2014 (7) TMI 133 - AT - Income Tax

Levy of capital gains Cost of acquisition - Sale of land - agricultural land or Non-agricultural land Held that - Assessee has sold agricultural land which is away from the municipal limits on which there is no doubt and further fact that assessee s land was acquired by the State Government as agricultural land and based on the pahani patrikas and the report of the MRO as well as Horticulture Officer evidencing that these survey numbers are having agricultural operations - evidence indicates that assessee is indeed cultivating the land and the land in question is agricultural land - Sale of agricultural land does not result in capital gains tax as agricultural land is not a capital asset under the definition of capital asset in the Income Tax Act - the AO did not give any opportunity while inspecting the land nor he has given any opportunity to examine the MRO certificates obtained by him - assessee should be given one more opportunity to support his contentions - Assessee is also willing to take the A.O. to the land to show that the land in question is still agricultural land - physical verification of the land will clinch the issue without any doubt, so that not only on legal principles but also factually also assessee s contentions can be proved or disproved thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Issues Involved:
1. Determination of whether the land sold by the assessee is agricultural land.
2. Applicability of capital gains tax on the sale of land.
3. Validity of the agreement of sale and possession transfer.
4. Calculation of the cost of acquisition for capital gains computation.
5. Tax treatment of compensation received from the State Government for land acquisition.

Issue-wise Detailed Analysis:

1. Determination of Whether the Land Sold by the Assessee is Agricultural Land:
The primary contention of the assessee was that the land sold was agricultural, thus exempt from capital gains tax. The assessee provided various evidences like electricity bills, returns admitting agricultural income, and pahani patrikas to support this claim. The Assessing Officer (A.O.) disputed this, citing findings such as barren land classification, lack of agricultural income in certain years, and the physical state of the land being rocky and unsuitable for cultivation. The A.O. also noted that other family members had admitted capital gains for similar land. However, the Tribunal found several errors in the A.O.'s findings, such as the incorrect assertion that the agreement of sale did not mention the land as agricultural. The Tribunal noted that the land was indeed classified as agricultural in the agreement and other official documents. Therefore, the Tribunal directed a physical verification of the land to conclusively determine its agricultural status.

2. Applicability of Capital Gains Tax on the Sale of Land:
The A.O. treated the land as non-agricultural and subjected it to capital gains tax. The assessee argued that no transfer had occurred since possession was not handed over due to restrictions under G.O.Ms.No.111 and pending land acquisition notifications. The Tribunal found that the A.O.'s conclusions were biased and based on incorrect presumptions. It emphasized that if the land is proven to be agricultural, capital gains tax would not apply as agricultural land is not a capital asset under the Income Tax Act. The Tribunal remanded the matter to the A.O. for fresh examination, including a physical inspection of the land.

3. Validity of the Agreement of Sale and Possession Transfer:
The A.O. argued that the agreement of sale constituted a transfer under Section 2(47)(ii) of the Income Tax Act, as the assessee had extinguished his rights. The Tribunal, however, noted that possession was not handed over due to regulatory restrictions and pending land acquisition. The Tribunal stated that the issue of possession transfer would become academic if the land is confirmed as agricultural. It directed the A.O. to reassess this aspect after determining the land's status.

4. Calculation of the Cost of Acquisition for Capital Gains Computation:
The assessee contested the A.O.'s determination of a low cost of acquisition. The Tribunal directed the A.O. to reconsider the cost of acquisition if the land is found to be non-agricultural and capital gains tax is applicable. The A.O. was instructed to provide the assessee with an opportunity to present evidence and arguments regarding the cost of acquisition.

5. Tax Treatment of Compensation Received from the State Government for Land Acquisition:
For A.Y. 2008-09, the A.O. treated compensation received for land acquisition as income from other sources. The Tribunal found that the land was acquired as agricultural land, and compensation was paid accordingly. Therefore, it directed the A.O. to delete the addition made under income from other sources, as agricultural land compensation should not be taxed as capital gains.

Conclusion:
The Tribunal found significant procedural and factual errors in the A.O.'s assessment. It remanded the case for a fresh examination, including a physical inspection of the land to determine its agricultural status. The Tribunal directed the A.O. to reassess the applicability of capital gains tax and the cost of acquisition based on the land's status. It also ruled that compensation for agricultural land acquisition should not be treated as income from other sources. The Tribunal's decision emphasized the need for a fair and unbiased reassessment of the facts.

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