Tax Forum: Questions & Answers
Effect of extension of municipal limits
We have agricultural lands as an investment regularly used for agricultural operations for the past several years. It was outside the city limits but the limit has been extended five years ago to include our land. Since prices are going up, we propose to realise the value of the same by sale. Since these were agricultural lands at the time of our acquisition and we are continuing to use the land for agricultural operations, is it open to us to claim that we will be entitled to exemption meant for agricultural lands. If we are liable, can we claim the cost at market value on the date on which the land becomes urban land because of the extension of municipal limits?
The problem posed by the reader could arise even where agricultural lands fall within the limits of notified periphery of any city or town. In such cases, where agricultural lands become urban lands either because of the extension of the city limits or because of notification treating such land as urban land, though continued to be used for agricultural purposes, will be liable to tax on sale, since what is relevant is the character of the asset at the time of sale as had been held in a number of cases as in Ranchhodbhai Bhaijibhai Patel v CIT (1971) 81 ITR 446 (Guj).
As regards the manner of computation whether the cost should be taken as what is paid for the agricultural land or whether the assessee can take the market value on the date on which the agricultural land became urban land because of the extension of municipal limits or on account of notification, the answer is not free from controversy.
There are decisions which hold that the real cost paid by the assessee, subject only to substitution of market value as on the specified date is permissible and not the market value on which it became taxable in Ranchhodbhai Bhaijibhai Patel’s case (supra), besides the decision of other High Courts in CIT v M. Ramaiah Reddy (1986) 158 ITR 611 (Kar) and CIT v Smt. M. Subaida Beevi (1986) 160 ITR 557 (Ker). The reasoning in these cases is that the provisions of Sec. 48 providing for computation of capital gains is clear to the effect that only the cost or the substituted cost being market value on specified date is deductible. But the Punjab and Haryana High Court has held in CIT v S.Hoshnak Singh (HUF) (2007) 292 ITR 390 (P&H) and CIT v Gurcharan Singh (2007) 292 ITR 387 (P&H) that the assessee is entitled to adopt the market value as on the date on which the agricultural land became a capital asset within the definition of capital asset. The High Court had not noticed the different view taken by three other High Courts so that the inference is vulnerable.
S. RAJARATNAM
Printer friendly
page
Send this article to Friends by
E-Mail
Business
