Section 54B of Income Tax Act deals with Capital Gain on Transfer of Land used for Agricultural Purposes. Section 54B applies to only Individual Assessees and HUF. Here we will cover the issues relating to Section 54B like, the overall scope and applicability of Section 54B, Reinvestment of the sale proceeds under section 54B and also all relevant case laws.
Scope of Section 54B Income Tax Act
Where any capital gain either long-term or short-term arises on the transfer of land which, in the two years immediately preceding the date of transfer, was being used by the assessee being an individual or his parents or a Hindu Undivided Family for agricultural purposes and where the assessee has purchased any other agricultural land within a period of two years after the date of its transfer, such capital gain is to be treated as under:
Reinvested under Section 54B Income Tax Act
The capital gain arising on the transfer of old agricultural land is exempt to the extent it is reinvested in the purchase of any other agricultural land within the aforesaid period.
If whole capital gain is reinvested, it is fully exempt from income-tax and not includible in the total income of the assessee.
If only a part of it has been re-invested, the balance of it is chargeable to income-tax. New land may be in rural or urban area.
Sale of Reinvested under Section 54B Income Tax Act
New agricultural land so purchased should not be transferred within three years of its purchase. If it is sold before the expiry of three years, the cost of the new agricultural land is to be reduced by the amount of old exempted capital gain [Section 54B(1)].
Capital gain not Utilized under Section 54B Income Tax Act
The amount of capital gain not utilised by the assessee for purchase of new agricultural land before the date for furnishing the return of his income is to be deposited by him, on or before the due date for furnishing the return of income, in an account in any bank or institution specified by the Central Government.
The amount already utilised for the purchase of agricultural land together with the amount so deposited is deemed to be the amount utilised for the purchase of agricultural land. Accordingly, the assessee is allowed exemption in respect of capital gain so utilised or deposited [Section 54B(2)].
The assessee is also required to utilise the amount of deposit for the purchase of agricultural land within the specified period as aforesaid [Section 54B(1)].
If the deposited amount is not so utilised for the purchase of agricultural land, the unutilised amount is treated as capital gain of the relevant previous year in which the period of two years from the date of such transfer expires.