EXEMPTION FROM CAPITAL GAINS ON SALE OF AGRICULTURAL LAND

[Mr. M. GOVINDARAJAN]

Section 54B of the Income Tax Act, 1961 deals with the capital gains on transfer of land used for agricultural purposes.  Section 54B (1) provides that where the capital gain arises] from the transfer of a capital asset being land which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee being an individual or his parent, or a Hindu undivided family for agricultural purposes, and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-

•  if the amount of the capital gain is greater than the cost of the land so purchased, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall benil; or
•  if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be reduced, by the amount of the capital gain.

Section 54B(2) provides that  the amount of the capital gain which is not utilized by the assessee for the purchase of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilized in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilized by the assessee for the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset.

If the amount deposited under this sub-section is not utilized wholly or partly for the purchase of the new asset within the period specified in sub-section (1), then,-

• the amount not so utilized shall be charged under section 45 as the income of the previous year in which the period of two years from the date of the transfer of the original asset expires; and
• the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

In ‘Kamal Kant Kamboj V. Income Tax Officer’ – 2017 (8) TMI 285 - PUNJAB AND HARYANA HIGH COURT the assessee is an individual.   He along with his brother sold agricultural land on 09.10.2006.  The assessee purchased another agricultural land in the name of his wife.  As the value of the new agricultural land purchased by the assessee was more than that of the land sold, the assessee did not disclose any long term capital gain in regard to the same and claimed exemption under section 54B of the Act.

A notice was issued to the assessee for not disclosing the long term capital gain in his return of income.  The Revenue passed the order not allowing exemption to the assessee since the land was purchased in the name of his wife and not in his name.  The assessee filed appeal against the order of the Original Authority to Commissioner (Appeals).  Before Commissioner (Appeals) the assessee contended that section 54 B of the Act does not specifically mention that the land should be purchased in the name of the assessee only.  The Commissioner (Appeals) dismissed the appeal of the assessee.  The Tribunal also dismissed the appeal filed by the assessee against the order of Commissioner (Appeals).

The assessee filed an appeal before the High Court.   The main issue that arised for consideration of the High Court is whether the assessee is entitled for exemption under section 54B of the Act on account of agricultural land purchased by him in the name of his wife.  The assessee relied on the following judgments of High Courts/Supreme Court-

Commissioner of Income tax V. Gurnam Singh’ – 2008 (4) TMI 28 - PUNJAB AND HARYANA HIGH COURT;

Commissioner of Income Tax V. Kamal Wahal’ – 2013 (1) TMI 401 - DELHI HIGH COURT;

Commissioner of Income Tax V. V. Natarajan’ –2006 (2) TMI 136 - MADRAS High Court;

DIT (International Taxation) V. Mrs. Jennifer Bhide’ – 2011 (9) TMI 161 - KARNATAKA HIGH COURT

Commissioner of Income Tax V Vegetable Products Limited’ – 1973 (1) TMI 1 - SUPREME Court;

Jai Natarajan V. Income Tax Officer’ – 2007 (8) TMI 295 - PUNJAB AND HARYANA HIGH COURT;

Commissioner of Income Tax V. Dinesh Verma’ – 2015 (7) TMI 486 - PUNJAB & HARYANA HIGH COURT;

The High Court analyzed the judgments of the above cases.

In ‘Jai Natarajan’ (supra) case the question was whether the assessee who purchased the land in his son and grandson’s names after the sale of the agricultural land would be entitled to the benefit of exemption under section 54B.  It was held that section 54B nowhere suggests that the Legislature intended to advance the benefit of the said section to an assessee who purchases agricultural land even in the name of a third person.  The term ‘assessee’ is qualified by the expression ‘purchased any other land for being used for agricultural purposes’ which necessarily means that the new asset has to be in the name of the assessee himself.

In ‘V. Natarajan’ (supra) case the assessee sold his residential house and purchased another residential house in his wife’s name.  The Madras High Court held that the assessee was entitled to exemption under section 54 of the Act.  The High Court does not accept the view laid down in this case.

In ‘Dinsesh Verma’ case the assessee sold the land by an agreement for a consideration of ₹ 60 lakhs.  He purchased another immovable agricultural property within two years and utilized some amount out of the total amount.  The balance consideration was paid by his wife.  The Assessing Officer held the gain to be a short term capital gain.  The Commissioner (Appeals) and the Tribunal held in favor of the assessee.  The High Court held that where the assessee had established that he had been using land for a period of two years immediately preceding the date on which he transferred the same exemption under section 54 of the Act was to be allowed.   In case of purchase of agricultural land in the name of his wife, the relief under section 54B of the Act would not be allowed.

In ‘Gurnam Singh’ case the assessee out of the sale proceeds of the agricultural land sold by him had purchase some other piece of land in his name and in the name of his only son who was a bachelor and dependent upon him for being used for agricultural purposes within the stipulated period.  The Tribunal held that merely because in the sale deed, his only son was also shown as the co-owner, it did not make any difference because the purchased land was being used by the assessee for agricultural purposes.  The High Court concluded that no substantial question of law arose and dismissed the appeal.

In ‘Vegetable Products Limited’ case the Supreme Court held that the duty of the court is to read the section, understand its language and give effect to the same.  If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision.  If is for the Legislature to step in and remove the absurdity.  On the other hand, if two reasonable interpretations of a taxing provision are possible, then construction which favors the assessee must be applied.

The High Court held that the exemption under section 54B of the Act was not allowed to the assessee on the ground that the land was not purchased by the assessee in his own name.  The Commissioner (Appeals) as well as the Tribunal dismissed the appeals.  Since the issue has been already concluded against the assessee in ‘Jai Narayan’ case the appellant has not able to controvert the applicability of the said decision or to show any error in the findings recorded by the Tribunal except to rely upon the pronouncement of the High Courts.  The High Court found no merit in the appeal and dismissed the appeal.