Capital gain on rural agricultural land

[manoj gupta]

A businessman purchases a rural land which is outside the presribed limits of a municipality for qualifying as rural land. Before selling, the seller used the land for agricultural operations for many years. But the businessman or his parents have not done agriculture either on this land or any other land throughout their life. The businessman sells the land within 1 year of purchase. Is capital gain arising on this sale is exempt for this land being not a capial asset. Is this land a rural agricultural land.

[CAGOPALJI AGRAWAL]

To my view, there is as such no requirement of actual cultivation of land for for qualifying the land as agricultural land. If the agricultural land has not been put to use for any purpose other than agricultural,then it would be agricultural land provided other conditions are met out.

[DEV KUMAR KOTHARI]

I agree with reply of Shri Gopal Ji. However, you should also establish that land was acquired for use as agricultural land and an items of fixed asset and not as an item of stock-in-trade. One year lull in agricultural operation will not change character of agricultural land. however in case some steps have been taken to develop or convert the land for other purposes and activity seems to be an activity in nature of trading venture, then the AO may regard the income as income from business. The land must be distinctly shown under head Fixed Assets- Rural agricultural land in balance sheet. It must be stated at cost. There should not be efforts and cost to improve land other than as agricultural land. Costs incurred for improvement of land as agricultural land for better agricultural practices, better yield like soil testing and enrichment, drainage system, irrigation. and can make your case better and beyond doubt. In case buyer use the land for agricultural purposes, it will be a case of continued agricultural operation. in case buyer use the land for non agricultural purposes, these factor can be considered against assessee by the AO. In case businessman is in property business, the transaction can be considered as a trading transaction.

AI Summary

Rural agricultural land classification can preserve capital gain exemption if held as fixed asset and not stock in trade. Capital gain treatment hinges on the land's characterization as rural agricultural land rather than the purchaser's farming history. Land previously used for agriculture remains agricultural if not put to non agricultural use; temporary lapses do not change this. The taxpayer should hold the land as a fixed asset at cost and avoid treatment as stock in trade; evidence of conversion or trading activity, or the taxpayer's property business, may prompt the Assessing Officer to treat proceeds as business income.