Capital gains arising on the transfer of land used by an individual or his parents for agricultural purposes for a period of two years immediately preceding the date of transfer is exempt from the tax if the individual assessee has purchased another agricultural land within a period of two years from the date of such transfer (subject to the requirements).
Rural agricultural land is fully exempted from tax as it is not covered under capital assets definition under income tax act. Agricultural land in the 54B above is other than rural agricultural land.
Rural Agricultural land means an agricultural land in India:
1.if situated in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town committee or by any other name) and its population should be less than 10,000 as per the last published census, or
2.if situated outside the limits of municipality, etc., it should be situated certain kilometers away from the local limits of any municipality, etc. as may be specified by the Central Government in the Official Gazette. The Central Government can notify urban land upto maximum 8 kms from the limits of municipality, etc.
Related Cases:
S. 2(14)(iii) & 54B of IT Act, 1961—Capital gain—The Tehsilder working under the State Government, is competent to measure the distance of the land, more competent to measure the distance of the land than the Inspector of the Department. Since as per the report of the tehsildar, the assessees land is situated more than 8 kms away from the municipal limits, such land constitutes agricultural land and, therefore, assessee is entitled for exemption u/s 54B of the Act—CIT vs. Lal Singh & Ors. (2010) 228 CTR 575 (P&H)
S. 48, 54B(2), Proviso, 143 (1) (a) & 154 of IT Act, 1961—Capital gain—If the assessee claims exemption from payment of tax in that year, then assessee has to deposit capital gain in specified bank account in terms of sub s. (2) of S. 54B of the Act. No computation or re-computation of capital gain is required to be made in the year in which capital gain obtained on sale of agricultural land is assessable by virtue of the proviso to S. 54B (2) of the Act. Since, no computation of capital gain is required to be made in the year 1993-94, the Assessing Officer rightly treated the capital gain as income assessable u/s 45 in terms of specific provision contained in d. (i) of the proviso to S. 54B (2). Hence, re-computation of capital gain based on the amended provisions does not arise at all—CIT vs. Thomy P. Chekola (Decd.) through LR & Ors (2011) 237 CTR 375 (Ker)
S. 54B of the IT Act, 1961—Capital gain—The purchase of agricultural land by the assessee in his son or grandson’s name cannot held to be entitled to exemption u/s 54B of the Act—Jai Narayan vs. ITO.
S. 54B of IT Act, 1961—Capital gain—The assessee sold the agricultural land which was used by him for agricultural purposes and thereafter out of sale proceeds of the said sale, the assessee purchased other piece of land in his name and in the name of his only son, who was bachelor and dependent upon him, for being used for agricultural purposes within the stipulated time. Therefore, the assessee is entitled for deduction u/s 54B of the Act and it does not make any difference that the assessee’s son is shown in the sale deed as co-owner—CIT vs. Gurnam Singh (2010) 327 ITR 278 (P&H)
S. 54B, 281B of IT Act, 1961—Recovery of tax—The Commissioner directed the assessee to pay at least 50 per cent of the demand till disposal of the appeal by the Commissioner (Appeal) and the recovery of the balance amount was kept in abeyance. Since the issue relating to exemption from capital gains is pending before the Commissioner (Appeal), the Court under art. 226 of the Constitution of India cannot express any final opinion on the said issue. However, the writ petition is disposed of with the direction to the respondents to release the FDRs from the attachment, provided the petitioner first submit an undertaking and immediately upon release of the FDRs pays the 50 per cent of the disputed demand as directed by the Commissioner within a week of the release of the FDRs, subject to decision of his appeal by the Commissioner and also furnish a solvent security in the form of bank guarantee to the extent of the remaining amount of 50 per cent to safeguard the interest of the revenue—Jagdish Sharma vs. U.O.I. [2010] 322 ITR 108 (RAJ)
S. 54B—IT ACT, 1961—Capital Gain—Kalya vs. Commissioner of Income-tax.
S. 54B can be summarized as under:
| Section | Asset | Assessee | Holding Period of Original Assets | Whether Reinvestment Necessary —Time Limit | Other Conditions/Incidents | Quantum |
| 54B | Agricultural Land | Individual | Use for 2 years | Yes — In Agricultural Land, within 2 years after the date of transfer. | Must have been used by assessee or his parents for agricultural purposes. | The amount of gains, or the cost of new asset, whichever is lower. |
Reference:
As Per Section 54B, of the Income Tax Act, 1961-
Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.
54B. (1)Subject to the provisions of sub-section (2), 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 [(hereinafter referred to as the original asset)], 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,—
(i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter referred to as the new asset), 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 be nil; or
(ii) 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.
[(2) 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 :
Provided that 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,—
(i) the amount not so utilised 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
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.