Agriculture land shown in balance sheet of a proprietorship or any business entity as business asset does not change its nature.Income tax law provides that when the question of taxing sale of agriculture land arises, first thing to check is whether the agriculture land is capital asset as defined under section 2(14) of the Income Tax Act . In case conditions as given under the definition of capital asset in section 2(14) are fulfilled , only then an agriculture land is capital asset .
A reader of this blog , Ms Soma of Naihati asks
” An assessee is having a proprietorship business. As it is a proprietorship business the asset purchased in the name of the assessee is being disclosed in the balance sheet of the Proprietorship business under the heading of asset(not under the heading of investment). The assessee is having this agricultural land in his own name.The value of land is being shown in the same balance sheet every year of this Proprietorship business.This agricultural land was purchased in the year 2001.my question is that if the assessee sale this land now(in 2012),it will be treated as long term capital gain? not as STCG(since it is under heading of asset of proprietorship business)?
Whether you show the land in the balance sheet under business asset or investment, it does not matter , because no depreciation is allowed on land as such section 50 of the I T Act is not applicable. Since the agriculture land was bought in 2001 , its sale now will be charged under long term capital gains only if it does not fulfill following conditions of definition section 2(14) of Income Tax Act
(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 ten thousand according to the last preceding census of which the relevant figures have been published before the first 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;
Conditions for Agriculture Land not to Be Treated as Capital Asset
The most important condition for tax exemption of sale of agriculture land is to see where the land is actually situated. In other words , just see if the following conditions are met :
1. It should be agriculture land i.e land on which agriculture activity is possible.
2. That agriculture land should be situated
i. NOT within any area within a municipal corporation, or notified area committee, town area committee, town committee, or by any other name or a cantonment board and the population of the area should be less than 10000.
ii. 8Kms away from notified area from municipal corporation, or notified area committee, town area committee, town committee, or by any other name or a cantonment board .
Coming back to your question, therefore, following things are possible in your case
sale may not capital asset and therefore is tax free at all if it satisfies conditions given above.
- If it does not satisfy the conditions above, there will be long term capital gains and and you can claim indexation from the year 2001.
- Tax rate is 20 % on the gains.
- You can claim capital gains tax exemption u/s 54F or 54EC or section 54B of Income Tax Act.
You should also note that under section 54B even capital gain on transfer of agriculture land used exemption if you buy agriculture land for equivalent amount .