By CA Surekha S Ahuja
A Law Rooted in Genuine Agricultural Activity
Section 54B of the Income-tax Act, 1961 grants exemption on capital gains arising from the transfer of agricultural land, if the land was used by the assessee or parents for agricultural purposes in the two years immediately preceding the date of transfer, and the capital gains are reinvested in new agricultural land within the stipulated period.
On paper, it appears straightforward.
In practice, it has become one of the most litigation-prone capital-gain exemptions, primarily due to the mismatch between land classification and actual use.
The Judicial Spark: ITAT Ahmedabad in ITO v. Nitinbhai Kanubhai Patel [179 taxmann.com 365]
The Ahmedabad Bench of the ITAT recently reiterated a foundational principle — Section 54B relief is a factual benefit, not a presumptive one.
The Tribunal held that the initial onus lies entirely on the assessee to prove actual agricultural use of the land for the two preceding years.
The following were emphasized:
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Evidence must be cogent, dated, and verifiable — e.g., crop receipts, sale invoices, fertilizer or seed bills, irrigation or labour expenses, or bank credits reflecting agricultural income.
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Land-revenue or 7/12 extracts alone do not establish agricultural activity. They may show classification but not use.
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The CIT(A), while granting relief, must record independent satisfaction and not rely merely on the label of “agricultural land.” Mechanical acceptance violates Section 250(6), which mandates a reasoned, speaking order.
Accordingly, the ITAT remanded the case to the Assessing Officer for fresh verification and evidence appraisal.
The Analytical Core: Law Meets Evidence
The crux is simple yet profound:
When law meets evidence, exemption follows naturally; when law meets assumption, litigation is inevitable.
Section 54B stands at the intersection of fact and intent — a provision designed to protect genuine farmers reinvesting in agriculture, not mere land traders taking shelter under agricultural nomenclature.
Thus, the judicial stance in Patel underscores that the benefit must follow proof, not presumption.
The Evidentiary Doctrine: Burden and Balance
Under Section 54B(1), two tests must be simultaneously satisfied:
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Use Test:
The land was used for agricultural purposes by the assessee or parents in the two years immediately preceding the date of transfer. -
Investment Test:
The capital gain was invested in new agricultural land within two years after the transfer.
The burden of proof under Section 102 of the Evidence Act, 1872 lies squarely on the claimant (the assessee).
Once credible primary evidence is produced, the burden may shift to the Revenue to rebut or verify.
Courts have repeatedly clarified that agricultural classification alone is not conclusive — the use and intention must be evidenced.
The Contrary Judicial Perspective: When Circumstances Favoured the Assessee
Interestingly, several judicial precedents have interpreted the rule liberally when circumstantial evidence supports genuine use:
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CIT v. Smt. Savita Rani (270 ITR 40 [P&H]) – Exemption allowed where land was cultivated jointly by family members and supported by revenue records.
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DCIT v. Gopal Lal Mishra [ITA No. 194/Jp/2018] – Mere absence of sale bills or labour records not fatal if 7/12 extracts and witnesses confirmed cultivation.
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CIT v. Narinder Singh [360 ITR 272 (P&H)] – Human probabilities and local agricultural practices can be considered; strict documentation is not always mandatory.
These cases reveal a judicial balancing act —
- where facts are bona fide, courts lean toward substance over form;
- where evidence is ambiguous, the benefit of doubt rarely survives.
Learning & Compliance Takeaways
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Maintain Contemporaneous Evidence:
Keep yearly crop details, mandi sales, expense invoices, and bank entries ready for the two years prior to sale. -
Document Agricultural Inputs:
Fertilizer, seeds, irrigation, and labour bills serve as corroborative proof of activity. -
Preserve Revenue and Panchayat Records:
Certified 7/12 extracts, mutation entries, and irrigation tax receipts can support claims. -
Ensure Traceable Reinvestment:
Link the capital-gain amount directly to new agricultural-land purchase through verifiable banking channels. -
Avoid Post-event Documentation:
Any document created or modified after the assessment trigger weakens credibility. -
CIT(A) Responsibility:
Appellate authorities must give speaking findings; mere reproduction of submissions is judicially untenable.
Section 54B is not just a technical relief — it reflects the legislature’s intent to preserve continuity in agricultural engagement.
But as the Patel ruling illustrates, judicial sympathy cannot replace statutory compliance.
The message is clear for professionals and taxpayers alike:
Claim the exemption only when the soil bears the evidence.
When law meets evidence, exemption flows effortlessly.
When law meets assumption, litigation is inevitable.
This judgment reinforces the evidentiary discipline behind every capital-gain exemption. It invites tax professionals to revisit their documentation approach — ensuring that compliance grows not on assumption, but on proof that is as fertile as the land itself.
