxpayer supplied, which showed sales of tomatoes and other products, did not prove that agricultural operations were conducted on that specific area of land.
