Tax Planning: Sale of Agricultural Land vis a vis N.A. Land

TAX TALK-19.01.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

Tax Planning: Sale of Agricultural Land vis a vis N.A. Land

Query 1]

My grandfather received a farm about 40 years ago as a gift. After his death my mother's name was put up legally on 7/12 extract as his kin. Whether it was taxable? Now, we want to make the land as Non Agricultural and clear it from Town planning (NA/TP). Is it advisable or possible? If yes, then can we start our own business? Are we required to pay taxes for this gift if we start business and can we have the rights to Gift or Sale this property to other person who don't belong to our family? Please help & guide as to the aspects that we should look in to from income tax angel. We would be thankful if you can kindly suggest tax planning measures. [Neha Rathod- rathodn326@gmail.com]

Opinion:

First of all, agricultural land received by your mother as a result of inheritance is totally tax free & doesn’t have any tax attachment. After inheritance of the property, recipient (i.e., your mother in the present case) enters the shoes of original owners. She gets all the rights and duties bestowed to the original owner. As such, subject to other land related rules & regulations, she can get it converted in to Non agricultural & can also get TP sanction.

She can also start the business & can sale/gift the land to outsiders who may not be the part of your family. The transactions of sale have income tax implication attached to it. In normal course, merely starting of the business by her would not be give rise to a taxable event. It’s at the time of sale/transfer that the tax liability would emerge.

In your specific case, the land inherited is an ancestral property. Though actual cost of acquisition by her is zero, still she can adopt the fair market value of the land as on 01.04.1981 as its cost of acquisition, Courtesy- Income Tax Act. She would be able to further get the indexation benefit from 1981 itself even though she might have becomes the owner of the property only few years back after inheritance.

Many taxpayers owning agricultural land in the vicinity of the city have queries like this. Timely tax planning on such an occasion could be of great benefit for the taxpayer. A stitch in time save nine & tax planning is more effective if done at the initial stage itself. Tax cost can be reviewed & an alternate with lower tax burden can be taken by the taxpayer within the framework of law.

One of the important aspects that should be considered in such situation is whether the land should be sold before NA/TP or after NA/TP. The question is of enormous importance in view of the fact that entire profit on sale of agricultural land would be tax free if (a) it is a rural agricultural land & (b) it is used for agricultural purpose.
An agricultural land is considered as rural agricultural land if it is not situated in any area within the distance (measured aerially) of not more than:
a] 2 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
 b] 6 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
c] 8 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.

Rural agricultural land is outside the purview of capital assets and hence no tax is payable on sale of rural agricultural land. No similar tax benefit is available to profit arising on sale of urban agricultural land; still taxpayer can opt for an exemption u/s 54B by investing the amount of capital gain towards purchase of another agricultural land.

No such benefit is available if the land sold is not an agricultural land. To be more precise, above exemption would not be available if the land is sold after converting it to non agricultural.

Considering the amount involved, taxpayer needs to be tax cautious while doing the transactions as mentioned in the query. They should consider the tax implications of all the possibilities in such type of transactions & can legally plan the business affairs in such a way that the tax liability is kept at minimum. Tax planning aspects cannot be generalized in such case and it has to be case & individual specific. Few of the factors which should be considered by land owner in such scenario could be:

1.      Whether to sale an agricultural land itself or sale an agricultural land after doing it NA/TP?

2.      Whether to convert the land in to stock in trade & thereafter sale the land as business assets OR sale the land as capital assets only after doing NA/TP? [If taxpayer opts to convert capital assets in to stock in trade, proper documentation should suffice the transactions. It could be an excellent planning tool if owner of an agricultural land wish to sale rural agricultural land after doing NA/TP as it has the capacity to defer tax payment liability till the time of sale. However, a careful study should be done before opting for this decision in view of the fact that (a) LTCG is taxable @ 20% straightway whereas business profit is taxable @ 30% if income exceeds Rs. 10 Lacs; (b) Exemption up to Rs. 50 Lacs is available every year for investment in NHAI/REC Bonds which is not available for investment of business profit (c) Exemption u/s 54F for investment in the residential house property could be claimed against transfer of capital assets whereas no such exemption is possible against transfer of business assets].

3.      Convenient timing & liquidity to pay the tax arising in the transactions?

4.      Whether the business should be carried out in the name of the land owner itself or in the name of some other family person with POA from land owners etc?

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at cassrpn@gmail.com]