A recent ruling by the Income Tax Appellate Tribunal (ITAT) has brought renewed focus to the practice of using agricultural land to launder money, potentially closing one of India's oldest loopholes for converting illicit wealth into legitimate funds. The ITAT questioned the non-payment of tax on the undervalued purchase of farmland, a common method for converting illicit cash into legitimate funds.
For decades, agricultural income and the sale of farmland have been used to evade taxes and convert black money into white. This loophole primarily exists because agricultural income is exempt from income tax under Section 2(1A) of the Income Tax Act. Additionally, rural agricultural land is not considered a capital asset, meaning that the sale of such land does not attract capital gains tax.
The process typically involves purchasing farmland at a significantly undervalued price, often with black money. Because agricultural land is excluded from the definition of a 'capital asset,' no capital gains tax is paid by the seller when the land is later sold at its full market value. The difference between the undervalued purchase price and the actual market value represents the amount of black money converted into white.
The ITAT ruling specifically addresses the first leg of the transaction, where farmland is bought at a price much lower than its actual value. Under Section 56(2)(x) of the I-T Act, full income tax is levied on the difference between the market value and the transaction price of immovable property. The ITAT has questioned the non-payment of tax on this difference, potentially impacting the viability of using farmland for money laundering. The tax office is also simultaneously looking into several cases of unrealistic farm income of ₹5 lakh per acre, where such declarations are inconsistent with the general trends and publicly available data.
If upheld, this ruling could significantly curb the use of farmland for money laundering. By taxing the difference between the market value and the transaction price at the time of purchase, the ITAT's decision targets the initial step in the laundering process. This could deter individuals from using this method to convert illicit funds into legitimate assets.
While the ITAT ruling is a step in the right direction, challenges remain. Determining the actual market value of agricultural land can be difficult, especially in rural areas where transactions may not be well-documented. Tax officials will need to conduct thorough investigations and gather evidence to support claims of undervaluation. The ruling's effectiveness will also depend on consistent enforcement and a strict interpretation of the law. The Income Tax department is conducting a nationwide probe is underway with the income tax (I-T) department homing in on cases in various states where persons and entities have shown agricultural income of ₹50 lakh or more without owning any land.
The ITAT ruling has the potential to close a significant loophole in India's tax system and curb the use of agricultural land for money laundering. By focusing on the undervalued purchase of farmland, the ruling targets the initial stage of the laundering process. However, effective implementation and enforcement will be crucial to ensure its success in preventing the conversion of black money into white.
