Section 54B exemption requires actual transfer of agricultural land followed by timely replacement purchase; agreement to sell is not enough.

Section 54B exemption applies only when agricultural land is actually transferred and another agricultural land is purchased within the prescribed period as a substitution. An agreement to sell does not itself constitute a transfer, because it only creates a right to sue for specific performance and does not amount to the statutory transfer contemplated by the Income-tax Act. A purchase made before the actual transfer of the original land also does not satisfy the mandatory sequence in the provision. On that reasoning, the capital gains exemption claim was rejected.

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Issues: (i) Whether an agreement for sale of agricultural land constitutes a transfer so as to attract section 54B of the Income-tax Act, 1961. (ii) Whether purchase of agricultural land before the actual transfer of the original land satisfies the statutory condition for exemption under section 54B of the Income-tax Act, 1961.

Issue (i): Whether an agreement for sale of agricultural land constitutes a transfer so as to attract section 54B of the Income-tax Act, 1961.

Analysis: Section 54B contemplates transfer of agricultural land followed by purchase of other agricultural land within the prescribed period, by way of substitution. An agreement to sell does not itself amount to transfer of property; it only gives a right to sue for specific performance. The definition of transfer in section 5 of the Transfer of Property Act, 1882, was applied to hold that mere restriction on alienation or extinguishment of some incidents of ownership is not the statutory transfer required by section 54B.

Conclusion: The agreement to sell did not amount to a transfer for the purpose of section 54B, and the assessee could not claim exemption on that basis.

Issue (ii): Whether purchase of agricultural land before the actual transfer of the original land satisfies the statutory condition for exemption under section 54B of the Income-tax Act, 1961.

Analysis: The provision requires the assessee to purchase other agricultural land within two years after the date of transfer of the original land. The statutory scheme presupposes an actual sale of the original agricultural land and then a subsequent purchase of another agricultural land. A prior purchase does not satisfy the condition, and the exemption cannot be extended contrary to the mandatory sequence built into the section.

Conclusion: The prior purchase of agricultural land did not satisfy section 54B, and the exemption was rightly denied.

Final Conclusion: The reference was answered against the assessee and the capital gains exemption claim was rejected.

Ratio Decidendi: Section 54B grants exemption only where there is an actual transfer of agricultural land followed by purchase of other agricultural land within the prescribed period; an agreement to sell or a prior purchase does not satisfy that statutory condition.

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