Taxpayer Responsible to Prove Land's Agricultural Status to Claim Capital Gains Tax Exemption: Kerala HC [Read Order]

In a recent decision, the Kerala High Court ruled that the taxpayer has the burden of proof to establish the agricultural nature of land when claiming exemption from capital gains tax.

The case involved the assessee, the late M.J. George, who was subsequently represented by his legal heirs. During the assessment year 2006-07, George sold 5.21 acres of land in Kakkanad village, Kochi, for Rs. 977.10 lakhs. The petitioner stated that this land was agricultural and thus exempt from capital gains tax under Section 2(14)(iii) of the Income Tax Act, 1961.

Initially, the assessing authority rejected the appellant’s claim, classifying the land sale proceeds as taxable capital gains. On appeal, the First Appellate Authority accepted the assessee’s claim, relying primarily on a certificate provided by the Village Officer indicating that the land was categorized as agricultural land in the revenue records.

Become PF & ESIC Pro: Basic to Advance Course - Click here to Enroll

Dissatisfied, the revenue department appealed to the Income Tax Appellate Tribunal (ITAT), which questioned the nature of the land and eventually rejected the assessee’s exemption claim. This led to the matter being further challenged before the Kerala High Court.

Read More: Major TCS Changes from April 1, 2025: Removed on Sales, Foreign Education & More

During the proceedings before the High Court, the assessee’s counsel argued that the tribunal had improperly considered factors such as the buyer's subsequent use of the land and its high sale value in determining its character. They also argued that the tribunal misinterpreted the meaning of "purayidam" (dry land suitable for construction) and disregarded earlier income declarations showing agricultural activities on the land.

The Revenue Department argued that the burden to prove active agricultural use rested entirely upon the taxpayer, and that mere certificates and minimal income declarations did not constitute adequate evidence. They pointed out the assessee’s failure to produce necessary supporting documents like evidence of cultivation, agricultural operations, irrigation sources, purchase receipts for agricultural inputs, or payments made to laborers.

Worried About SME IPO Pitfalls? Gain Clarity with This Advanced Course! Register Now

Read More: CBI Nabs Rohtak Income Tax Officer Red-Handed Taking Rs. 50,000 Bribe

The bench comprising  Dr. Justice A. K. Jayasankaran Nambiar and Justice Easwaran S. observed that the responsibility for proving eligibility for exemption lies firmly upon the taxpayer. The court held that the evidence provided primarily a Village Officer's certificate and declarations of nominal agricultural income was insufficient to prove the active agricultural status of the land conclusively.

The court pointed out the lack of substantial documentary proof of farming operations, including the absence of records relating to irrigation, farming expenditures, or labor payments, explaining that classification alone does not substantiate actual agricultural use. The Kerala High Court upheld the Income Tax Appellate Tribunal’s findings.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates