2022 (2) TMI 1246 - AT - Income Tax

Assessment u/s 153C - Nature of land sold - Long term capital gain on account of transfer of agriculture land - converted lands were transferred by the assessee to the company by way of sale deed - assessee contended that the land sold was not taxable as the same not being a capital asset within the meaning of section 2(14) - AO was of the view that the lands were converted in the name of the assessee on 21.06.2005 the transferee being company could not own agricultural lands as per section 80 of the Karnataka Land Reforms Act 1961 - HELD THAT - As per the provisions of section 153C of the Act incriminating material which was seized had to pertain to the assessment year under consideration. It is an undisputed fact that documents which are seized referred to in para 10 of this order do not establish any co-relation with the additions made in these assessment years. This requirement u/s. 153C of the Act was very essential for assessment u/s. provisions of section 153C which is a jurisdictional fact as held by the Supreme Court in Sinhgad Technical Edn. Society (supra). After taking note of the material as recorded in para 10 of this order there was no seized incriminating seized material so as to frame assessment for these two assessment years u/s. 153C. DR could not point out to the contrary. Being so the judgment of the Supreme Court in the case Sinhgad Technical Edn. Society 2017 (8) TMI 1298 - SUPREME COURT is squarely applicable to the facts of the present case. Since the assessment framed u/s. 153C of the Act to be based on material found during the course of search which relate to or belong to the assessee and since we have held that there is no seized material for addition made by the AO we do not wish to address the arguments made by the ld. AR for the assessee that the condition precedent for initiating the proceedings u/s. 153C of the Act having not been satisfied in the present case therefore the assessment is liable to be annulled. Accordingly we hold that the addition made by the AO is not based on seized material found in the course of search and therefore the addition cannot be sustained. Taxability of capital gain arising out of transfer of land - main reason for treating the land as non-agricultural is that the land was converted for usage of non-agricultural purposes - As brought on record by the assessee that the land revenue was paid as applicable to agricultural land only. The land got converted by the assessee for non-agricultural purposes and conversion permission was granted on the condition that the land should be used for non-agricultural purposes within two years otherwise original character of the land i.e. agricultural in nature would be restored. The assessee has not used the land for non-agricultural purposes even after conversion of the land for non-agricultural purposes. In similar circumstances in the case of Shri M.R. Anandaram (HUF) 2016 (6) TMI 175 - ITAT BANGALORE the Tribunal observed that though the said land was converted for non-agricultural purposes but cultivation of land continued till the date of sale of the land. Thus the land should have been treated as agricultural land and exempt from capital gain in view of section 2(14) of the Act. The Tribunal also observed that even after conversion the assessee was carrying on agricultural operations and conversion was done only to facilitate the sale of subject property to a corporate entity/non-agriculturist. These observations of the Tribunal have been extracted in the earlier part of this order. In the present case the land sold by the assessee was classified as agricultural land in the revenue records. The RTC filed by the assessee before us shows that the assessee raised crops of Ragi and Paddy in certain portion and other portion was temporarily kept idle on account of certain difficulties. Being so the status of the land therefore remained as agricultural land since mandatory condition stipulated in the conversion order is not complied with and on this count the CIT(Appeals) was not correct in holding that the land which is subject matter of sale is not agricultural land on the reason that the land was converted for non-agricultural purposes. In view of this the sale of the impugned land is to be treated as exempt from capital gain in terms of section 2(14) r.w. sections 45 48 of the Act. Accordingly this ground of the assessee is allowed.

Summary

Issues Involved:
1. Validity of assessment under Section 153C of the Income Tax Act.
2. Taxability of capital gains on the sale of agricultural land.

Detailed Analysis:

1. Validity of Assessment under Section 153C:
The primary issue is whether the assessment framed under Section 153C read with Section 143(3) of the Income Tax Act is valid. The assessee argued that the assessment under Section 153C is invalid as it was not based on any incriminating material seized during the search. The assessee cited several rulings, including CIT v. IBC Knowledge Park, CIT v. Kabul Chawla, and CIT v. Sinhgad Technical Education Society, to support the claim that an assessment under Section 153C requires incriminating material.

The Tribunal noted that the search took place on 8.12.2011 in the case of SPR Developers Pvt. Ltd., and documents seized did not relate to the assessee. The Tribunal agreed with the assessee, referencing the Supreme Court's ruling in Sinhgad Technical Education Society, which emphasized that incriminating material must pertain to the assessment years in question. The Tribunal concluded that the assessment under Section 153C was invalid as it was not based on any incriminating material and annulled the assessments for AYs 2008-09 and 2009-10.

2. Taxability of Capital Gains on the Sale of Agricultural Land:
The second issue pertains to whether the land sold by the assessee qualifies as agricultural land and thus is exempt from capital gains tax under Section 2(14)(iii) of the Income Tax Act. The assessee contended that the land, though converted for non-agricultural purposes, continued to be used for agricultural activities until the date of sale. The assessee provided RTC copies showing agricultural activities and argued that the conversion order stipulated that if the land was not used for the intended non-agricultural purpose within two years, it would revert to agricultural status.

The AO, however, treated the land as non-agricultural, citing its conversion and sale to non-agriculturists, and taxed the proceeds as long-term capital gains. The Tribunal examined the evidence, including RTC records and the conditions of the conversion order. It found that the land continued to be used for agricultural purposes and that the conversion was merely to facilitate the sale. The Tribunal referenced several rulings, including CIT v. Ashok Kumar Rathi and Tulla Veerender v. Addl. CIT, which supported the view that land recorded as agricultural in revenue records and used for agricultural activities qualifies as agricultural land.

The Tribunal concluded that the land should be treated as agricultural land and exempt from capital gains tax. It emphasized that the land's conversion did not change its agricultural nature, especially since agricultural activities continued, and the mandatory conditions for conversion were not met.

Conclusion:
The Tribunal annulled the assessments under Section 153C for AYs 2008-09 and 2009-10 due to the lack of incriminating material. It also held that the land sold by the assessee was agricultural land, exempting it from capital gains tax. The appeals were partly allowed in favor of the assessee.