Taxpublishers.in - Monday Corner Answer to the Quiz for the week (21 Oct 2024)

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Quiz for the week (21 Oct 2024): Manish acquired an agricultural land within 8 kms from the local limits of a municipality for Rs.20 lakhs in April,2002. In April,2010 he leased the same for an annual rent of Rs.3 lakhs to Pradip and it was used for cultivation of agricultural produce up to November, 2023. Manish sold the land for Rs.100 lakhs in December, 2023 when the stamp duty value was Rs.130 lakhs. He acquired another agricultural land for Rs. 90 lakhs in January,2024 and it was located beyond 8 kms from the local limits of municipality. It was also sold for Rs.105 lakhs in March,2024. Discuss the tax consequence of the transaction. Best Answer : The query posed above requires reference to section 2(14) and section 54B. Capital asset excludes agricultural land in any area by making reference to aerial distance from the local limits of municipality and the population of such municipality. Section 2(14)(iii)(b) says that the agricultural land beyond 8 kms aerial distance from the local limits of municipality is not a capital asset. In the query, the population of the municipality is not given. It is assumed that the population of municipality exceeded 10 lakhs as per the last preceding census. Otherwise, if the land is an agricultural land beyond 8 kms aerial distance from the municipal limits then it is not a capital asset at all and no tax consequence would follow. Since this information of the population of municipality is not given, let us assume that the population of municipality exceeded 10 lakhs according to the last preceding census and the agricultural land leased out is a capital asset so that the tax consequence could be discussed further. The sale consideration is Rs.100 lakhs and whereas the stamp duty value is Rs.130 lakhs. Since it is assumed as a capital asset, the deemed sale consideration to be adopted is Rs.130 lakhs. The indexed cost of asset would be Rs.69.14 lakhs (Rs.20 lakhs X 363 / 105). The long-term capital gain hence would be Rs.60.86 lakhs. The assessee has leased out the land which was used for cultivation since April, 2010 and up to November, 2023. Section 54B says that capital gain on transfer of land used for agricultural purposes is not to be charged to tax if the capital gain is redeployed in acquiring another agricultural land. It may be interesting to note that the assessee must have used the land for agricultural purposes in the two years immediately preceding the date on which the transfer took place in order to be eligible for exemption under section 54B and for acquisition of any other land to be used for agricultural purposes. In this case, the assessee has used Rs.90 lakhs for purchase of agricultural land beyond 8 kms (aerial distance) from the local limits of municipality which means it is a rural agricultural land. The entire capital gain of Rs.69.14 lakhs is exempt under section 54B since the assessee has used more than the amount of capital gain for acquiring the said agricultural land (rural land). The said rural agricultural land was sold in March, 2024 i.e. within 3 months after acquisition and in the same financial year. The capital gain on sale of such rural agricultural land is not liable to tax since the rural agricultural land is not a capital asset. Thus, the capital gain on sale of rural agricultural land is not liable to tax. For this purpose, whether we adopt the guideline value of Rs.130 lakhs or the actual sale consideration of Rs.105 lakhs, has no significance since the computation has no tax implication, whatsoever. The capital gain which was exempted under section 54B on acquisition whether could be withdrawn or denied since the new agricultural land was sold within 3 years after acquisition, is debatable. Since the assessee has complied with the letter and spirit of law by acquiring the agricultural land he has satisfied the conditions of section 54B and hence its subsequent sale (transfer) will not be impact the tax exemption granted earlier. Therefore, the capital gain on sale of agricultural land, not being a rural agricultural land is exempt from tax because of section 54B and subsequently the new asset being rural agricultural land when sold would not impact any tax liability in the hands of the assessee.

Quiz for the week (21 Oct 2024):

Manish acquired an agricultural land within 8 kms from the local limits of a municipality for Rs.20 lakhs in April,2002. In April,2010 he leased the same for an annual rent of Rs.3 lakhs to Pradip and it was used for cultivation of agricultural produce up to November, 2023. Manish sold the land for Rs.100 lakhs in December, 2023 when the stamp duty value was Rs.130 lakhs. He acquired another agricultural land for Rs. 90 lakhs in January,2024 and it was located beyond 8 kms from the local limits of municipality. It was also sold for Rs.105 lakhs in March,2024. Discuss the tax consequence of the transaction.

Best Answer :

The query posed above requires reference to section 2(14) and section 54B. Capital asset excludes agricultural land in any area by making reference to aerial distance from the local limits of municipality and the population of such municipality. Section 2(14)(iii)(b) says that the agricultural land beyond 8 kms aerial distance from the local limits of municipality is not a capital asset. In the query, the population of the municipality is not given. It is assumed that the population of municipality exceeded 10 lakhs as per the last preceding census. Otherwise, if the land is an agricultural land beyond 8 kms aerial distance from the municipal limits then it is not a capital asset at all and no tax consequence would follow.

Since this information of the population of municipality is not given, let us assume that the population of municipality exceeded 10 lakhs according to the last preceding census and the agricultural land leased out is a capital asset so that the tax consequence could be discussed further.

The sale consideration is Rs.100 lakhs and whereas the stamp duty value is Rs.130 lakhs. Since it is assumed as a capital asset, the deemed sale consideration to be adopted is Rs.130 lakhs. The indexed cost of asset would be Rs.69.14 lakhs (Rs.20 lakhs X 363 / 105). The long-term capital gain hence would be Rs.60.86 lakhs.

The assessee has leased out the land which was used for cultivation since April, 2010 and up to November, 2023. Section 54B says that capital gain on transfer of land used for agricultural purposes is not to be charged to tax if the capital gain is redeployed in acquiring another agricultural land.

It may be interesting to note that the assessee must have used the land for agricultural purposes in the two years immediately preceding the date on which the transfer took place in order to be eligible for exemption under section 54B and for acquisition of any other land to be used for agricultural purposes.

In this case, the assessee has used Rs.90 lakhs for purchase of agricultural land beyond 8 kms (aerial distance) from the local limits of municipality which means it is a rural agricultural land. The entire capital gain of Rs.69.14 lakhs is exempt under section 54B since the assessee has used more than the amount of capital gain for acquiring the said agricultural land (rural land).

The said rural agricultural land was sold in March, 2024 i.e. within 3 months after acquisition and in the same financial year. The capital gain on sale of such rural agricultural land is not liable to tax since the rural agricultural land is not a capital asset. Thus, the capital gain on sale of rural agricultural land is not liable to tax. For this purpose, whether we adopt the guideline value of Rs.130 lakhs or the actual sale consideration of Rs.105 lakhs, has no significance since the computation has no tax implication, whatsoever.

The capital gain which was exempted under section 54B on acquisition whether could be withdrawn or denied since the new agricultural land was sold within 3 years after acquisition, is debatable. Since the assessee has complied with the letter and spirit of law by acquiring the agricultural land he has satisfied the conditions of section 54B and hence its subsequent sale (transfer) will not be impact the tax exemption granted earlier.

Therefore, the capital gain on sale of agricultural land, not being a rural agricultural land is exempt from tax because of section 54B and subsequently the new asset being rural agricultural land when sold would not impact any tax liability in the hands of the assessee.