As per the Income Tax Act, any income derived from a Capital Asset, whether movable or immovable, is taxable under the head “Capital Gains”

Definition of a Capital Asset under sec. 2(14):

Capital asset means-

a) Any kind of property held by an assessee, whether or not connected with his business or profession.
b) Any securities held by a Foreign Institutional Investors in accordance with regulations made by SEBI Act

-but does not include:

i. Any stock-in-trade except (b) above
ii. Personal effects for personal use by assessee or dependent except jewellery, archeological collections, drawing, paintings, sculptures, ay art of work.
iii. Agricultural land in India not situated in:
a. Area within the jurisdiction of a municipality or a cantonment board and has population not less than 10 thousand.
 b. Area located at:
 i. Not more than 2 km from limits of municipality and population from 10 thousand to 1 lakh
ii. Not more than 6 km from limits of municipality and population from 1 lakh to 10 lakhs
iii. Not more than 8 km from limits of municipality and population more than 10 lakhs
iv. Bonds issued and notified by Central Government.

Therefore, it means that agricultural land as defined in 2(14) (iii) is not regarded as Capital asset and hence not taxable.

Other land used for agricultural purposes are included in the definition of Capital asset and hence the income as Capital Gains from transfer of such land is taxable. Also one must understand Transactions not regarded as transfer under sec. 47.

Section 54B: This section gives the circumstances when land used for agricultural purposes which is taxable shall be exempt:

  • The exemption is given only to an Individual and HUF.
  • The land should have been used for agricultural purposes for last 2 years preceding the date of transfer.
  • The assessee should purchase another land to be used for agricultural purposes within 2 years from transfer date.
  • Any excess of capital gains over the cost of asset shall still be chargeable to tax.

Therefore, if there is sale of agricultural land by company or such land is transferred by any Company/Firm etc. it shall be liable to tax under sec. 45, irrespective of the use of capital gain in purchasing another land for agricultural purposes.