Flipping farm land for cash? ITAT’s ruling may close India’s oldest black money trick

Mumbai: The old trick of flipping farm land to white-wash cash is in the crosshairs of the taxman.

Buying agricultural land way below the market value in a predominantly cash deal, and subsequently selling the land at the actual value in an official transaction has been used for decades by babus, businessmen, politicians, and cine stars to legitimise undisclosed funds.


Now, a recent tax tribunal ruling threatens to throw a spanner in this well-oiled machine. While the views of the Income Tax Appellate Tribunal (ITAT) pertain to an otherwise innocuous case of alleged tax evasion and are not linked to any dodgy deals, its observations strike at the heart of this laundering machine that thrives on buy-sell of farm lands. ITAT is a quasi-judicial authority and hears disputes before matters are challenged before the High Court.

Consider this: a person with unexplained cash cuts a deal with an agriculturist to purchase land, having a market value of ₹10 crore.

Here, the official land value in the sale deed is quoted as ₹2 crore while the balance ₹8 crore is paid in cash. The seller, probably a farmer who pays no tax and is not tracked by the I-T department, has no qualms in accepting cash. Besides, he may have genuine use of the cash for paying labourers, buying seeds, fertiliser etc. A few years later, the buyer of the land sells the land for ₹10 crore (its true value) receiving the entire money as cheque or bank transfer, with the registration documents recording the sale at the fair market value.

The two transactions-first buying the land and later selling it-enables the original buyer of the land to convert cash or 'black money' of ₹8 crore (the difference between ₹10 crore and ₹2 crore) into 'white'.

How? By virtue of the asset being agricultural land, no tax is paid for purchasing the land at a price much lower than the ready reckoner value-unlike a transaction involving any non-farm, urban land where the buyer must pay tax on the difference between the market price and transaction price. Again, no 'capital gains tax' is paid by the seller when the land is later sold at the full value of ₹10 crore because agricultural land is excluded from the definition of 'capital asset'.

Farm land is 'Immovable Asset'
While the Ahmedabad bench of ITAT has endorsed the exemption of capital gains tax on sale of farm land, it has questioned the non-payment of tax on the first leg of the transaction (where a ₹10 crore worth asset is bought for ₹2 crore).

Under Section 56(2)(x) of the I-T Act, full income tax is levied on the difference between the market value and transaction price of such "immovable property" (among other assets). The ITAT in its May 27 ruling said, "The term 'immovable assets' has not been defined in section 56(2)(x) or in any other section in the I-T Act. This renders the word to be used in general parlance. In general understanding of the term, the word 'immovable asset' means an asset which cannot be removed without destroying or altering it. Therefore, going by the general definition, 'immovable property would, in our view, include any rural agricultural land, in absence of any specific exclusion in section 56(2)(x)."

If this view is upheld by the High Court, buying-selling farm land to launder bribes and cash payments would run into a serious hurdle.

According to Ashish Karundia, founder of CA firm Ashish Karundia & Co, “It is a well-settled principle that the nature of income for the recipient does not necessarily depend on the nature of the source from which it is derived. Likewise, it is also recognized that the characterization of income arising from a transaction need not be the same between the parties involved. Based on this principle and considering that the difference between stamp duty value and actual transaction value is explicitly included as income, such difference can be taxed as income in the buyer's hand, regardless of the land’s classification or the tax treatment in the seller's hand. However, if it can be established that the difference in these values of agricultural land qualifies as income or revenue derived from agricultural land, it can be considered agricultural income. Once the income qualifies as agricultural income, tax cannot be levied since tax on agricultural income falls within the domain of the state legislature. It would, therefore, be very interesting to see how the higher courts interpret the nature of such a differential amount, especially given that agriculture is a state subject.”