2014 (4) TMI 103 - AT - Income Tax

Capital asset u/s 2(14) agriculture land or not - Whether, AO erred in considering agricultural land of assessee as capital asset u/s 2(14) - Held that - Piece of agricultural land sold by assessee is situated within 8 kms of Municipal limits but the population of that municipality is not more than 10,000 - For purposes of section 2(14)(iii) of Act, a specific gazette notification dated 6.1.1994 has been issued by Central Government As per notification, if any agricultural land which is situated within 8 kms of a notified municipality etc, it will be treated as a capital asset, subject to condition that population of that Municipality - If case piece of agricultural land falls within 8 km of stated municipality, but population of that municipality is not more than 10,000 , then in that case agricultural land sold cannot be treated a as capital asset - Therefore, in given facts and circumstances of this case, it would be apt to restore this issue to file of A.O. with direction that he must decide this issue in specific light of our above stated observations - Matter remanded back - Decided in favor of Assessee.

Summary

Issues Involved:
1. Whether the agricultural land sold by the assessee qualifies as a 'capital asset' under Section 2(14) of the Income Tax Act, 1961.
2. Whether the income from the sale of agricultural land is exempt from capital gains tax under Section 45 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Qualification of Agricultural Land as a 'Capital Asset'
The primary issue revolves around whether the agricultural land sold by the assessee qualifies as a 'capital asset' under Section 2(14) of the Income Tax Act, 1961. The assessee claimed that the income from the sale of agricultural land amounting to Rs. 1,07,57,716/- is exempt from taxation, asserting that the land is not a 'capital asset' as per Section 2(14)(iii)(a). The land was used for agricultural activities for over two years and is governed by the Panchayat Act. However, the AO found that the land is situated within 8 kms of the Municipal Limits of Udaipur City, which, according to Section 2(14)(iii)(b), qualifies it as a 'capital asset'. The AO and CIT(A) both treated the land as a 'capital asset' and included the sale proceeds in the total income of the assessee.

Issue 2: Exemption from Capital Gains Tax
The assessee argued that the agricultural land should not be treated as a 'capital asset' under Section 2(14)(iii)(a) and thus should be exempt from capital gains tax under Section 45. The AO, however, referred to the Rajasthan High Court decision in Mangla Industries Vs CIT, which held that land within 8 kms of municipal limits is liable to capital gains tax irrespective of its use. The AO concluded that the land falls under Section 2(14)(iii)(b) and added the sale proceeds to the assessee's total income. The CIT(A) upheld this view.

Legal Position and Analysis
The judgment delves into the legal framework governing 'capital gains' under Chapter IV of the Income Tax Act, 1961, particularly focusing on Sections 45 and 48, which define and prescribe the mode of computation of 'capital gains'. Section 2(14)(iii) specifically excludes certain agricultural lands from being treated as 'capital assets' if they are situated beyond 8 kms from a municipality with a population of more than 10,000.

The Tribunal noted that the land in question is within 8 kms of Udaipur's municipal limits, making it a 'capital asset' under Section 2(14)(iii)(b). However, it was observed that the AO and the assessee had not correctly considered the relevant municipality's population, which should be more than 10,000 as per the Act. The Tribunal emphasized the need to follow the specific gazette notification dated 6.1.1994 by the Central Government, which specifies the municipality for the purpose of Section 2(14)(iii).

Conclusion and Directions
The Tribunal concluded that the issue requires further examination regarding the relevant municipality's population and applicability of the gazette notification. Therefore, the matter was restored to the AO for a fresh decision in light of the Tribunal's observations. The AO is directed to give the assessee a clear opportunity of being heard.

Result:
The appeal of the assessee is allowed for statistical purposes, and the issue is remanded to the AO for reconsideration.

Order Pronouncement:
Order pronounced in the open court on 27th September, 2013.