ITAT ruling targets use of farmland deals for laundering 'black' money

New ITAT tax interpretation could tighten scrutiny of undervalued land deals, challenging the alleged use of agricultural land transactions for turning unaccounted cash into legitimate income

A recent tax ruling by the Income Tax Appellate Tribunal (ITAT) now targets the alleged use of agricultural land transactions to launder money. Under existing provisions, if a property — such as farmland — is acquired significantly below its market value, the difference is considered taxable income under “income from other sources”. Likewise, receiving agricultural land as a gift from a non-relative triggers tax liability on its market value.

 

This ruling reinforces that even purchasing agricultural land is not exempt from such taxation norms. By applying these rules, the Ahmedabad Bench of the ITAT has challenged the practice of understating purchase prices to launder unaccounted cash, a tactic often said to be used by individuals and institutional investors, given the lenient treatment of rural land. If this interpretation holds in future cases, it could substantially curb the laundering of unaccounted wealth through undervalued farmland deals, closing a critical loophole in property-based tax evasion.

 

For example, a buyer may buy a parcel of land valued at ₹5 crore but record the transaction on sale deed at ₹3 crore, paying the remaining ₹2 crore in cash. Since the sellers in such deals are often farmers, not liable to pay income tax, the cash component remains undocumented. The land is later sold at true value (₹5 crore) through formal banking channels, effectively converting the earlier “black” money into “white”.

 

In its May 27 order, the Ahmedabad ITAT held that Section 56(2)(x) of the Income-tax Act could apply even to rural agricultural land. This provision taxes the difference between a property’s market value and the consideration paid when the gap exceeds a certain threshold. The ruling, thus, challenges a widely held belief that such transactions fall outside the scope of this provision.

‘No exclusion for rural land’

“The term ‘immovable assets’ has not been defined in Section 56(2)(x) or in any other section in the I-T Act,” the Ahmedabad tribunal mentioned. “This renders the word to be used in general parlance… Therefore, going by the general definition, ‘immovable property’ would, in our view, include any rural agricultural land, in absence of any specific exclusion in Section 56(2)(x),” it said.

 

The provision, introduced by the Finance Act, 2017, aims to curb tax avoidance through undervalued property transactions and gifts. It taxes the notional gain arising out of a deal where a buyer pays less than the fair market value for an asset, including land or buildings.

 

While rural agricultural land is exempt from capital gains tax, as it is not treated as a “capital asset”, the ITAT’s observation makes it clear that this exemption does not protect buyers at the point of purchase, where Section 56(2)(x) may apply.

 

“So the very notion is that if a recipient is buying any property for less than the market value, the difference between the market value and the consideration paid will be treated as his ‘income from other sources’. This is because the difference is essentially disposable income in the hands of the recipient. Accordingly, it will be taxed as income from other sources,” said Bisweswar Ghosh, advocate & tax management consultant, and partner at Kolkata-based Datta Ghosh & Co.

ITAT tightens grip on undervaluation

Although the case before the Ahmedabad tribunal did not involve any illicit activity, if the ruling is upheld by the state’s high court, it could tighten the legal framework around a grey area that has long allowed the whitewashing of unaccounted money in India.

 

However, Ghosh, noted that this was not the first time the provision had been invoked in such cases. “Other tribunals, including Visakhapatnam ITAT, have previously upheld the applicability of the said provision u/ s 56(2)(x) in transactions involving undervaluation,” he told Business Standard.

Rule applies to farmers and investors alike

If the Ahmedabad tribunal ruling is upheld by higher courts, both agriculturists and non-agriculturists, such as companies or urban investors, may be impacted. “The law does not differentiate by profession or background. What matters is the value discrepancy in the transaction,” Ghosh said. However, he added that each case must be assessed on its individual facts: “This isn’t a one-size-fits-all situation.”

Clarity on definition of ‘immovable property’

Ghosh also clarified a common misconception about the status of agricultural land: “Agricultural land is immovable property. It may be exempt from capital gains tax in some cases, but it is still covered under the definition of “immovable property” for the purposes of Section 56(2)(x).”