Buying agricultural land near a city? Key income tax rules you must know

When Mr. Ishwarbhai had filed his income tax return (ITR) for Assessment Year 2018– 19 he had reporting a total income of Rs 11.66 lakh. However, during the course of assessment, the Assessing Officer (AO) noted that Mr. Ishwarbhai had jointly bought agricultural land for Rs 22 lakh (22,30,320), while the stamp duty valuation of the same property was Rs 40 lakh (40,40,960).

The AO observed that there was a difference of Rs 18 lakh (18,10,640) between the purchase price and the stamp duty valuation. As a result, the Assessing Officer invoked the provisions of Section 56(2)(x) and treated this difference as income from other sources, arguing that Mr. Ishwarbhai had bought the property for less than its fair market value. Consequently, the AO made an addition of Rs 18,10,640 to the ITR declared income, and computed the total income at Rs 29,77,410. Unhappy with this addition, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) [CIT(A)].

The Income Tax Department claimed that the land bought by an individual wasn’t an agricultural land because the stamp duty was charged at higher urban land rates. As a result, the Income Tax Department, under Section 56(2)(x), added the difference between purchase price and stamp value as taxable income for the land buyer.


The Commissioner of Appeals (CIT A) ruled in the tax department's favour and said that since stamp duty was based on urban land rates, it suggested that the land had lost its agricultural character. However, ITAT Ahmedabad pointed out that it’s a well-established legal principle that the stamp duty valuation or classification for fiscal purposes does not define the property’s character under the Income-tax Act.

ITAT Ahmedabad also emphasised that the higher stamp duty charged by the Sub-Registrar’s Office, based on a draft AUDA scheme, wouldn’t change the fundamental nature of the land, and thus ruled in favour of the land buyer.

Chartered Accountant Suresh Surana says that the ITAT Ahmedabad, while referring to the expression “settled legal position,” clarified that the valuation or categorisation adopted by stamp duty authorities cannot, by itself, determine the true legal nature of the property for the purposes of the Income-tax Act.

Stamp duty assessment is undertaken solely for fiscal and revenue purposes, and therefore, cannot override documentary evidence, statutory land records, or the factual use of the land.

In the case at ITAT Ahmedabad, even lthough a higher stamp duty was imposed because the property was classified as non-agricultural due to its inclusion in a draft Town Planning Scheme, the registered sale deed, Form No. 7 extract, and other revenue records consistently showed the land as agricultural.

Moreover, there wasn’t any formal conversion proceeding to change the character of the land.

Accordingly, ITAT Ahmedabad held that the temporary stamp duty classification or the rate set by the Sub-Registrar cannot be taken as conclusive proof that the land is no longer agricultural.

Surana says that on this basis, ITAT Ahmedabad rejected the reasoning of the CIT(A) and reiterated that for the purpose of determining the applicability of Section 56(2)(x), the inherent nature and legal status of the land must prevail over stamp valuation.

Surana says:“Since the land demonstrably retained its agricultural status in law and fact, the addition of income made merely on account of higher stamp duty valuation treating the land as non-agricultural was held to be unjustified and liable to be deleted.”

Also read: Man gets tax notice of Rs 18 lakh for buying land at low price, ITAT Ahmedabad quashes it; here's why

What are the key factors that determine if the land retains its agricultural character for income tax purposes?

Surana says the determination of whether the land retains its agricultural character for income-tax purposes is based on its legal status, factual use, and supporting documentary evidence, and not merely on stamp duty valuation or revenue authority assumptions. Some of the indicative key determining factors may include:

• The status reflected in official revenue records entries is a primary indicator of the status of land. If the land continues to be reflected as agricultural in these records, it strongly supports its agricultural character.
• Evidence demonstrating actual agricultural operations carried out such as crop records, cultivation patterns, irrigation use, or receipts of sale of agricultural produce etc. supports the claim that the land is being used for agriculture.
• Unless formal conversion permission has been granted under local land laws to treat the land as non-agricultural (NA), its character may remain agricultural in law, irrespective of proposed development schemes.
• The description of land in the registered sale deed and agreement, if explicitly described as agricultural land, may add evidentiary value.
• Prior treatment of the land by the assessee (or seller) in income-tax filings, including capital gains classification and exemption claims may enable in establishing continuity of agricultural status.

Some important factors to watch out for someone who is selling agricultural land near an urban area
Surana says that taxpayers should consider whether such land falls within the scope of “agricultural land’” under Section 2(14)(iii). The term agricultural land in India excludes certain categories of land based on its location and proximity to urban areas. For income-tax purposes, land shall not be treated as agricultural land if it falls within any of the following specified limits:

• Land situated within the jurisdiction of a municipality or cantonment board (irrespective of the designation used such as municipal corporation, notified area committee, town area committee, or similar authority) where the population is 10,000 or more; or
• Land located within the following aerial distances from the local limits of such municipality or cantonment board:

1. Within 2 kilometres, where the population exceeds 10,000 but does not exceed 1,00,000;
2. Within 6 kilometres, where the population exceeds 1,00,000 but does not exceed 10,00,000;
3. Within 8 kilometres, where the population exceeds 10,00,000.

For this purpose, the term "population" refers to the population figures as per the most recent census published before the first day of the relevant financial year.