₹18 lakh tax demand quashed: How misclassification of land can trigger and cancel I-T notices

A routine land purchase can sometimes spiral into a tax nightmare — not because of wrongdoing, but because of how authorities interpret paperwork. Chartered Accountant Nitin Kaushik recently highlighted one such case that underscores how valuation mismatches and classification errors can unfairly expose genuine buyers to hefty tax demands. 

In a detailed post on X (formerly Twitter), Kaushik explained how a man who bought agricultural land for around ₹22–23 lakh received a startling income-tax notice soon after registration. The transaction itself was clean: payments were genuine, documents were in order, and there was no attempt to understate the purchase price. 

When valuation becomes a problem 

The trouble arose from how the land was valued by the stamp duty authority. While the buyer paid a price higher than the official agricultural jantri rate, authorities assessed the same land at nearly ₹40 lakh by applying urban, non-agricultural rates. The reason: the land fell within a draft town planning scheme. 

This single assumption created an on-paper gap of nearly ₹18 lakh. That difference triggered Section 56(2)(x) of the Income Tax Act, which treats the excess of stamp duty value over purchase price as “income from other sources.” In effect, the buyer was told to pay tax simply because the land was deemed undervalued — even though it wasn’t.

Planning intention vs land character 

According to Kaushik, the buyer challenged the notice on a fundamental point: the nature of the land had never changed. Government records continued to classify it as agricultural. There was no conversion to non-agricultural use, no development permission, and no alteration in land use. 

The higher stamp valuation, he noted, was based not on reality but on an administrative practice — applying city rates to land merely because it lies within a planning boundary. As Kaushik put it, planning intention does not equal land character, and that distinction carries significant legal weight. 

Adding strength to the buyer’s argument was the fact that the purchase price already exceeded the official agricultural circle rate, ruling out any allegation of undervaluation. 

Facts, not labels 

When the dispute reached the Income Tax Appellate Tribunal (ITAT) in Ahmedabad, the tribunal examined the substance of the case rather than the labels applied by authorities. It looked at revenue records, the nature of the land, applicable rates, and the actual transaction value. 

The tribunal concluded that merely applying urban rates due to a future planning proposal does not convert agricultural land into non-agricultural land for income-tax purposes. As a result, the ₹18 lakh addition was deleted, the tax demand was cancelled, and the department’s assumption was rejected. 

Why this ruling matters 

Kaushik emphasised that this case has wide implications for land buyers. Many genuine purchasers receive tax notices not because of tax evasion, but due to valuation mismatches created by draft planning schemes, zoning maps, or administrative shortcuts. 

The takeaway, he noted, is simple but crucial: not every difference between stamp value and purchase price is taxable income, and not every official valuation reflects market reality. Sometimes, understanding how the law interprets facts can be just as important as paying taxes honestly.