Mukesh Patel.in
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TAX LIABILITY ON AGRICULTURAL LAND!

Total Exemption from Wealth Tax & Gains Tax Concessions subject to fulfillment of conditions

Today, we shall discuss two interesting Readers’ Queries on taxability of agricultural land under wealth tax and capital gains tax.

Query: I am holding a large piece of agricultural land situated just outside the limits of Ahmedabad Municipal Corporation (AMC). I have always been under the impression that agricultural land does not attract wealth-tax. However, my tax consultant says that this land being within the 8 kms range from AMC limit is ‘urban land’ within the meaning of the Wealth-tax Act and since its market value is more than Rs.30 lakhs (being the general exemption limit), it is liable to wealth-tax. Can you please guide me regarding my correct tax liability?

Reply: You have raised a very interesting issue. Infact, the Wealth-tax Act nowhere directly refers to the term ‘agricultural land,’ either for purposes of levy of tax or exemption. No doubt, Section 2(ea), which defines assets liable to wealth-tax, lists ‘urban land’ as taxable. However, the said provision also states that “urban land does not include land on which construction of building is not permissible under any law.”

Lands on which construction is not permitted would include by implication, any land meant for agricultural use, any land covered under Urban Land Ceiling or Green Belt Regulations etc. Unless an agricultural land is cleared by the revenue authorities for non-agricultural (NA) use, regular construction on the same is not permitted. Based on this logic and reasoning, it should be possible for you to contend that as long as the land is agricultural, it is not liable to wealth tax.

CAPITAL GAINS TAX ON AGRICULTURAL LAND

Query: Is it true that there is no income-tax liability on any capital gains arising on sale of agricultural lands? Can you please explain the taxing provisions, if any, in this regard?

Reply: It is not correct to state that capital gains arising on every agricultural land are exempt from income-tax.

Section 2(14) of the Income-tax Act, which defines ‘capital asset,’ excludes from within its purview an agricultural land situated in India at a place having a population of less than 10,000 as per the last preceding census and situated at an area not comprised within any municipal limits or within a notified distance from such municipal limits. The Government notification in this regard has specified distances ranging between 2 to 8 kms for various towns situated in different states keeping in view the extent of urban development in the respective areas.

Thus, if the agricultural land sold by a taxpayer does not qualify as a ‘capital asset’ on the basis of the above tests, then it does not give rise to any taxable capital gains.

However, any agricultural land situated in an ‘urban area’ on the basis of the above guidelines being required to be treated as a ‘capital asset,’ any gains arising from the transfer of the same would be liable to income-tax as capital gains.

With effect from Assessment Year 2005-06, a special exemption has been provided under Section 10(37) in respect of capital gains arising out of compensation or consideration received for any urban agricultural land on account of compulsory acquisition under law. This exemption is further subject to the condition that the land in question was used for agricultural purposes either by the individual or his parent or by his HUF during the period of 2 years immediately preceding the transfer.

It needs to be noted, however, that even in such cases, while the amount of capital gains out of the award of compensation would be exempt, the compensation awarded in the form of interest would very much be taxable as ‘income from other sources’ in the hands of the taxpayer.

As per the amendment to Section 145A as introduced by the Finance (No. 2) Act, 2009, with effect from Assessment Year 2010-11, interest received by a taxpayer on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. However, as per the new provision made under Section 57(iv), it has also been provided that a deduction of a sum equal to 50% shall be allowed in respect of such income treated as taxable in the year of receipt.

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