FEBRUARY 12, 2025

By CA Lukose Joseph, CA Jobby George & CA Maju P Jose

IT is seen that in ordinary parlance transactions through Gift is treated as one of the ways of proper tax planning subject to the provisions of section 56(2), whether if one person gifts rural agricultural land, whether it is taxable in the hands of the recipient in accordance with section 56(2) of the Act. In this article, we are trying to analyse the issue.

While Gift Tax was abolished in 1998, gifts continue to be taxed in India through an alternative mechanism under the Income Tax Act, 1961. A gift, for tax purposes, refers to the receipt of property (both movable and immovable) or money without consideration or for inadequate consideration.

What Constitutes a Gift Under Income Tax

The term "gift" under the Income Tax Act includes:

- Movable property like cash, shares, jewellery, etc.

- Immovable property, such as land or buildings, when received without consideration or at a price significantly lower than its market value.

Exemptions from Tax on Gifts

Certain gifts are not taxable, provided they meet the following conditions:

- Gifts from relatives: Gifts received from specified relatives are fully exempt from tax.

- On marriage: Gifts received by an individual on the occasion of their marriage are not taxed.

- Under a will or inheritance: Any gift received as part of an inheritance or through a will is not subject to tax.

- In contemplation of death: Gifts given in anticipation of the payer's death are also exempt.

- From specified entities: Gifts received from local authorities, or certain specified trusts and institutions under Section 10(23C) and those registered under Section 12AA, are tax-free.

Taxability of Gifts in Other Cases

In cases where a gift does not fall under the exempt categories mentioned above, it becomes taxable if its aggregate value exceeds Rs.50,000 in a financial year. In such cases, the entire value of the gift is taxable under the head Income from Other Sources. This applies to both movable and immovable property, with different rules for their taxation:

1. Money: If a person receives money (cash, cheque, etc.) without consideration and the total value exceeds Rs.50,000 in a year, the entire amount becomes taxable.

2. Immovable Property: In the case of immovable property, taxability depends on two factors:

- Received without consideration: If the property is received without any payment and its stamp duty value exceeds Rs.50,000, the entire stamp duty value is taxable.

- Received for inadequate consideration: If the property is transferred for a price that is less than its stamp duty value by more than Rs.50,000, the difference between the stamp duty value and the consideration paid becomes taxable.

Taxation of Agricultural Land as a Gift

There is often confusion regarding the taxability of gifts involving agricultural land, particularly in rural areas. To understand this, we must first look at the definition of capital asset under Section 2(14) of the Income Tax Act.

A capital asset generally refers to property of any kind, but rural agricultural land is specifically excluded from this definition. Rural agricultural land is not considered a capital asset if it meets certain conditions:

- It is located outside the limits of any municipality with a population of 10,000 or more.

- It is situated at least 2 to 8 kilometers away from the municipal boundaries, depending on the population size.

Since rural agricultural land is not treated as a capital asset as provided by Definition of Capital Asset in Section 2(14) of the Income Tax Act, 1961, it does not fall within the scope of taxable property under Section 56(2)(x) of the Income Tax Act. This means that if agricultural land in a rural area is gifted, it does not attract any tax because it is not considered a "capital asset."

The view is also upheld in the ruling by honorable Income Tax appellate Tribunal Jaipur Bench in the case of ITO Vs Komal Kumar Bader decided in April 24, 2009 that gift of agricultural land cannot be considered as Income under section 56(2)(v) or section 56(1) of the Income tax Act. The genuineness of the Gift to be established and no reason to disbelieve the gift. The valuation of gift as Income was found to be erroneous, thereby provisions of section 56(2)(v) and 56(1) were deemed inapplicable.

But in the case of The ITO, Ward -2(1) Alwar Vs Shri Trilok Chand Sain, S/o Shri Ram Swaroop Sain, 805, Wonder Residency, 200Ft. Road, Alwar decided in January 07, 2019, The Honourable Income Tax Tribunal, Jaipur Bench "B" has taken a view that - On a reading of provisions of 56(2)(vii)(b), we find that it refers to any immoveable property and the same is not circumscribed or limited to any particular nature of immoveable property. It refers to any immoveable property which by its grammatical meaning would mean all and any property which is immovable in nature, i.e., attached to and forming part of earth surface .

Even though different judgments are available on the matter of consideration of agricultural land as Immovable Property , which takes it origin from Capital Asset, treated differently for taxation purpose, irrespective of the same, we are of the opinion individuals receiving gifts of agricultural land in rural areas is exempt, as the transaction remains outside the purview of taxation under Section 56(2)(x) for transaction after 01.04.2017 and section 56(2) (vii) for transactions before 01.04.2017 as both these are covered for transactions relating to Immovable Property . But the term Immovable Property takes its color from definition of Capital Asset as per Section 2(14) of the Income Tax Act 1961 which excludes Agricultural land in rural area and therefore it is not treated as Capital Asset in section 2(14) of the Income tax Act , 1961

Conclusion:

To summarize, gifts of immovable property like land or buildings, when received without adequate consideration, may be subject to tax if their value exceeds Rs.50,000, except in certain exempt situations such as receiving the gift from a relative or on the occasion of marriage. However, rural agricultural land is not regarded as a capital asset under tax laws, and therefore, gifting such land is not taxable.

This distinction is important to note for individuals receiving gifts of agricultural land in rural areas, as the transaction remains outside the purview of taxation under Section 56(2)(x) read with Section 56(2)(vii) considering the fact that Agricultural land in rural area is not treated as Capital Asset in section 2(14) of the Income tax Act, 1961.

[The views expressed are strictly personal.]