I declared no capital gain on the sale of the family field because it is rural agricultural land - the officer says it is within the distance limit and that it had stopped being agricultural anyway. What decides this?
The client is an individual at Jaipur, a salaried manager, who inherited 4.06 hectares at village Kanota from his father in 1998. The land is entered as agricultural in the revenue record and land revenue has been paid every year. Gram and mustard were grown on it up to the kharif season of 2022 through a share-cropping arrangement; it lay fallow after that. On 12 December 2024 he sold the whole holding to a builder for Rs 3,85,00,000 by registered sale deed. The buyer deducted Rs 3,85,000 under s.194-IA and applied for conversion to non-agricultural use in March 2025. The return for AY 2025-26, filed on 25 July 2025, declares salary and interest of Rs 9,60,000, agricultural income of Rs 2,40,000, and no capital gain. A notice under s.143(2) issued on 14 June 2026. A show-cause of 20 October 2026 proposes a long-term capital gain of Rs 3,78,80,000, taking the cost at the 1 April 2001 value of Rs 6,20,000. It says the nearest municipal board has a population of 1,12,400 on a State projection of 2023, which brings the aerial distance of 3.4 kilometres inside the limit, and that in any event the land had ceased to be agricultural. The client holds the revenue records, the share-cropping receipts, the sale deed and the 2011 census abstract showing the board's population at 41,286.
Get three documents before answering anything: a certificate of the population of every local body within ten kilometres, taken from the last preceding census whose figures were published before 1 April 2024; a certificate of the aerial distance from the outer limit of each of those bodies to the nearest boundary of the land itself; and the revenue record for the six years to the date of sale. The whole case is decided by those three papers. Argue the character of the land before they are on the file and you will be arguing in the dark, and the officer's projected population figure will sit unanswered.
Section 2(14)(iii) keeps agricultural land in India out of the definition of capital asset altogether unless it falls inside one of two described areas, so land outside them produces no capital gain to charge at all. Item (a) catches land inside the jurisdiction of a municipality or cantonment board with a population of at least ten thousand; item (b) catches land within two, six or eight kilometres of such a body, the limit depending on that body's population. The population is the figure at the last preceding census of which the relevant figures have been published before the first day of the previous year, and for a sale of 12 December 2024 that is the 2011 census. A State projection of 2023 is not a census figure. On the published figure of 41,286 the board's limit is two kilometres and the land at 3.4 kilometres is outside it.
These two certificates decide the case and neither is in the client's own possession. The population certificate comes from the local body or the census authority, the distance certificate from the tehsildar or the public works authority, and both take weeks. A Tribunal Bench has admitted exactly these two documents as additional evidence under Rule 29 of its own rules, on the footing that they went to the core issue contested and had not been available before the revenue authorities, condoned a delay of 180 days and decided the appeal on them. That is a rescue, not a plan.
The second limb of the officer's case is independent of distance and it is the harder one. The Supreme Court has held that whether land is agricultural land is a question of fact to be decided on a cumulative consideration of all the circumstances, and that the revenue entry is only one relevant fact and not a conclusive one; there the land had not been cultivated for four years and was agreed to be sold to a housing society, and the claim failed. On the other side a High Court has held land to have remained agricultural on the date of sale even where permission to sell it for residential use had been taken, and set out thirteen factors bearing on the question, holding that not all will appear in any case and that the decision must be reached on a balanced view of those that do. Two fallow seasons is the weak point on this file.
The return declares Rs 2,40,000 of agricultural income for the very year in which the officer says nothing was grown. That figure is either evidence for the client or evidence against him, and which it is depends on whether it can be supported. The three limbs of s.2(1A) are all anchored to land situated in India and used for agricultural purposes, and the Supreme Court's test is that basic operations on the land itself - tilling, sowing, planting - must have been performed, with subsequent operations counting only as part of an integrated activity. On the evidentiary standard a Tribunal Bench has held that what is needed is enough to show sufficient sources, not vouchers for every rupee, deleting an addition where vouchers covered about 72 per cent of the year's deposits and the family landholding was established.
Where the distance argument is strong, officers move to the head of income instead: if the sale is business, s.2(14) never comes into it. A High Court has held that selling one's own land after plotting it out to secure a better price is not an adventure in the nature of trade, that an isolated transaction can be business only where there is regular activity of purchasing and selling, and it declined to treat a gifted holding diverted to non-agricultural use, cut into forty plots with roads laid and sold over three years, as business. That is the client's answer here, and it is stronger than in the reported facts: one holding, one buyer, one deed, no roads laid and no plotting at all.
If the land is held to be a capital asset, the gain is long term on land inherited in 1998 and the return has claimed nothing. Section 54B is the natural claim - reinvestment in other agricultural land, subject to its own conditions on use in the two years before the transfer - and the bonds under s.54EC are the other route, with the six-month window from the date of transfer and the fifty lakh ceiling across two financial years. Section 10(37) is not available: it needs a compulsory acquisition, and the Supreme Court decision extending it to a negotiated figure did so only where the whole statutory acquisition procedure had been gone through and the negotiation settled the amount of compensation. A sale deed to a builder is not that.
The buyer deducted one per cent and that deduction is what put the transaction in front of the officer, but it decides nothing. Section 194-IA applies to the transfer of immovable property other than agricultural land, so the deduction is either an admission by the buyer's accountant or a precaution, and it is neither evidence nor estoppel. A Tribunal Bench has dismissed the Revenue's appeal and upheld the deletion of a demand of Rs 1,69,34,640 raised against a buyer under s.201, holding that the lands qualified as rural agricultural land and fell outside the scope of s.194-IA altogether, so the buyer could not be treated as an assessee in default. The same characterisation answers both sides of the transaction.
The buyer paid Rs 3,85,00,000 against a stamp duty value the client should check, and if there is a shortfall his own exposure turns on the identical question. The Tribunal is divided on whether s.56(2)(x) reaches agricultural land at all. One Bench held it does, reasoning that the clause speaks of any immovable property and does not exclude agricultural land - though that Bench expressly proceeded on an assumption for argument's sake and never decided whether the land before it was agricultural. Another Bench held it does not, following a coordinate Bench and deleting an addition of Rs 61,02,500 where the lower authorities had never doubted the agricultural character of what was bought. A third order relied on by officers for the contrary view was recalled by the Bench that passed it.
The distance and population limb is usually won where the certificates are produced, because it is documentary and the statute names the census. The character limb is the one that decides most of these files and it is genuinely open: two fallow seasons, a builder buyer and a conversion application will lose it before the officer more often than not, and it is retrieved, if at all, at the first appeal or the Tribunal on a cumulative view of the record. Expect the assessment to go against the client and expect the first appellate authority to take two years. Where the character finding goes the client's way the whole charge falls, so there is no middle outcome on the main issue - which is why the alternative exemption claims must be on the record from the start.
