AMENDMENT IN THE DEFINITION OF CAPITAL ASSET - W.e.f. AY 2014-15

AMENDMENT IN THE DEFINITION OF CAPITAL ASSET

- W.e.f. AY 2014-15

By K P C Rao, LLB, FCMA, FCS.,

CMA (USA)., FIPA (Australia)

Practicing Company Secretary

kpcrao.india@gmail.com

The Finance Act 2013 has amended the Income Tax  Act,  1961  by introducing  new provisions  and amending  certain  existing provisions  which  may result  in  far  reaching consequences on the real estate sector in India, not only from a taxation perspective but may also have an impact on the sector as whole. The real estate sector has always been under the scanner of Central & State Governments. New provisions under Income tax, Wealth tax, Service tax, Value added tax & revised guidelines for registration are examples of attempts on the part of the Government to raise more & more revenue from real estate transactions.

Before the Amendment of the Finance Act, 2013

Definition

The provisions contained in clause (14) of section 2 of the Income-tax Act, 1961, before amendment by the Finance Act, 2013 define the term ‘capital asset’ as property of any kind held by an assessee, whether or not connected with his business or profession.

Exclusions

Certain categories of properties including agricultural land have been excluded from this definition. Sub-clause (iii) of clause (14) of section 2 provides that:

(a)    agricultural land situated in any area within the jurisdiction of a Municipality or Cantonment Board having population of not less than ten thousand according to last preceding census, or

(b)   agricultural land situated in any area within such distance not exceeding eight kilometers from the local limits of any Municipality or Cantonment Board as notified by the Central Government having regard to the extent and scope of urbanization and other relevant factors, forms part of capital asset.

How to measure distance was not given in the definition. Therefore it was taken by road. The same view was followed in following judicial pronouncement.

(1)  CIT Vs. Lal Singh (2010) 195 Taxman 420 (P&H)

(2)  CIT Vs. Satinderpal Singh (2010) 188 Taxman 54 (P&H)

(3)  Laukik Developers Vs. Dy. CIT (2007) 105 ITD 657 (Mum.)

After the Amendment of the Finance Act, 2013

What are the Changes in the Amendment?

Item (b) of sub-clause (iii) of clause (14) of section 2 has been amended so as to provide that the land situated in any area within the distance, measured aerially (shortest aerial distance),

(i)             not being more than two kilometers, 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

(ii)          not being more than six kilometers, 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

(iii)        not being more than eight kilometers, 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, shall form part of capital asset.

The expression ‘population’ has also been defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

The ‘distance’ is to be measured on straight line aerially as crow flies. The shortest aerial distance has to be considered.

Table showing the classification of land for Income & Wealth Tax

Population of Municipality/Cantonment Board	Distance from local limits of Municipal / Cantonment Board
	[Aerial Distance]
	Urban Land	Rural Land
>10,000 but < 1lakh	Within 2 kms	Beyond 2 kms
> 1 lakh but < 10 lakhs	Within 6 kms	Beyond 6 kms
>10 lakhs	Within 8 kms	Beyond 8 kms

Consequential Amendments

Similar amendments are also carried out in clause (IA) of section 2 of the Income-tax Act, 1961 relating to the definition of ‘agricultural income’ and in respect of the definition of ‘urban land’ in the Wealth-tax Act, 1957.

Applicability

These amendments take effect from 1st April, 2014 and accordingly will apply in relation to Assessment year 2014-15 and subsequent assessment years.  The above amendment resolves the controversy discussed in the Decision of CIT vs. Satinder Pal Singh, 188 Taxman 54 (P & H), where it was held that  the distance is required to be measured by approach road and not by a  straight line distance on horizontal plane. Now it is specifically provided that distance has to be measured aerially.

 Effect of the Amendment

(a)  Distance from jurisdiction or municipality or cantonment board within which agricultural land is to be considered as urban land has been changed depending on population of municipality or cantonment board.

(b)   Distance to be measured straight line aerially as crow flies and not by road method which was used by courts in various decisions.

(c)  More land will be covered under the urban land because aerially distance covered more area.

(d)   Earlier only notified area were covered under the distance criteria but from now any area will be covered under the distance criteria.

(e)  Also, income derived from any building meeting certain specified criteria and situated in the immediate vicinity of the agricultural land is presently exempt as agricultural income. Section 2(14) has been similarly amended and rationalized to provide that income from such Building falling outside  the area as specified above will qualify as Agricultural income, while if the  building is situated within the limits as specified above then the income will  not enjoy the exemption as Agricultural income

(f)    Impact on Wealth Tax: The term agricultural land is not defined in Wealth tax Act. However, it is defined in Section 2(14) of the Income tax Act. The definition for non-urban land and agricultural land is similar. Hence the above analysis will also be applicable for the purpose of determination of net wealth as per the wealth tax act. Thus a person owning land will need to re-assess on whether the land owned by him will qualify for exemption from wealth tax or not.

(g)  This new definition of ‘measuring distance’ will now supersede the following judicial decisions:

(1)  CIT Vs. Lal Singh (2010) 195 Taxman 420 (P&H)

(2)  CIT Vs. Satinderpal Singh (2010) 188 Taxman 54 (P&H)

(3)  Laukik Developers Vs. Dy. CIT (2007) 105 ITD 657 (Mum.)


[Published in 'Circuit', monthly journal of ICAI, Hyderabad during  February, 2014]