This article has been written by Sandra Jim, pursuing a Diploma in US Contract Drafting and Paralegal Studies from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

A farmer is constantly battling the issues of low yield, poor farming infrastructure and technology, decreasing soil fertility, etc.; burdening him further with the liability of income tax on any capital gain arising from the sale of his agricultural land would only add to the misery. The Income Tax Act, 1961, under Section 54 gives a hand-holding to the farmers by way of exemption from the tax liability on the sale proceeds of agricultural land if invested in another agricultural land. This article aims to understand and demystify the concept of exemption for agricultural land and its implications or changes, especially in exemptions, if any, within the Union Budget 2023.

Exemption for agricultural land under Section 54b

The exemptions under this provision are provided on agricultural land depending on where it is situated, i.e., in a rural area or an urban area. The location of the land is determined to be rural or urban by aerially measuring the distance, which ranges from two to eight kilometres from the boundaries of the municipality. All capital gains arising from the sale of rural agricultural land are exempt without any condition but that is not the case for urban agricultural land. To avail of this exemption, the proceeds from the sale of the urban agricultural land should be reinvested in the new agricultural land itself.

There are a few basic conditions that need to be observed while claiming the benefit of the exemption on the sale of agricultural land under this section:

1. The assessees should be a person or a HUF; this provision excludes companies, LLPs, and trusts.
2. The land is to be agricultural land; it can be either a short-term or long-term capital asset but should have been used for a minimum of two years before the transfer by the individual, his family (parents) or member of the HUF. If the land is used for more than 2 years, it will be taxable at the rate of 20%, as it would be considered a long-term capital gain, whereas if used for a shorter period, it would be taxable at the slab rate and considered a short-term capital gain.
3. After the sale of the agricultural land, new agricultural land in India has to be purchased within a period of two years.
4. Claiming of “capital gains exemption” is to be done through filing of ITR – 2 (Income Tax Returns) for the particular financial year

What amount of exemption can be claimed

The exemption shall be the lower amount of:

• Amount arising from the sale of agricultural land as capital gains, or
• amount invested in the new agricultural land, including the amount in the “Capital Deposit Account Scheme”. This scheme comes in handy in a situation when the new land has not been purchased on the date of filing the returns; thus, in order to avail of the exemption, the unused amount can be deposited in this account in any public sector bank and withdrawn when purchasing the land within the prescribed time period. If this deposited amount is not utilised within the said period, it would be taxable as income.

Restriction on claiming exemption

In order to avoid the misutilization of the exemption by transferring agricultural lands on a roll, a restriction is placed on the sale of the new agricultural land. A streak of three years is to be maintained before selling the new agricultural land, and if the land is sold before this period, the exemption granted shall be withdrawn. In a simpler sense, when the assessee sells his newly purchased agricultural land within three years, the amount already claimed as an exemption would be deducted from the cost of acquiring the new land while calculating the capital gain on the sale.

Union Budget 2023 : interception

The Union Budget of 2023, with its objective of uplifting the Indian economy into a robust one through technology and knowledge. It is aimed at achieve the same through a core focus on infrastructure, inclusive development, youth, finance, etc. An unforgettable change has been brought to the tax regime of personal tax by raising the exemption limit in the tax slab. Among others, the Union Budget has brought about reductions, exemptions, funds, etc.

When observing the budget’s take on the exemptions on capital gains, it has put a cap on the exemptions available under Sections 54 and 54F, i.e., now there is a limit on the exemption that can be availed of on capital gains.

Limiting the benefit claimed under Sections 54 and 54F

Sections 54 and 54F enable the claiming of deductions on the gains from long-term capital assets such as house property, gold, and other capital assets, respectively, and reinvestment through the purchase of residential property. These provisions allow the assessee to claim the deduction when the sale of the long-term asset has been done and a residential property has been purchased within two years, one year before the sale or if he has constructed a residential house within three years.

The initial objective of these provisions was to address the issue of acute housing shortages and stimulate house building. Throughout the years, it has been observed that wealthy assessees and those of high net worth have claimed deductions of a shedload while purchasing expensive and luxurious housing properties.

The Union Budget 2023, to put a halt to the misuse of these provisions to the advantage of the assessees, has brought about a limit on the maximum deduction that can be claimed by the assessee. Now, the maximum deduction that can be allowed is ten crore rupees. Thus, when the property is of a value higher than ten crores, the cost of such property would be deemed to be ten crore rupees. Further, the provision for deposit into the Capital Gains Account Scheme would only apply to a net consideration of up to ten crores.

This cap will apply in relation to assessment years from 2024-25 onwards. As mentioned earlier, the cap was placed so as to reduce the undermining of the purpose of these provisions and ensure tax liability arises from the hefty purchase or construction of housing properties.

Comparison of Section 54B and 54 and 54F of the Income Tax Act, 1961

While comparing the three provisions, it can be observed that Section 54B has not attracted any changes or amendments through the Union Budget 2023. While Sections 54 and 54F have placed limitations on the exemptions to be claimed, the Budget did not create such a condition in the case of capital gains arising from the sale of agricultural land.

Though not explicitly explained, by analysing the objective of the provision of Section 54B, it is to be understood that the objective is to act as a relief to agriculturists in shifting their land of agriculture or promoting their house-building activities. Thus, placing a limit on this exemption would drastically impact the whole objective and vision of the provision.

If a limit had been placed, the provision would demotivate farmers and agriculturists and negatively impact agricultural continuity. Further, it would hinder the facilitation of the transition from one agricultural land to another, the reduction of a significant tax burden, and investments in other agricultural land. If a limit is placed, the farmers would be disheartened to further invest in new pieces of land or housing activities, fearing the additional burden of tax and other liabilities that might fall upon them. This tax relief is an encouraging factor for farmers amidst the various hardships they face in making a living through agriculture.

Further, another main difference among these provisions is that Sections 54 and 54F sanction the purchase of new land even prior to the transfer of the old one, while Section 54B strictly prohibits this practice and mandates the purchase of new land after the transfer of the old. Thus, the provision under Section 54B seems less flexible and stringent, as alleged by various scholars and legal professionals. It is also argued that the provision under Section 54 is not in line with other provisions of the Act and creates disparities within the statute.

Though the provision is inconsistent with the provisions under Sections 54 and 54F and creates difficulty for the taxpayers in claiming the exemptions, it is done to serve the whole objective of the provision. In order to ensure that the reinvestment is genuinely done on a new agricultural land itself and also prevent the manipulation of the provision of exemption to the needs of any individuals. The provision aims to serve the purpose of development and continuity in agricultural activities; thus, certain elements of flexibility might affect and destroy it.

Paras Chinubhai Jani vs. Principal Commissioner of Income-tax (2019)

The case law adjudged in the year 2019 is one where the Assessing Officer has disallowed the exemption under Section 54B on part of the capital gain from the sale of the agricultural land that was invested in a new one prior to the transfer of the capital asset. The Tribunal has reiterated the provision to be clear and unambiguous; thus, claiming deduction under the provision in respect of land acquired before the transfer of the capital asset is clearly opposed to the mandates stretched out under the provision and is in violation of the language and intent of the Act. Therefore, it is not sustainable and is invalid.

This case highlights the mandate of the provision and ensures it is not manhandled to satisfy the convenience of taxpayers.

Conclusion

The Union Budget 2023 has not touched on the provisions under Section 54B while bringing changes and amendments to a majority of tax provisions and exemptions. Opinions on this matter seem to differ from the perspective of the government, as professionals point out the need for the provision under Section 54B to be in line with the provisions under Sections 54 and 54F, thereby eliminating disparities and, moreover, reducing the administrative burden on taxpayers. By doing so, the tax system would bring equality, fairness, and efficiency.

The government, on the other hand, opines the legislative point of view and intent of the legislation, which is not to be structured to fit the convenience of taxpayers. Further, it believes such an amendment would make the provisions more flexible, attracting misuse of the provision at a rate higher than the present.

Finally, the Tax Department has always created an incentive to the agricultural sector, be it agricultural income or exemptions on the sale of agricultural land, etc. Thus, the non-limitation of the exemption under Section 54B is in furtherance of this incentive and objective of facilitating growth and development for farmers and agriculturalists. Apart from these, the Union Budget has brought about the “Agriculture-Accelarator Fund” and an increase in agriculture credit, all to develop the agricultural sector. Thus, the government is acting in furtherance of the development of the economy and also aiding the agricultural sector and its stakeholders to contribute to the same.

References

• https://housing.com/news/section-54b-of-income-tax-act/
• https://www.taxmanagementindia.com/visitor/tmi_faq_details.asp?ID=783 https://tax2win.in/guide/union-budget-2023-highlights?utm_source=budgethighlights&utm_medium=clickbutton&utm_campaign=guidebudget
• https://learn.quicko.com/section-54b-income-tax-act-sale-of-agri-land
• https://cleartax.in/s/capital-gains-exemption-on-sale-of-agricultural-land https://taxguru.in/income-tax/decoding-sections-54-54f-income-tax-act-1961.html#google_vignette
• https://incometaxindia.gov.in/Tutorials/17.%20Exemption%20uder%2054B.pdf https://taxguru.in/wp-content/uploads/2019/05/Paras-Chinubhai-Jani-Vs-Pr.-Commissioner-of-Income-Tax-ITAT-Ahmedabad.pdf
• https://www.taxscan.in/capital-gain-exemption-u-s-54b-can-be-claimed-without-filling-of-income-tax-return-itat-read-order/258175/

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