2010 (9) TMI 1133 - AT - Income Tax

exemption u/s 054F - sale of agricultural land - capital asset u/s 002(14) - land not situated within the municipal limits of 8 kms notified by the central government vide notification no.9447 - HELD THAT - In the instant case, the impugned land is admittedly situates within area of a local limit of the GVMC for which no notification as specified in clause (b) is required to be issued by the central government. We have also examined the contention of the assessees that the GVMC was notified by the local laws and local laws cannot supersede the central laws. But we do not find any force in this argument because the municipality or the cantonment board are subject to local laws and within a state subject and are created by a notification by the state government. Central government has no jurisdiction to create a municipality, cantonment board in any state of the country. Central government is concerned with the central act. Once the municipality of the cantonment board is created by a notification by the state government as per local laws, the central act will apply. Therefore once the impugned land is situated within the jurisdiction of the local limit of the GVMC, the impugned land cease to be the agricultural land and on its sale capital gain is to be computed. We therefore, find no infirmity in the order of the CIT(A) who has rightly computed the capital gain on sale of the impugned agricultural land. Regard to cost of acquisition - HELD THAT - Generally, the fair market rate of the lands are much more than the rates notified by the registration department for the purpose of registration of a document. These rates are not regularly revised. We have also examined the basis for the adoption of the rate at ₹ 70 per sq.yd. by the assessees and we find that assessee has relied upon the sale deed executed on 25.3.1987 in which the land was sold at ₹ 100 per sq.yd., whereas the rates are to be determined as on 1.4.1981. Therefore, the basis taken by the assessees is not correct. Now it is a question of pure estimate and we therefore estimate the rate of land at ₹ 60 per sq.yd. keeping in view the rates adopted by the assessee and the revenue. Accordingly, we set aside the order of the CIT(A) and restore the matter to the file of the A.O. with a direction to recompute the capital gain after having adopted the cost of acquisition of the land at ₹ 60 per sq.yd.

Summary

Issues:
1. Classification of subject agricultural land as a capital asset.
2. Assessment of cost of land for capital gain computation.

Analysis:

Issue 1: Classification of subject agricultural land as a capital asset
The primary issue in this case revolves around whether the sale of the agricultural land by the assessee should be considered a capital asset under section 2(14) of the Income Tax Act. The assessee contended that the land sold was agricultural and thus not liable for capital gains tax. However, the assessing officer argued that the land fell within the definition of a capital asset due to its location within the Greater Visakhapatnam Municipal Corporation (GVMC) limits. The assessing officer rejected the appellant's claim based on the absence of a notification by the Government of India, stating that the land was sold for non-agricultural purposes to a society running educational institutions. The assessing officer cited various case laws to support the contention that the land did not qualify as agricultural. The assessing officer also disputed the appellant's claim regarding the allocation of the sale consideration to agricultural income. The dispute further extended to the valuation of the land, with the appellant valuing it at Rs. 70 per sq.yd, while the assessing officer adopted Rs. 35 per sq.yd for cost determination.

Issue 2: Assessment of cost of land for capital gain computation
The second issue pertains to the determination of the cost of acquisition for computing the capital gain. The assessee had initially adopted the fair market value of the land as on 1.4.1987 at Rs. 70 per sq.yd, but the assessing officer used a rate of Rs. 35 per sq.yd based on information from the Registration department. The appellant argued that the fair market rate should be considered, relying on a sale deed from 1987 where the land was sold at Rs. 100 per sq.yd. The ITAT agreed with the appellant that the fair market rate should prevail over the rates used for registration purposes. After considering the arguments from both sides, the ITAT estimated the rate of land at Rs. 60 per sq.yd and directed the assessing officer to recompute the capital gain based on this valuation.

In conclusion, the ITAT partially allowed the appeal, emphasizing the importance of correctly classifying the nature of the land and using appropriate valuation methods for determining capital gains tax liabilities.