Exemption Under Section 54B (of Income Tax Act, 1961): Land Use and Ownership Dispute Resolved

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Case Name:

Commissioner of Income Tax Vs. Dinesh Verma (High Court of Punjab & Haryana)

ITA No.381 of 2014(O&M) 

Date: 6th July 2015

Key Takeaways:

• Section 54B (of Income Tax Act, 1961): This section allows for tax exemption on capital gains from the sale of agricultural land if the proceeds are reinvested in another agricultural property within two years.
• Ownership and Investment: The exemption applies only to the amount directly reinvested by the assessee, not by relatives.
• Use of Land: The land must have been used for agricultural purposes for two years immediately preceding the sale.

Issue

The central question was whether the respondent was entitled to an exemption under Section 54B (of Income Tax Act, 1961) for the capital gains from the sale of agricultural land, considering part of the reinvestment was made by his wife.

Facts

• The respondent sold agricultural land for Rs.60,00,000.
• He reinvested Rs.44,76,000 in another agricultural property within two years.
• The remaining Rs.16,84,000 was paid by his wife.
• The land was used for agricultural purposes for more than two years before the sale.

Arguments

• Respondent’s Argument: Claimed exemption under Section 54B (of Income Tax Act, 1961), asserting the land was used for agriculture and the reinvestment was made in another agricultural property.
• Revenue’s Argument: Contended that the exemption should not apply as the reinvestment was partly made by the respondent’s wife, and questioned the agricultural use of the land.

Key Legal Precedents

• Section 54B (of Income Tax Act, 1961): Allows exemption for capital gains if the land was used for agriculture and the proceeds are reinvested in agricultural land.
• Jai Narayan vs. Income-Tax Officer: Emphasized that the exemption applies only if the new asset is purchased in the name of the assessee.

Judgement

The court ruled in favor of the respondent, allowing the exemption under Section 54B (of Income Tax Act, 1961) for the amount he reinvested himself. The court clarified that the exemption does not extend to the portion of the investment made by his wife.

FAQs

Q1: What is Section 54B (of Income Tax Act, 1961)?

A1: It provides tax exemption on capital gains from the sale of agricultural land if the proceeds are reinvested in another agricultural property within two years.

Q2: Why was the exemption not granted for the amount paid by the wife?

A2: The law requires the reinvestment to be made by the assessee himself to qualify for the exemption.

Q3: How long must the land be used for agriculture to qualify for the exemption?

A3: The land must be used for agricultural purposes for at least two years immediately preceding the sale.

1. This is an appeal under Section 260A (of Income Tax Act, 1961), against the order of the Income Tax Appellate Tribunal in respect of the assessment year 2006-07.

2. The appellant contends that the following substantial questions of law arise in this appeal:-

“1. “Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in upholding the order of Ld. CIT(A) in allowing the exemption u/s 54B (of Income Tax Act, 1961) of the I.T Act even though the assessee was not entitled to the claim of exemption u/s 54B (of Income Tax Act, 1961) as the asset sold was not a long term capital asset but a short term capital asset that is not eligible for

exemption under section 54B (of Income Tax Act, 1961), 54D (of Income Tax Act, 1961) and 54F (of Income Tax Act, 1961) as is clear from CBDT Circular No.495 dated 22.09.1987?”

2. “Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in upholding the order of Ld. CIT(A) in allowing the exemption u/s 54B (of Income Tax Act, 1961) of the I.T Act when the assessee failed to furnish evidence to show that the land was being used for agricultural purpose for two year immediately preceding the date on which transfer took place.

3. “Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in upholding the order of Ld. CIT(A) that the agricultural income of previous year 2004-05 related to and was derived

from that particular land for which exemption u/s 54B (of Income Tax Act, 1961) has been claimed by the assessee, when assessee has not been able to show any correlation between the said land and agricultural income.

4. Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in upholding the order of Ld. CIT(A) in allowing and enhancing the exemption u/s 54B (of Income Tax Act, 1961) to the extent of Rs.60,00,000/- where as the assessee’s own claim of his exemption was only to the extent of Rs.34,32,575/- as is evident from the return of income filed by him.

(NOTE: The figure of Rs.34,32,575/- was, during the assessment proceedings, corrected to read Rs.44,76,000/-.)

5. Whether on the facts and in the circumstances of the

case, the Hon’ble ITAT was right in law in holding

the capital gain as Long Term Capital Gain whereas

calculation of tax by the assessee shows that the

said gain was only short term capital gain.

6. “Whether on the facts and in the circumstances of the

case, the Hon’ble ITAT was right in law in dismissing

the Revenue’s appeal without deciding the grounds

taken by the Revenue on the issue of addition of

Rs.60,000/- which was made by the AO for on account

of law house hold withdrawals and deleted by the Ld.

CIT(A)?”

By our order dated 02.03.2015, we issued notice of motion on the following further question of law No.7:-

“7. Whether the respondent-assessee was entitled to the benefit under Section 54-B (of Income Tax Act, 1961), 1961 in respect of the property purchased from the sale proceeds in the name of his wife?” This additional question raised by us would fall for consideration while considering question No.4.

3. The appeal is admitted in respect of the Question Nos.1,4,5,7 and the additional question raised by our order dated 02.03.2015. The appeal is dismissed as regards Question Nos.2,3 and 6 as they do not raise a substantial question of law.

4. Section 54B (of Income Tax Act, 1961) reads as under:-

“54-B. Capital gain on transfer of land used for

agricultural purposes not to be charged in certain

cases.—(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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961); 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 utilised

by the assessee for the purchase of the new asset before

the date of furnishing the return of income under

Section 139 (of Income Tax Act, 1961), 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 (of Income Tax Act, 1961)] in an account in any such

bank or institution as may be specified in, and utilised

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

utilised 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 utilised 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 (of Income Tax Act, 1961) of 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.”

FACTS

5. There were two transactions of sale of land by the

assessee. This appeal concerns only one of them. For the purpose of

this appeal, it is sufficient only to note that the respondent sold

the land in question by an agreement dated 26.09.2005. The

Assessing Officer in fact took this to be the relevant date for the

purpose of considering the date on which the land could be said to

have been sold. We proceed on the same basis.

The respondent/assessee sold the land for a

consideration of Rs.60,00,000/-. He purchased another immovable

agricultural property within two years. He utilized a sum of

Rs.44,76,000/-out of the sale proceeds of Rs.60,00,000/- for the

payment of the consideration of the plot that he purchased

subsequently. The balance consideration in respect of the plot of

Rs.16,84,000/- was paid by his wife.

6. The Assessing Officer held the gain to be a short-term

capital gain. The CIT(A) and the Tribunal have held in favour of

the respondent on the grounds we will shortly refer to.

Re: Questions No.1 and 5:

7. It was submitted before us that the difference between

the sale price of the first property and the expenditure of

Rs.44,76,000/- for the purchase of the second property ought to be

taxed as a short-term capital gain as the property sold by the

respondent was held by him for a period of less than three years.

8. The submission is not well founded. It proceeds on the

erroneous assumption that provisions of Section 54B (of Income Tax Act, 1961) would be

applicable only to a long-term capital asset.

Sections 2(14)(iii) and 2(42-A) read as under:-

“2. Definitions.

(14) “capital asset” means property of any kind held by

an assessee, whether or not connected with his business

or profession, but does not include—

(iii) agricultural land in India, not being land

situate—

(a) in any area which is comprised within the

jurisdiction of a municipality (whether known as a

municipality, municipal corporation, notified area

committee, town area committee, town committee, or by

any other name) or a cantonment board and which has a

population of not less than 10,000 according to the last

preceding census of which the relevant figures have been

published before the 1st day of the previous year; or

(b) in any area within such distance, not being more

than eight kilometres, from the local limits of any

municipality or cantonment board referred to in item

(a), as the Central Government may, having regard to the

extent of, and scope for, urbanisation of that area and

other relevant considerations, specify in this behalf by

notification in the Official Gazette;

........ ............. .......... ...........

(42-A). “short-term capital asset” means a capital asset

held by an assessee for not more than thirty-six months

immediately preceding the date of its transfer:”

9. Section 54B (of Income Tax Act, 1961) does not refer to a short-term capital asset

or a long-term capital asset. It merely refers to a capital asset.

Where the ingredients of Section 54B (of Income Tax Act, 1961) exist, the computation of

capital gain is to be in accordance with that section. Admittedly,

the land that was sold by the respondent was a capital asset within

the meaning of Section 2(14)(iii) (of Income Tax Act, 1961) being in an area which is

comprised within the jurisdiction of a municipality.

10. All the ingredients of Section 54B (of Income Tax Act, 1961) exist in the present

case. Firstly, the land sold by the assessee was a capital asset.

Secondly, this capital asset was land. Thirdly, during the two

years immediately preceding the date on which the transfer took

place, the land was being used by the respondent for agricultural

purposes. We will shortly demonstrate the existence of the third

ingredient but on a basis different from the Tribunal. The fourth

and the fifth ingredients are also present in this case as,

admittedly, the assessee had within a period of two years after the

sale purchased another land for being used for agricultural

purposes.

11. The third ingredient is established by the evidence on

record. The respondent had tendered a compilation of documents

before the CIT(A). A copy thereof was tendered before us by Mr.

Jain, the learned senior counsel appearing on behalf of the

respondent. Page-44 of this compilation is a record/statement of

the “Patwari” which confirms that the respondent had utilized the

land sold by him for agricultural purposes during the period

03.07.2003 to 27.01.2006. There is nothing on record that suggests

the contrary. The respondent, therefore, used the said land for a

period of more than two years prior to the date of sale i.e.

26.09.2005.

12. Having said this, however, we must pause here to

consider an observation made by the Tribunal to the effect that for

the purpose of Section 54B (of Income Tax Act, 1961), it is not necessary that land should

have been used for agricultural purposes for full two years

immediately preceding the date of transfer and that it is

sufficient if it was so used in the whole of the preceding year and

for some days in the year earlier to the preceding year. We are

unable to agree. There is nothing in Section 54B (of Income Tax Act, 1961) that supports such

an inference. The plain language of Section 54B (of Income Tax Act, 1961) requires the land

sold to have been in use by the assessee or by his parents or the

HUF for agricultural purposes for a period of two years immediately

preceding the date on which the transfer took place. There is

nothing in this section that bifurcates the period of the use

during these two years. There is nothing in this section that

indicates that the land should have been used continuously only in

the second of the two years and only for a few days in the first of

the two years. Nor are we able to infer such a limitation from the

plain language of this section on principle.

13. What constitutes use would, however, depend upon the

facts of each case. We express no opinion in that regard. However,

on facts, the respondent has established that he had been using the

said land for a period of two years immediately preceding the date

on which he transferred the same.

14. In the circumstances, questions No.1 and 5 are answered

in favour of the respondent but subject to what we have said.

Re: Question Nos.2 and 3

15. Question No.3 requires only a consideration of the

facts. The Tribunal, after considering the facts, came to the

conclusion that the land was being used for agricultural purposes.

Firstly, we have already referred to the statement of the “Patwari”

that establishes the same. Secondly, as noted by the Tribunal, the

respondent had derived an agricultural income of Rs.10,000/- from

the use of the said land. A question of law, therefore, does not

arise. The appeal as far as question Nos.2 and 3 are concerned is,

therefore, dismissed.

Re: Questions No.4 and 7, the additional question raised by our

order dated 02.03.2015.

16. Question No.4 must be answered in favour of the

appellant.

As we mentioned earlier, the respondent sold his

agricultural land for a sum of Rs.60,00,000/-. Out of the sale

proceeds he invested only a sum of Rs.44,76,000/- towards the

purchase of another agricultural plot. The balance consideration of

Rs.16,84,000/- in respect of that plot was paid by the respondent’s

wife. It is not the respondent’s case that it is actually he who

paid the amount of Rs.16,84,700/- and that his wife’s name was

added benami and that the title thereof even to that extent vested

in himself. We must, therefore, proceed on the basis that out of

the sum of Rs.60,00,000/-, the appellant invested only

Rs.44,76,000/- in the second property.

17. The Tribunal observed that it is settled now that an

assessee can purchase a new asset or part thereof in the name of

his wife and that there was sufficient justification for the same

on considerations, such as, stamp duty rebate, social

considerations, security for ladies. The Tribunal noted that as

long as the funds are invested the respondent’s exemption cannot be

denied.

18. It is difficult to accept this view. Section 54B (of Income Tax Act, 1961)

requires the assessee to purchase the property from out of the sale

consideration of the capital asset. It does not entitle the

assessee to the benefit conferred therein if the subsequent

property is purchased by a person other than the assessee including

a close relative even such as his wife or children. If the

legislature intended conferring such a benefit, it would have

provided for the same expressly. Indeed, an assessee can purchase

an asset or a part thereof in the name of his wife but he would not

be entitled then to the benefit of Section 54B (of Income Tax Act, 1961). Moreover, it is

not the case of the assessee that he purchased the asset benami in

the name of his wife. We have proceeded on the basis that his wife

invested the amount of Rs.16,84,700/- herself.

19. A Division Bench of this Court in Jai Narayan vs.

Income-Tax Officer, [2008] 306 ITR 335 (P&H) held:

“10. In interpreting the words contained in a statute,

the court has not only to look at the words but also to

look at the context and the object of such words

relating to such matter and interpret the meaning

intended to be conveyed by the use of the words under

the circumstances. The word “assessee” occurring in

section 54B (of Income Tax Act, 1961) must be interpreted in such a manner as to

accord with the context and subject of its usage. A

reading of section 54B (of Income Tax Act, 1961) nowhere suggests that

the Legislature intended to advance the benefit of the

said section to an assessee who purchased the

agricultural land even in the name of a third person.

Wherever the Legislature intended it to be so, it had

specifically provided under the provision. 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 which is

purchased has to be in the name of the assessee himself

for seeking exemption under section 54B (of Income Tax Act, 1961). The

purchase of agricultural land by the assessee in his son

or grandson’s name, therefore, cannot be held entitled

to exemption under section 54B (of Income Tax Act, 1961).

11. We may make a brief reference to the decision

relied upon by counsel for the assessee. Learned counsel

mainly relied upon the decision in V. Natarajan [2006]

287 ITR 271 (Mad), with reference to section 54 (of Income Tax Act, 1961) of the

Act.

12. The Madras High Court in V. Natarajan’s case

[2006] 287 ITR 271 was dealing with a case relating to

section 54 (of Income Tax Act, 1961) wherein the assessee who after

selling his residential house had purchased another

residential house in his wife’s name. the court had

concluded that the assessee in such circumstances was

entitled to exemption under section 54 (of Income Tax Act, 1961).

After giving our thoughtful consideration, we are unable

to accept the view as laid down in V. Natarajan’s case

[2006] 287 ITR 271 (Mad).”

Thus, even assuming that the assessee had invested the said amount

of Rs.16,84,700/- in the name of his wife, it would have made no

difference.

20. The order of the Tribunal to this extent is, therefore,

overruled. It is declared that respondent shall be entitled to the

benefit of Section 54B (of Income Tax Act, 1961) on the basis that he invested only a sum of

Rs.44,76,000/- in the agricultural property purchased by him after

the sale of the agricultural property earlier owned by him. Even

the additional question No.7 raised by us in our order dated

02.03.2015 is answered in favour of the appellant/department.

Re: Question No.6:

21. Question No.6 does not raise any issue of law. The

CIT(A) found that the Assessing Officer had made the estimate out

of the household expenses of Rs.60,000/- on a vague and arbitrary

basis unsupported by any evidence or material on record. We see no

reason to interfere with this finding of fact. The appeal as far

as question No.6 is concerned is, therefore, dismissed as it does

not raise any question of law.

22. The appeal is accordingly disposed of.

(S.J. VAZIFDAR)

ACTING CHIEF JUSTICE

(G.S. SANDHAWALIA)

JUDGE

06.07.2015

NOTE: Whether reportable: YES