Section 2(14) Capital Assets – Meaning, Definition, FAQ’s & Case Laws

Introduction: Section 2(14) of the Income Tax Act defines capital assets, covering a broad spectrum. This article delves into the meaning, definition, frequently asked questions (FAQs), and case laws related to Section 2(14) Capital Assets, with a focus on agricultural land.

MEANING:

1. Property of any kind held by an Assessee, whether or not connected with his business or profession;

2. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

3. any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof,

But does not include:

1. Any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession;

2. Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him,

Personal Effects Does not include:

2. archaeological collections;

5. sculptures; or

6. Any work of art.

Explanation.—for the purposes of this sub-clause, “Jewellery” includes—

1. ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

2. Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;

• Agricultural land in India, not being land situate—

1. in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand ; or

1. in any area within the distance, measured aerially,—

1. not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or

2. not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or

• Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.

Explanation.—For the purposes of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

3. 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

4. Special Bearer Bonds, 1991, issued by the Central Government;

5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.

Explanation 1.—For the removal of doubts, it is hereby clarified that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

Explanation 2.—for the purposes of this clause—

1. the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;

(a) The expression “Foreign Institutional Investor” means such investor as the Central Government may, by notification in the Official Gazette, specify in this behalf;

1. The expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

Section 2(h) of SCRA, 1956:

Exemption:

• Section 10(10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—

1. any sum received under sub-section (3) of section 80DDor sub-section (3) of section 80DDA; or

2. any sum received under a Keyman insurance policy; or

3. any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured ; or

4. any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:

Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person.

Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C.

Provided also that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—

(i) A person with disability or a person with severe disability as referred to in section 80U; or

(ii) Suffering from disease or ailment as specified in the rules made under section 80DDB,

The provisions of this sub-clause shall have effect as if for the words “ten per cent”, the words “fifteen per cent” had been substituted:

Provided also that nothing contained in this clause shall apply with respect to any unit linked insurance policy, issued on or after the 1st day of February, 2021, if the amount of premium payable for any of the previous year during the term of such policy exceeds two lakh and fifty thousand rupees:

Provided also that if the premium is payable, by a person, for more than one unit linked insurance policies, issued on or after the 1st day of February, 2021, the provisions of this clause shall apply only with respect to those unit linked insurance policies, where the aggregate amount of premium does not exceed the amount referred to in fourth proviso in any of the previous year during the term of any of those policies:

Provided also that the provisions of the fourth and fifth provisos shall not apply to any sum received on the death of a person:

• Following provisos shall be substituted for the existing sixth proviso to clause (10D) of section 10 by the Finance Act, 2023, w.e.f. 1-4-2024:

Provided also that nothing contained in this clause shall apply with respect to any life insurance policy, other than a unit linked insurance policy, issued on or after the 1st day of April, 2023, if the amount of premium payable for any of the previous years during the term of such policy exceeds five lakh rupees:

Provided also that if the premium is payable by a person for more than one life insurance policy, other than unit linked insurance policy, issued on or after the 1st day of April, 2023, the provisions of this clause shall apply only with respect to those life insurance policies, other than unit linked insurance policies, where the aggregate amount of premium does not exceed the amount referred to in the sixth proviso in any of the previous years during the term of any of those policies:

Provided also that the provisions of the fourth, fifth, sixth and seventh provisos shall not apply to any sum received on the death of a person:

Provided also that if any difficulty arises in giving effect to the provisions of this clause, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty and every guideline issued by the Board under this proviso shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and the assessee.]

Explanation 1.—For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.

Explanation 2.—For the purposes of sub-clause (d), the expression “actual capital sum assured” shall have the meaning assigned to it in the Explanation to sub-section (3A) of section 80C.

Explanation 3.— For the purposes of this clause, “unit linked insurance policy” means a life insurance policy which has components of both investment and insurance and is linked to a unit as defined in clause (ee) of regulation 3 of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019 issued by the Insurance Regulatory and Development Authority under the Insurance Act, 1938 (4 of 1938) and the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);

Section 80C (3) The provisions of sub-section (2) (Deduction under Section 80C) shall apply only to so much of any premium or other payment made on an insurance policy, other than a contract for a deferred annuity, issued on or before the 31st day of March, 2012, as is not in excess of twenty per cent of the actual capital sum assured.

Explanation.—in calculating any such actual capital sum assured, no account shall be taken—

of the value of any premiums agreed to be returned, or

Of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

Explanation to sub-section (3A) of section 80C.:

Explanation.—For the purposes of this sub-section, “actual capital sum assured” in relation to a life insurance policy shall mean the minimum amount assured under the policy on happening of the insured event at any time during the term of the policy, not taking into account—

(i) The value of any premium agreed to be returned; or

(ii) Any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

RELAVENT CASE LAWS:

Income-Tax Officer vs P. Venkataramana on 14 June, 1993, 46 ITD 484 (Hyd)

Bench: C Singh, A V Reddy

Brief Fact of the Case:

The reproduction of Section 2(14)(iii)(a)is clear that Agricultural land situated in India is also taken as a capital asset which fulfils the condition that any area which has a population of more than 10,000 according to the last preceding census. The assessee’s claim is that the land in question is situated in Palamaner town which comes under a Panchayat and not a municipality, though the population exceeds 10,000 as per the last census should not be assessed to Capital Gains. Several names are given in each State in India which are innumerable. Perhaps the Legislature found it difficult or not practicable to list out all the names in existence throughout the country in the above-said Sub-clause. Therefore, the clause or by any other name’ is added after giving few categories. The name of the Palamaner town i.e. Panchayat therefore certainly comes under this ‘any other name’.

Held That:

This issue was also examined by the Income-tax Appellate Tribunal, Madras Bench ‘C in the case of K. Parameshwaran v. ITO [1982] 2 ITD 371. In the said case, the assessee sold certain lands belonging to him which were situated in a taluk headquarters with a population of over 10,000 but which was a town panchayat governed by the Madras Panchayats Act. The Income-tax Officer took the view that the term ‘municipality’ used in Section 2 (14)(iii)(a) would cover such town panchayats also and brought the capital gains to tax. On these facts, it was held:-

The historical evolution of local self-Government in the State shows that ‘municipalities’ are governed by the Municipalities Act while the panchayats are governed by the Panchayats Act and the concept of the former relates to urban local self-Government whereas the later relates to rural self-Government. The terms ‘municipality’, ‘notified area committee’, ‘town area committee’ and ‘town committee’ used in Section 2(14)(iii)(a) have legal conceptions and must, therefore, be given their legal meaning and consequently, they would be entirely different concepts from the term ‘panchayat’, be it a village panchayat or a town panchayat. The rule of ejusdem generis, relied upon by the revenue to bring the panchayat under the category of’ any other name’ would also not apply since panchayats are a distinct genus by themselves. Panchayats cannot, therefore, be treated as municipalities under Section 2(14)(iii)(a) and, hence, sale of the impugned lands could not attract capital gains tax.

In the case before us, it bears repetition that the acquired land was situated in Palamaner town which is governed by the Panchayats Act and does not fall within any municipality, municipal corporation or cantonment board and hence the agricultural land falls outside the purview of Section 2(14) of the I.T. Act. The revenue was, therefore, not justified in levying capital gains tax. We, therefore, uphold the order of the CIT (Appeals) though for different reasons.

The Revenue’s appeal is dismissed.

FAQ’S ON SECTION 2(14) OF INCOME TAX ACT, 1961:

Q.1 Whether land on which agricultural operations have actually been carried out may alone be termed as Agricultural Land or the land which is capable of being used for agriculture operations but no such operation were carried out at the time of transfer or two years or more prior to such transfer can also be termed as Agricultural Land?

Ans. It is not requirement of Section 2(14)(iii) that there should be agricultural operations undertaken on the land at the time of transfer or immediately prior to transfer. But provisions of Section 10(37) & 54B requires that land being used in agricultural operations for a period of two years prior to date of transfer of land. This Section is applicable in case of Compulsory Acquisition of Agricultural Land by Government.

CONDITIONS FOR AVAILING EXEMPTION UNDER SECTION 10(37) the exemption under section 10(37) is available only on account of compulsory acquisition of urban agricultural land. However, all the following conditions are mandatorily required to be satisfied, in order to claim an exemption under section 10(37) of the Income Tax Act–

An exemption under section 10(37) is available only to an individual or a Hindu Undivided Family.

The exemption is available towards capital gain arisen on the transfer of agricultural land.

The said agricultural land should be situated within the area mentioned below-

* The agricultural land should be situated within the jurisdiction of a municipality; municipal corporation; notified area committee or town area committee or town committee having a population of more than 10,000; or

*The agricultural land should be situated within the following distance, measured aerially-

The said agricultural land should have been used, for a period of two years immediately before the date of transfer, for the agricultural purpose by- An individual or his parent; or A Hindu Undivided Family.

The transfer of capital gain is on account compulsory acquisition under any law or the transfer consideration for which is determined / approved by the Central Government or the Reserve Bank of India.

The consideration or compensation from the transfer should have been received on or after 1st April 2004. In case all the above conditions are fulfilled, the capital gain arising on compulsory acquisition of an urban agricultural land would be exempted under section 10(37) of the Income Tax Act. Amount of exemption available under section 10(37) If all the above-mentioned conditions are satisfied, entire capital gain arising on transfer of urban agricultural land is exempted under section 10(37). There is no maximum limit prescribed under the law.

Q.2 Whether in a situation when land has been classified as an Agricultural Land is the revenue records but no agricultural operation were carried out on such land for a long period , can such land be treated as Agricultural Land?

Ans. i) Shiv Shankar Lal Vs. CIT [1974] 94 ITR 433-Delhi High Court:

Held that where a land has been put to agricultural use for a long period and the agricultural operations were temporarily suspended, the land does not cease to be an agricultural land.

ii) Ranchhodbhai Bhaijibhai Patel Vs. CIT [1971] 81ITR 446(GUJ)-

Held that if the agricultural use of land has ceased but it is apparent that the land is meant for to be used for agricultural purposes, such land would still continue to an agricultural land.

iii) CWT Vs. Officer-in-Charge (Court of Wards)[1976] 105 ITR 133(SC)-

In this case the land was never been used for agricultural purposes, in the sense that it had never ploughed or tilled. However the land was capable of being used for agriculture and the land revenue was being assessed and paid in respect of that land. The Apex Court held that for a land to be agricultural, what is really required to be shown in the connection with an agricultural purpose and user and not mere possibility of user of land, by some possible future owner or processor, for an agricultural purpose. If there is neither anything in its condition, nor anything in evidence to indicate the intention of its owner or possessor, so as to connect it with an agricultural purpose, the land cannot be termed as an “Agricultural Land”.

iv) State of UP Vs. Nand Kumar [Agrawal AIR 1998] SC 473, 476-

Held that simply because the land is entered in the revenue record would not mean that it is being used mainly for the agricultural purpose.

Q.3 Whether land in revenue records shown as an agricultural land but not agricultural activities were held for a long period of time ,will be considered as an agricultural land?

Ans. There are two views on this matter;

i) On one hand, it can be argued that if land is appearing as rural agricultural land in revenue records, such land is capable of being used for agricultural purposes but for some or other reason, agricultural operations could not be carried on such land. Therefore such land would be regarded as Rural Agricultural Land and Capital Gain arising on transfer should be exempt.

ii) On the other hand, it can be argued that any land on which agricultural operations are not carried cannot be treated as agricultural land merely for reason that such land is appearing as agricultural land in the revenue records. It is generally presumed that if a land is capable of being used for agricultural operations, such operations would be carried on such land. In case agricultural operations are not being carried on such land for fairly long period of time, it may lead to the presumption that such land is not in the nature of agricultural land.

Q.4 Land originally used for agricultural purpose, later unfit for cultivation but still registered as “Agricultural Land” in the revenue records.

Ans. In this case we have to check whether:

i) Land is unfit for temporary period, or

ii) It is unfit for agricultural operations for permanent period.

In case the nature is of temporary, it would nonetheless be treated as an agricultural land. However in case such nature of land has become permanent and in future such land is not capable for being used for agricultural purposes at all, then such land cannot be treated as agricultural land irrespective of the fact that such land is registered as agricultural land in the Revenue Record.

Q.5 Land registered as Urban Land on which agricultural activity carried out.

Ans. Any land which is registered as Urban Land on which agricultural operations are carried out can at best be considered as Urban Agricultural Land, which always be a Capital Assets, for computation of Capital Gain Tax on transfer of such Urban Land. CIT Vs. Gemini Pictures Circuit (P) Ltd. [1996] 220 ITR 43(SC) – it was held that land situated within municipality limits, registered as Urban Land, bearing municipal door number and subject to Urban Land Tax, sold on yardage basis surrounded on all sides by industrial and commercial buildings on which assessee itself constructed two buildings after its purchase, part of such land lying vacant cannot be agricultural land for the mere reason that it was subjected to agricultural operation and hence its sale gave rise to capital gain.

Q.6 Whether it is necessary to show agricultural income/loss in the income tax return to claim the land as agricultural land?

Ans. It is not necessary to declare income from agriculture in the income tax return of the assessee. CIT vs. Smt. Debie Alemao [2011] 331 ITR 59(BOM) – it was held that land which was shown as agricultural land in revenue records and never sought to be used for agricultural purposes by the assessee till it was sold has to be treated as agricultural land, even though no agricultural income was shown by the assessee from this land and, therefore, no Capital Gain was taxable on sale of said land.

Q.7 Land sold after plotting but of agricultural nature.

Ans. CWT Vs. Narandas Motilal [1971]80 ITR 39(Guj)-

The division bench pointed out that throughout the relevant period the lands had been so situated that they could not have put to any other use except for agriculture. It was further in evidence that neither the assessee nor the person to whom the assessee had sold different plots of land had, at any time, made any attempt to put the land to non-agriculture use. There was absolutely no evidence on the record going to show that even the purchasers had made any attempt to carry on any non-agricultural activities on any of those plots of land.

On the basis of above facts the Division Bench held that the fact that the lands were plotted out and sold on yardage basis would not be sufficient for changing the nature /character and presumption about the agricultural character of land.

Q.8 Whether future use of agricultural land by the buyer is of relevance to determine the character of land at the time of transfer?

Ans. The use of land at the time of transfer is relevant to determine the character of land. The future use of an agricultural land by the buyer would not be relevant. The buyer of land may be a real estate developer, buying land for development in future does not change the basis characteristic of land at the time of transfer. DLF United Ltd. vs. CIT [1986] 161 ITR 714(Delhi) – the assessee had acquired agricultural land with object of developing it and selling it as plots for construction of houses but before the

assessee could commence any development activity, the land was compulsory acquired by the Government. If was held that the land was of agricultural nature.

Q.9 Whether acquisition of agricultural land by real estate developer entities per se would alter the character pf such land as non- agricultural land?

Ans. Real Estate Developers generally purchase agricultural land and keep them as Stock-In Trade for development of the same land in future. The land may be agricultural or non-agricultural. The nature of land will be change through due process of loss. It is the intention at the time of acquisition of subject land which would be material factor to determine the character of land.

Q.10 Agricultural land falling within territories of two municipalities.

Ans. It may be possible that an agricultural falls under jurisdiction of two municipalities or one in village and some part of it in a notified area. In this case any agricultural land complying with provisions of Section 2(14)(iii) of IT Act, 1961 will be treated as non- agricultural land and hence whole part of land even though some part of its falls in a village or rural area will be treated as non- agricultural land.

Dy. CIT Vs. Capital Local Area Bank Ltd. [2009] 29 SOT 394 (Amritsar) – it was held that from the local limits of Phagwara in Municipality for purpose of Section 2(14)(iii)(b) , the agricultural land situated in village in Phagwara beyond 2 Kms from the local limit of Phagwara Municipality cannot be treated as a Capital Asset within the meaning of Section 2(14) simply because it is situated within 8 Kms from the local limits of Jalandhar Municipality. The above decision of Tribunal has been reversed by the High Court.

Q.11 Method of measurement of distance.

Ans. The distance should be measured aerially from the periphery limits of the municipality, earlier it was silent on the issue and therefore there used to be dispute as to how the distance is to be measured.

CIT Vs. Satinder Pal Singh [IT Appeal No. 646 & 647 of 2009] – it was held that the distance of the agricultural land belonging to the assessee within the meaning of Section 2(14)(iii)(b) has to be measured in terms of the approach by road and not by a straight-line distance on horizontal plane or as per Crow’s flight.

Q.12 Agricultural Land Held As Business Asset:

Ans. 1. DLF United Ltd. Vs. CIT [1982] 29 CTR (Delhi)– it was held that agricultural land purchased by the assessee for its colonisation business acquired by the Government before taking any step for colonisation , the nature of land does not change and hence capital gain will not be charged on such transfer.

DLF United Ltd. Vs. CIT [1986] 161 ITR 714 (Delhi) – it was held that compensation for acquisition of agricultural land which was purchased by the assessee for conversion into building plots. The acquisition of such plot by Government before conversion, any compensation received by the assessee on such acquisition is not an agricultural income within the meaning of Section 2(1A) of the Act, 1961.

IN CASE OF REAL ESTATE DEVELOPERS:

In case of Real Estate Developers under taking the activities of purchase and sale of rural agricultural land which is treated as business activity. A question may be raised that since sale and purchase of agricultural land by Real Estate Developer is a business activity, then any gain from such activity should be treated as business income.

1. As per general scheme of taxation any income arising from the business activity is liable to be taxed as business income. However in the case of business activity in purchase and sale of rural agricultural land, income arising from such activity may be treated as exempt income if revenue from sale proceeds of such land will falls within the scope of Section 2(1A)(a) of IT Act, 1961.

Section 2(1A) in the Income- Tax Act, 1961: “Agricultural income” means-

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

2. Gains arising from the sale of agricultural land would be in nature of agricultural income.

3. Agricultural income is exempt under provisions of Section 10 and hence not taxable.

4. In case of Corporate Entity such agricultural income is credited in to P/L Account and it a part of the profit of the company.

5. For purpose of calculation of MAT, the gain credited in the P/L account in sale of agricultural land will be excluded.

6. The Government with retrospective amendment through Finance Act, 1989 with effect from 01/04/1970 inserted an Explanation to Section 2(1A) as follows;

Explanation- for the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in Section 2(14)(iii)(a) or (b).

2. The effect of above amendment is that revenue from sale of urban agricultural land would no longer constitute agricultural income falling within the scope of Section 2(1A)(a) . However revenue derived from sale of rural agricultural land is still not covered by the above amendment and therefore the ratio of the decision of Bombay High Court still holds good qua for rural land.

3. Therefor it can be argued that profit arising on transfer of rural agricultural land even when transaction of purchase and sale of rural agricultural land is treated as business activity, shall be in nature of agricultural income and therefore exempt u/s. 10(1).

4. Agricultural Income [Section 10(1)]

As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax.

Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means:

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

2. Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.

3. Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).

4. Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Conclusion: Section 2(14) plays a crucial role in defining capital assets, particularly in the context of agricultural land. Understanding its provisions, exemptions, and associated case laws is essential for individuals, businesses, and real estate developers to navigate the complexities of taxation related to land transactions. Always consult with tax professionals for personalized advice based on your specific circumstances.