[Opinion] Tribunal Brings Back Wrong Approach of Lower Authorities to Rails

S. Krishnan – [2025] 174 taxmann.com 1237 (Article)

1. Introductory Remarks

Sometimes while going through the orders/judgments passed by judicial authorities one wonders whether one has to go through the basics in the subject all over again in order to understand the issue(s) decided by the authorities. One such occasion arose when the author came across the order dated 22nd April, 2025 passed by the ITAT Mumbai Bench in the case of Suresh Bhagwandas Mehta v. ITO [2025] 174 taxmann.com 298 (Mum. Trib.) wherein it was held that

“where assessee claimed exemption under section 54B of the Income-tax Act (the Act) on ground that he had invested sale proceeds of land sold by him in purchase of new agricultural land and the Assessing Officer denied exemption on ground that land sold by the assessee was not agricultural land, since lower authorities had not examined extract relied upon by the assessee to substantiate claim that land sold was used for agricultural purposes, the issue was to be restored to file of Assessing Officer for denovo adjudication.”

Let us refer to some basics with regard to classification of agricultural land and its exemption on reroll of such land.

2. Basics With Regard to Classification of Agricultural Land and Its Exemption on Reroll of Such Land

2.1 It is to be noted that the term ‘transfer’ is wide enough to include sale, exchange or relinquishment of the asset and so on.

Again, the term “capital asset” means property of any kind held by an assessee, whether or not connected with his business.

It is to be stated that therefore the term “capital asset” includes an agricultural land. Agricultural land can either be a rural agricultural land or urban agricultural land.

2.2 Rural Agricultural Land

It means an agricultural land in India –

(a) If situated in any area which is comprised within the jurisdiction of a municipality and its population is less than 10,000, or

(b) If situated outside the limits of municipality, then situated at a distance measured-

(i) more than 2 kms, from local limits of municipality and which has a population of more than 10,000 but not exceeding 1,00,000; or

(ii) more than 6 kms, from local limits of municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000; or

(iii) more than 8 kms, from local limits of municipality and which has a population of more than 10,00,000.

It is to be noted that the distance has to be measured aerially.

Transfer of Rural Agricultural land is exempt from tax

As a Rural Agricultural Land does not qualify to be a capital asset, no capital gains/loss would arise on transfer of such Rural Agricultural Land. In other words, on transfer of rural agricultural land, no capital gain tax liability would arise.

2.3 Urban Agricultural Land

Urban Agricultural Land is a land located in specified location i.e. not a Rural Agricultural Land and used for agricultural purposes.

3. Taxability of Transfer of Agricultural Land in India

Transfer of land can result in two kinds of income. If the land is held as stock in trade, then the transfer of such lands would result in business income whereas, if the land is held as investment (i.e. as a personal asset) then the surplus on the transfer of the land would result in Capital Gain.

The long-term capital gain arising out of transfer of a long-term capital asset in the form of an urban agricultural land is subject to tax at special rate of 12.5% plus applicable surcharge plus cess @4% on the sum total of tax and surcharge.

The short-term capital gain arising out of transfer of a short-term capital asset in the form of an urban agricultural land is subject to tax at normal rates in the sense that it will be added to other income for the purpose of taxation.

However, the entire tax liability can be saved or minimised as discussed below.

4. Exemption Provided Under Section 54B of the Act in Case of Rerolling

If the assessee as transferor does not want to pay any capital gain tax or wants to minimise his tax liability arising out of transfer of such capital asset being either short-term urban agricultural land or long-term urban agricultural land, then he can take advantage of provisions of section 54B of the Act which have been digested below:

This exemption is available when capital gain arises on transfer of Urban Agricultural Land (as Rural Agricultural Land is not a Capital Asset) and such capital gain is used for purchase of another agricultural land.

Conditions to be satisfied for claiming exemption from Capital Gains under section 54B of the Act –

1. The exemption is available to an Individual or an HUF.
2. The land which is being sold must have been used for agricultural purposes by the individual or his parents or by the HUF for a period of two years immediately before the date of transfer.
3. Another land to be used for agricultural purposes (whether Rural or Urban) should be purchased within a period of two years from the date of transfer of this land.
4. The new agricultural land which is purchased to claim capital gain exemption should not be sold within a period of three years from the date of its purchase.
5. In case the assessee is not able to purchase such agricultural land before the due date of furnishing of Income Tax Return under section 139 of the Act, the amount of such capital gains must be deposited before the due date of filing of return in any bank or institution specified according to the Capital Gains Account Scheme, 1988. The exemption can be claimed for the amount which is deposited.
6. If the amount which was deposited as per Capital Gains Account Scheme is not utilised for the purchase of agricultural land, then it shall be treated as the capital gain of the year in which the period of two years from the date of transfer of land expires.
7. Amount of exemption from Capital Gains – If the cost of new Agricultural Land is equal or greater than capital gains, then the entire capital gains would be exempt. However, if the cost of new Agricultural Land is less than capital gains, then capital gains only to the extent of the cost of new agricultural land would be exempt and the balance would be chargeable to tax.

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