[Opinion] Union Budget 2023: Exemptions for Agricultural Land in the Income Tax Act

Authored by CA Naveen Wadhwa – DGM | Taxmann Advisory and Research & CA Tarun Kumar – B.Com, FCA, DIIT-ICAI

The Income-tax Act grants certain exemptions for agricultural land. The classification for tax purposes is determined by whether the land is considered rural or urban, with rural land being defined as situated beyond a certain distance, ranging from 2 km to 8 km, from the boundaries of the municipality or cantonment board, as calculated by aerial measurement.

The transfer of rural agricultural land is exempt from taxes without any conditions, whereas the transfer of urban agricultural land is only exempt if the capital gains from the transfer are invested in new agricultural land as per Section 54B of the Income-tax Act.

According to Section 54B, individuals or HUFs can claim an exemption on capital gains from the transfer of urban agricultural land if they reinvest the gains in a new agricultural land. The exemption is only available if the new land is purchased within 2 years of the transfer and can be located anywhere, whether in India or abroad, and in rural or urban areas.

The Section 54B of the Income Tax Act allows for an exemption on capital gains from the transfer of urban agricultural land, but it comes with certain restrictions. One of the main conditions for obtaining this exemption is that the individual or HUF must purchase agricultural land that will be used for agriculture after the date of transfer of the original asset. Unlike Sections 54 and 54F, Section 54B does not allow the purchase of agricultural land prior to the date of transfer, which can be seen as a limitation of the provision. This makes it less flexible than the provisions of Section 54 and 54F, which provide exemptions for the purchase of residential properties before or after the transfer of the original asset.

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The Tribunal in the case of Paras Chinubhai Jani v. Principal Commissioner of Income-tax, Ahmedabad ruled that the exemption on capital gains from the transfer of urban agricultural land under Section 54B of the Income Tax Act can only be claimed if the agricultural land is purchased after the transfer of the original capital asset. It was found that the claim for the deduction under Section 54B for land acquired before the transfer of the capital asset is in violation of the language of the Act and not valid. The Tribunal also noted that the intention of the legislature is clear, as different sections of the Act use phrases such as “before or after the transfer of the capital asset.” Therefore, Tribunal upheld the decision of the Commissioner to disallow the exemption under Section 54B, as the assessee had purchased the land before the date of transfer of his agricultural land.

The provision under Section 54B of the Income Tax Act has a limitation that it does not permit the purchase of agricultural land before the date of transfer of the original asset, unlike Section 54 and 54F which allow exemptions for the purchase of residential houses before or after the transfer of the original asset. This makes Section 54B less flexible when compared to the other provisions.

It is suggested that the exemption in Section 54B should be aligned with the provisions of Section 54 and 54F, to allow for exemptions even if the assessee acquires the new agricultural land before disposing of the original one. This would create consistency in the exemption provisions and make it more accessible for individuals and HUFs to benefit from these exemptions.

By making the exemption provision in Section 54B of the Income Tax Act more in line with those of Section 54 and 54F, it would simplify the process for taxpayers, making it easier for them to claim the exemption. Additionally, it would also eliminate any disparities between different types of assets and reduce administrative burden on taxpayers. This would ultimately lead to a more fair and efficient tax system.

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