2023 (9) TMI 1619 - AT - Income Tax

Nature/Character of the land sold - whether agricultural land or not? - qualification as a capital asset in terms of section 2(14)(iii) - whether capital gain earned thereon is taxable or not in terms of the provisions of law in this regard? - HELD THAT - We hold that the Revenue authorities have wrongly held the land to be non-agricultural in nature and have totally mis-appreciated the relevant provisions of the Land Laws, i.e. Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997, in this regard. Our reasoning for the same follows. AO deems the land to be non agricultural noting the fact that the assessee had sold the land to M/s. Steel Strips Wheels Ltd. who had purchased it for bona fide industrial purposes u/s 63AA of Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997. Since the emphasis is on 63AA of GT ALL, we shall elaborate on the said provision so as to understand its implication. What transpires from a conjoint reading of the relevant provisions of Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997 and the Bombay Land Revenue Code, 1879, is that in case of agricultural lands designated by authorities for bona fide industrial purposes the requirement of seeking prior permission for land use change is done away as per the Bombay Land Revenue Code, 1879. Such agricultural lands can be transferred to non agriculturist as per section 63AA of the GT ALL Act, which Act otherwise prohibits such transfers. Thus Lands purchased u/s 63AA of Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997, is nothing but agricultural land. Applying this to the facts of the present case where in the land has been sold u/s. 63AA of the GT ALL, undoubtedly the said land is agriculture land. This fact is further evidenced by various covenants of the conveyance deed stating the character of the land sold in clear terms to be agricultural. As per the facts of the present case the purchaser of land, i.e the company, after purchase of the agricultural land from the assessee u/s 63AA of the GT ALL Act, notified the purchase of agricultural land for bonafide industrial use and was issued a certificate in this regard by the collector after verifying its user for bonafide industrial purposes. Thus, it was subsequent to purchase of land, that its use was changed to non-agriculture purpose. Therefore that the AO/DRP has erred in interpreting section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997 to mean that the land sold by the assessee had been converted into non-agriculture prior to the date of sale. At the cost of repetition, we may state that what it only implies is that the land was designated for use for non-agriculture purpose. It was only designated so, and its user for non-agriculture purpose was completed only when the non-agriculture usage was commenced and notified to the Collector, which in the present case was done by the company, which purchased the land subsequent to its purchase. The conveyance deed, all along mentions the land sold by the assessee as agricultural land. Its conversion from agricultural to non-agricultural land is certified by the Collector post-sale of the land. Land sold by the assessee, having been held to be agricultural land, and since there is no dispute vis- -vis its distance from the municipal limits, the impugned land, we hold, did not qualify as capital asset in terms of section 2(14)(iii) of the Act. The claim of the assessee to the entire capital gain earned on these piece of land amounting to Rs. 3,56,70,539/-, as not being liable to tax is, we hold, in accordance with law. The order passed by the AO, therefore, treating the land sold by the assessee, as non-agricultural and subjecting to capital gain thereonas liable to tax, is set aside. Ground of assessee is allowed.

Summary

Issues Involved:

1. Validity of the addition of Rs. 3,56,70,539/- on account of undisclosed capital gain.
2. Characterization of the land as agricultural or non-agricultural for determining its qualification as a "capital asset."

Detailed Analysis:

1. Validity of the Addition of Rs. 3,56,70,539/- on Account of Undisclosed Capital Gain:

The core issue under consideration was whether the addition of Rs. 3,56,70,539/- to the assessee's income as capital gain was justified. The Assessing Officer (AO) initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961, after discovering that the assessee sold land for Rs. 3,86,98,710/- but did not report any capital gain from the transaction. The assessee argued that the land was "rural agricultural land" and thus not a "capital asset" as per Section 2(14)(iii) of the Act, making the capital gain non-taxable. However, the AO concluded that the land was non-agricultural, as it was purchased by a company for industrial purposes under Section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997. The Dispute Resolution Panel (DRP) upheld this view, leading to the addition being confirmed in the final order.

2. Characterization of the Land as Agricultural or Non-Agricultural:

The primary contention revolved around the nature of the land sold by the assessee. The assessee maintained that the land was agricultural, as evidenced by the conveyance deed and its classification at the time of sale. The AO and DRP, however, classified the land as non-agricultural based on its intended industrial use by the purchaser and the permissions obtained under Section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997. The AO noted that the land was sold to a non-agriculturist company, which had received permission for industrial use before the sale, and that stamp duty was paid at non-agricultural rates.

The tribunal examined the provisions of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997, and the Bombay Land Revenue Code, 1879. It clarified that Section 63AA allows the sale of agricultural land for bona fide industrial purposes without changing its agricultural character until actual use is changed post-sale. The tribunal found that the land was indeed agricultural at the time of sale, as the conversion to non-agricultural use occurred only after the sale, when the purchaser notified the collector and received a certificate for industrial use.

Conclusion:

The tribunal concluded that the AO and DRP misinterpreted the relevant land laws and incorrectly classified the land as non-agricultural. It held that the land was agricultural at the time of sale and did not qualify as a "capital asset" under Section 2(14)(iii) of the Income Tax Act. Consequently, the capital gain of Rs. 3,56,70,539/- was not taxable, and the addition made by the AO was set aside. The appeal concerning the characterization of the land and the resultant capital gain was allowed in favor of the assessee. The order was pronounced on 13th September 2023, at Ahmedabad.