A recent Income Tax Appellate Tribunal (ITAT) ruling may disrupt the long-practiced use of agricultural land transactions to legitimize unaccounted money in India. Tax authorities are beginning to scrutinize deals involving farmland, often used as a loophole to convert black money into legal assets.
According to a report by The Economic Times, the ITAT’s latest decision — though stemming from a routine tax dispute — has significant implications for real estate transactions that rely on underreported land values and large cash components.
How the Scheme Typically Works:
Here’s a typical example:
An individual holding unaccounted cash agrees to buy agricultural land worth ₹10 crore from a farmer. However, the official sale agreement reflects only ₹2 crore, while the remaining ₹8 crore is paid in cash, off the books.
Since the seller is often a farmer — and agricultural income is exempt from income tax — such cash payments are rarely questioned. Later, the buyer resells the land at full market value (₹10 crore) through formal banking channels, effectively converting ₹8 crore of black money into legitimate income.
Why Agricultural Land?
Agricultural land enjoys special tax exemptions in India:
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It is not classified as a ‘capital asset’, so capital gains tax does not apply on its sale.
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Buyers do not pay tax on undervalued transactions (below stamp duty or ready reckoner rates), unlike urban property transactions.
This legal gray area has made farmland a preferred route for politicians, bureaucrats, business owners, and others looking to park undisclosed wealth.
The Turning Point: ITAT’s May 27 Ruling
In a case heard by the Ahmedabad bench of ITAT, the tribunal held that the difference between market value and transaction value of agricultural land could be taxable under Section 56(2)(x) of the Income Tax Act.
The tribunal stated:
“The term ‘immovable asset’ is not explicitly defined in Section 56(2)(x), so it must be interpreted in common terms. Based on this, rural agricultural land is not specifically excluded and should be included under ‘immovable property.’”
If upheld by the High Court, this interpretation could significantly curtail the use of agricultural land as a laundering channel for black money.
Expert View: Taxing the ‘Difference’
According to Ashish Karundia, founder of CA firm Ashish Karundia & Co:
“The buyer can be taxed on the difference between the market value and the declared sale price, regardless of the land’s agricultural classification. However, if this income can be classified as agricultural income, it becomes exempt, as agriculture is a state subject.”
This could potentially trigger legal debates over the nature of such income — whether it’s agricultural in nature or taxable under central law.
🔹 What’s Next?
If higher courts uphold the ITAT ruling, it could:
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Close a major tax loophole used by high-net-worth individuals to launder money.
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Set a precedent for treating land sale discrepancies as taxable income.
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Prompt policy changes and stricter enforcement around rural property transactions.
