When Mr Patel from Navrangpura, Ahmedabad, sold his 1/3rd share of his family's agricultural land for Rs 7.24 crore, he didn't pay any tax because he claimed the Section 54B tax exemption.
For those unfamiliar, Section 54B of the Income-tax Act, 1961 states that you don't need to pay any income tax on sale of agricultural land that has been used for agricultural purposes by you, or your parents, or the family's HUF for at least two years immediately before the date of sale transfer, and the capital gains from this sale is reinvested in another agricultural land within 2 years from the date of transfer. The tax exemption applies to the amount you invest in the new agricultural land.
The issue the Income Tax Department had with Patel's sale was that the land was allegedly not used for agricultural activities in the two years leading up to the sale. So, on this ground, they denied Patel's Section 54 tax exemption claim.
Feeling aggrieved, Patel filed an appeal with the commissioner of appeals (CIT A) which ruled in his favour. However, the tax department was not happy and took the case to ITAT Ahmedabad.
On July 15, 2926, Patel won the case in ITAT Ahmedabad.
ITAT Ahmedabad pointed out that in a separate case involving a co-owner of the same land, it was clearly established that the land has been used for agricultural purposes, supported by Form 7/12 along with Form 8. Thus in Patel's case, the same evidence was presented, proving that the land was indeed sold for agricultural purposes.
Read on to find out more about this case and learn how Patel won the case in ITAT Ahmedabad (case no: I.T.A. No. 183/Ahd/2025).
Summary of the judgement
Chartered Accountant Suresh Surana explained to ET Wealth Online : The appeal was filed by the Income-tax Department against the order of the National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated November 11, 2024, for Assessment Year (AY) 2016-17.
The dispute arose because the Assessing Officer (AO) rejected Patel's claim of exemption of approximately Rs 2.95 crore under Section 54B, 1961 on the ground that the assessee had failed to prove that the land sold for Rs 7.24 crore had been used for agricultural purposes in the 2 years preceding its sale.
The Income Tax Department relied on the absence of agricultural produce in certain revenue records and questioned the adequacy of the evidence furnished by Patel.
While granting relief, the CIT(A) noted that the issue had already been decided in favour of the Patel's co-owner on identical facts.
According to Surana, Patel had produced documentary evidence such as Forms 7/12, Form 8, revenue records and Google Earth photographs to demonstrate that agricultural operations were carried out on the land. Thus the CIT(A) held that once such evidence was placed on record, the burden shifted to the Income Tax Department to rebut the claim that this land was not used for agricultural activities with evidence, which it failed to do.
Surana says that the ITAT Ahmedabad agreed with this reasoning and observed that there was no distinguishing feature between the present assessee's case and that of the co-owner, where identical evidence had already been accepted.
Surana says that the tax tribunal emphasized that the Income Tax Department had not controverted (overturned) the documentary evidence with any tangible material and, therefore, there was no justification to interfere with the findings of the CIT(A).
Consequently, the Income Tax Department's appeal was dismissed, and Patel's entitlement to tax exemption under Section 54B was upheld.
What does this ruling mean for other taxpayers?
According to Surana, the tax tribunal ruling reinforces the principle that eligibility for exemption under Section 54B is to be determined on the basis of credible evidence regarding the agricultural use of land and not on conjectures.
Surana says: "Where a taxpayer furnishes relevant documentary evidence establishing agricultural operations, the onus shifts to the tax authorities to disprove the claim through positive and credible material."
Surana pointed out that mere doubts or absence of specific entries in revenue records, without corroborative evidence, would not be sufficient to deny the statutory exemption.
How does Section 54B tax exemption work?
Section 54B under Income Tax Act, 1961 is called Section 83 under Income Tax Act, 2025.
Surana says that Section 54B of the Income-tax Act (ITA), 1961, provided relief from long-term capital gains tax to an Individual or a Hindu Undivided Family (HUF) on the transfer of agricultural land, provided the land had been used for agricultural purposes by the assessee, his/her parent, or the HUF for at least 2 years immediately preceding the transfer, and the capital gains were reinvested in another agricultural land within 2 years from the date of transfer.
Conditions:
?The tax exemption is available to the extent of the investment made in the new agricultural land.
?If the new land was transferred within 3 years, the tax exemption granted earlier was effectively withdrawn by reducing the cost of acquisition.
?The provision also allowed the unutilised capital gains to be deposited under the Capital Gains Account Scheme (CGAS) before the due date for filing the ITR, enabling the taxpayer to claim the exemption even if the new land had not yet been purchased.
However, with effect from April 1, 2026, the Income-tax Act, 2025 has come into force, and the corresponding provision is now contained in Section 83. While the provision has been substantially retained, it has been redrafted in a simplified and structured manner under the new legislation.
