How Black Money Conversion via Agricultural Land Was Blocked | Section 56(2)(x) Explained

Learn how black money was converted into white through rural agricultural land and how a 2025 ITAT ruling closed this loophole under Section 56(2)(x). Includes examples and practical impact.

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❓ What Was the Farmland Black Money Loophole?

For decades, many individuals used rural agricultural land purchases in India as a way to convert black money into white. The scheme relied on:

• Purchasing rural agricultural land, which is exempt from capital gains tax.
• Declaring a low sale deed value.
• Paying the rest in unaccounted cash.
• Reselling the land later at full market value via clean bank transfer.

🧮 Since rural agri-land isn’t classified as a capital asset, no capital gains tax was applicable. The result? Black money became “clean,” tax-free income.

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🔍 Real-Life Example of the Farmland Loophole

👤 Ramesh had ₹5 crore in unaccounted cash.

• He bought agri-land worth ₹7 crore, officially declared ₹2 crore, paid ₹5 crore in cash.
• Years later, he sold the land for ₹7 crore via bank transfer.
• Since rural land is exempt from capital gains tax, he paid zero tax.

🧾 End Result: ₹5 crore of black money successfully laundered.

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⚖️ The 2025 ITAT Ruling That Shut the Door

In May 2025, the Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) ruled:

If a buyer pays less than the market value for any land (even rural agricultural land), the difference between the market price and declared price is taxable under Section 56(2)(x) as “Income from Other Sources.”

🔴 This means: even if the land sale is exempt, the purchase is now taxable if it appears undervalued.

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📌 Practical Impact of the Ruling

• Before: Buy cheap “on paper,” pay rest in cash, sell at full value later = no tax.
• Now: If the declared purchase price is less than fair market value, the difference is taxed as income.

🚨 New Example:

👩‍💼 Seema buys land:

• Declared value: ₹2 crore
• Market value: ₹6 crore
  ➡️ Taxable income = ₹4 crore under Section 56(2)(x), even if the land isn’t resold.

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💼 What Is “Income from Other Sources”?

It’s a residual head under the Income Tax Act used to tax suspicious or undeclared income, including:

• Gifts
• Undervalued property transactions
• Certain dividends or winnings

Now, undervalued land purchases are taxed under this head.

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🧠 Key Takeaways

• Rural agricultural land sales remain tax-free under capital gains provisions.
• But undervalued land purchases are now taxable to the buyer.
• The government has plugged a major black money loophole.
• Section 56(2)(x) acts as a watchdog for property transactions below market value.

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🏛️ What Happens If This Ruling Holds in Higher Courts?

• The farm flip scam collapses.
• Black money conversion through land becomes highly risky.
• Tax revenue increases, and cleaner land transactions will emerge.