The Income Tax Appellate Tribunal (ITAT) Delhi has recently ruled against a taxpayer seeking capital gains exemption under Section 54B of the Income-tax Act, 1961, because the new agricultural land was purchased in his wife's name.

Section 54B of the Income-tax Act, 1961, allows individuals or Hindu Undivided Families (HUFs) to claim tax exemptions on long-term capital gains (LTCG) arising from the sale of urban agricultural land if the capital gains are reinvested in purchasing another agricultural land within two years of the sale.

In this particular case, the assessee sold agricultural land for ₹5 crore and reinvested the proceeds to purchase new agricultural land. However, he purchased the new land in his wife's name and consequently claimed an income tax exemption on ₹55 lakh under Section 54B. The ITAT Delhi denied the tax exemption, citing a judgment from the Punjab and Haryana High Court in the Dinesh Mehta case. The High Court had ruled that income tax deductions under Section 54B are not permissible if the new agricultural land is purchased in the name of a spouse.

To claim an exemption under Section 54B, the new agricultural land must be purchased within two years from the date of selling the original land. If the capital gain is not utilized to purchase another agricultural land by the time of filing the income return, the assessee can deposit the unutilized amount in the Capital Gains Deposit Account Scheme to avail the exemption. The new land can then be purchased by withdrawing the amount from this account within the specified time limit of two years.

In a similar vein, two different benches of the Income Tax Appellate Tribunal (ITAT) – in Chennai and Pune – recently dealt with a similar issue and denied capital gains tax exemptions on the sale of land. The reason for denial was that no agricultural activities had been carried out on the land. Section 54B of the Income Tax (I-T) Act allows for an exemption on capital gains arising from the transfer of agricultural land, provided it has been used for agricultural purposes for at least two years prior to the sale. The capital gains are exempt to the extent such gains are used to buy another agricultural land within three years.

In the Chennai ITAT case, the taxpayer, Keshav Sunderam Rajam, a non-resident, had invested ₹2.4 crore in a capital gains account scheme from the sale of agricultural land and paid ₹1.2 crore to his father to acquire agricultural land in Coonoor. Although the taxpayer produced 'adangal' (local land records) to substantiate the land sold was agricultural, the I-T officer denied the capital gains exemption benefit of approximately ₹3 crore, arguing that the land sold had not been used for agricultural purposes. The ITAT bench observed that the 'adangal' showed only a few coconut trees, which did not sufficiently demonstrate that the taxpayer carried out agricultural operations, especially since he had not reported any agricultural income.

These cases highlight the importance of adhering to the specific conditions laid out in Section 54B to successfully claim capital gains exemptions on the sale of agricultural land. The land should be used for agricultural purposes for at least two years before the sale, and the new land should be purchased in the name of the assessee, not their spouse. Tax officials are also scrutinizing claims more closely, using land records and even satellite images to verify agricultural activity.