Hitting the Bull’s Eye: An attempt to Curb Illegit Black Money practice of purchase of Agricultural Land

• Cash payments serve practical purposes (e.g., expenses on farming – wages, inputs, other farming necessities etc.)
• Farmers are exempted from capital gains tax as agricultural land does not qualify as capital assets.

Want a deeper insight into the Income Tax Bill, 2025? Click here

However, the transactions in respect of purchase of agricultural land below SDV is lately coming under scanner of Indian Tax Authorities. A similar case was recently analyzed and adjudged by Hon’ble Ahmedabad ITAT. A synopsis of the decision is summarized as follows:

In this case, the Assessee^[2] purchased an agricultural land at value equal to 36% of its SDV. Subsequently, the Assessee converted the said land for non-agricultural use post permission from the Collector and then registered it. The case was selected for limited scrutiny on account of purchase of land at value lower than SDV. During the assessment proceedings, the Assessing Officer^[3] observed that land was acquired for non-agricultural purposes. The AO opined that agricultural status depends on actual use as well as intention, and not merely on classification in revenue records. Therefore, even though at the time of purchase, the land was agricultural in nature, it was bought with intention to convert it. Accordingly, the said land qualified as a capital asset. Further, the AO invoked Section 56(2)(x) of the Income-tax Act, 1961 (the Act) to consider the difference between the SDV and purchase consideration as income from other sources. The Assessee argued that status of land was that of agricultural land at the time of purchase. Hence, the said land does not qualify as ‘capital asset’ and accordingly, the deeming provision under Section 56(2)(x) of the Act was not applicable.

How to Audit Public Charitable Trusts under the Income Tax Act Click Here

The Assessee challenged the assessment order before the CIT(Appeals) but could not succeed. The Hon’ble Ahmedabad ITAT categorically demarcated between the provisions relating to capital assets and deemed income on purchase of immovable property. The Hon’ble ITAT noted that capital assets do not include an agricultural land. Hence, there would not be any tax on the sale of an agricultural land by a seller.

Further, the Hon’ble ITAT observed that, on the other hand, the deeming provision under Section 56(2)(x) of the Act specifies the term “any immovable property” and this term is not defined in the Act. Accordingly, the said term has to be interpreted in its general sense – an asset which cannot be moved without damaging / altering it. In the absence of any specific exclusion, the Agricultural land falls within the ambit of an “immovable property”. However, the Hon’ble ITAT agreed with the contention of the Assessee that once the SDV of the property is disputed before the AO, a reference to Departmental Valuation Officer (DVO) has to be made. Thus, the Hon’ble ITAT allowed the appeal for statistical purposes but confirmed the view adopted by AO that provision of Section 56(2)(x) of the Act applies to an agricultural land.

Thus, this is a very important ruling from the perspective of the buyers of the immovable property to understand the implications of tax where the purchase consideration is less than the SDV.

Mr. Jignesh Shah

Partner at Bhuta Shah & CO LLP, leading the International and Corporate Tax practice with over 22 years of experience.

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