Income Tax Sections Applicable:
Definition of Capital Asset (Section 2(14))
Exemption from Capital Gains on transfer of Agricultural Lands on acquisition (Section 10(37))
Charging section for Capital Gains (Section 45)
Capital Gains in cases of understated consideration on sale/ transfer of lands (Section 50C)
Exemption from Capital Gains on transfer of Agricultural Lands in certain cases (Section 54B)
TDS on compensation payment for acquisition of Lands other than agricultural Lands (Section 194LA)
Sale of land can result in 2 kinds of incomes:
i. If the land is held as stock in trade then the sale of such lands results in business income (held as stock in trade)
ii. If the land is held as investment then the income on the sale of the land results in Capital Gain (held as investment)
Sale of Land held as investment
In case, the land is an investment then it becomes necessary to establish after thorough verification of documents whether the land sold is an agricultural land or not. This is most important because as per Section 2(14) of the I.T. Act, agricultural land which are not situated in specified areas are not Capital assets and sale of such land does not give rise to capital gains.
Section 2(14) which defines Capital Asset reads as under:
“Capital asset” means—
(a) Property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),
But does not include—
(iii) Agricultural land in India, not being land situate—
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or
(b) In any area within the distance, measured aerially,—
(I) not being more than 2 Kms., from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than 6 Kms., from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
(III) Not being more than 8 Kms. from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.
Further exemption from Capital gains is provided in Section 10(37) of the Act from sale of Agricultural lands arising to individual assesses or to HUF even if the lands are situated within the area specified in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2.
Thus Farm land or Agriculture Land situated outside specified limits (Rural Area) would not be treated as capital asset for taxation and hence fully exempt. Hence Agriculture Land situated within specified limits (Urban Area) would be treated as capital asset and Capital Gains Tax Liability arises.
Section 10(37) reads as under:
(37) in the case of an assessee, being an individual or a Hindu undivided family, any income chargeable under the head “Capital gains” arising from the transfer of agricultural land, where—
(i) Such land is situated in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2;
(ii) Such land, during the period of 2 years immediately preceding the date of transfer, was being used for agricultural purposes by such HUF or individual or a parent of his;
(iii) Such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India;
(iv) Such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004.
Explanation.—for the purposes of this clause, the expression “compensation or consideration” includes the compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority;
Agricultural land is a land on which agricultural activities are carried out. Agricultural activity has been held to be an activity where human effort has resulted in growing crops.
From Courts judgments following emerge:
‘Agricultural land’ should comprise the following characteristics
a. It must be a land;
b. It must pertain to or be connected with cultivation;
c. It must involve expenditure of human labour and skill for the purpose of cultivation or for keeping it in a cultivable state
Agricultural land is land on which a prudent owner will undertake any of the processes of farming in its widest sense.
The actual conversion of the land for non-agricultural purposes will also affect the character of the land as agricultural land. Whether such a conversion has taken place will depend on the facts of each case
'Agriculture' in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term, meaning thereby tilling of the land, sowing of the seeds, planting and similar operations on the land. These are basic operations and require the expenditure of human skill and labour upon the land itself. Operations which the agriculturist has to resort to and which are absolutely necessary for the purpose of effectively raising produce from the land, e.g., weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the growth and preservation of the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, would all be agricultural operations when taken in conjunction with the basic operations. The human labour and skill spent in the performance of these subsequent operations cannot be said to have been spent on the land itself. The mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations.
Agriculture comprises within its scope the basic as well as the subsequent operations described above regardless of the nature of the products raised on the land. These products may be grain or vegetable or fruits.
The essence of agriculture, even when it is extended to include 'forestry', is the application of human skill and labour. Without that it can be neither art nor a science.
Reading entry 82 of the Union List and entry 46 of State List of the Seventh Schedule of the Constitution, it is clear that the Parliament is not competent to tax agricultural income. The expression 'agricultural income' occurring in the said entries has to be understood in the manner and in the sense defined in clause (1A) of section 2.
Agricultural land may cease to be agricultural because it was lying fallow for some years and the land in the neighborhood was under development as non-agricultural land as was decided by the Supreme Court in the case of Sarifabibi Mohmed Ibrahim vs. CIT  204 ITR 631 (SC), where such land was held to be non-agricultural because it was sold for non-agricultural purposes to a co-operative housing society with construction following the sale. In the case of Gemini Pictures Circuit Pvt. Ltd. reported in 220 ITR 43 (SC) the Supreme Court held that where certain lands were located in most important and busiest thoroughfare in city and the land was surrounded on all sides by industrial and commercial buildings and no agricultural operations were being carried on any land nearby, the mere fact that vegetables were being raised thereon at the time of sale or for some years prior thereto, could not change the nature and character of the land from non-agricultural to agricultural.
Once it is held that the land is agricultural then one of the major legal issue arising in the treatment of capital gain is whether the land is situate within the area specified in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2. The distance of not more than 8 km. mentioned in the Section 2(14) of the I.T. Act whether it is the road distance or distance as crow flies? Several judicial pronouncements have now established that distance of 8 km. is to be reckoned by the shortest motorable road which leads to the land and not the distance as the crow flies.
It is worth mentioning that the distance mentioned in the item (b) is not more than 8 kms. The AO should refer to Notification No. [SO 9447] (File No. 164/3/87ITA.I)], dated. 6-1-1994, wherein the exact distance in respect of every area is specified. It would also be worthwhile to see what is the nearest urban area because the land may be located in the vicinity of several areas mentioned in the notification. If the land falls within anyone of the areas then it becomes a “Capital Asset” within the meaning of the Act.
Once it is established that the land in question is agricultural land and is not land situate in any area referred to in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2, then no Capital Gain can arise out of the Transfer of such lands. However if the land is situated in any area referred to in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2 then the following issues may be relevant.
Application of Section 50C
50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer :
Provided that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of agreement may be taken for the purposes of computing full value of consideration for such transfer:
Provided further that the first proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of the agreement for transfer.]
Following third proviso shall be inserted after the second proviso to sub-section (1) of section 50C by the Finance Act, 2018, w.e.f. 1-4-2019:
Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.
(2) Without prejudice to the provisions of sub-section (1), where—
(a) The assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;
(b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,
the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.
Explanation 1.—for the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).
Explanation 2.—for the purposes of this section, the expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.
(3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.
The AO should gather the information about the jantri rates prevailing in the area while ascertaining the Capital Gains on sale of lands. In cases of sale consideration being less than the Jantri rates he should apply the Jantri rates to compute the Capital Gains by applying Section 50C of the IT Act.
Deduction under Section 54B from Capital Gains arising out of sale of agricultural land
The agricultural land is situate in the area specified in item (a) and (b) of sub-clause (iii) of clause (14) of Section 2 is a capital asset. However, deduction under Section 54B of the I.T. Act provided from the capital gains arising from sale of such agricultural land, provided agricultural operations are carried out on such land for two years preceding the year in which the land is sold and the cost of new agricultural land purchased within two years of sale of such land is more than the capital gain. Lesser deductions are provided if the cost of the agricultural land purchased within 2 years of sale of the original agricultural land is less than the capital gains arising to the assessee.
Information that may be gathered by Income Tax Authorities
1) Purchase deed and sale deed of the sale of the land.
2) 7/12 certificate issue showing the characterization of land.
3) The certificate of Talati regarding crops grown whether the land is irrigated or not and the income from the land as shown in the land revenue records.
4) Reconer (Jantri or Circle) rates prevailing in the area for stamp duty purposes for Agriculture Land
5) Evidences of income arising from agricultural operations in the form of sale bills etc.
6) Evidences of expenditure having been incurred on agricultural operations by calculating bills of expenditure etc.
7) Distance of the land from the areas specified in Section 2(14) (iii) (a) & (b) of the I.T. Act.
8) Any permission has been obtained from the revenue authorities to convert the land use to non-agriculture. Whether the permission has been obtained by the vendor or vendee.
9) Whether land itself was developed by plotting and provided with roads and other facilities.
10) The land use in the surrounding area to indicate whether the land was agricultural or not?
11) Whether there were any previous sales of portions of the land for non-agricultural use?