2025 (4) TMI 838 - AT - Income Tax

Revision u/s 263 - capital gain arising from sale of the agricultural land in question by treating the same as situated within the distance of 2 km from Tehsil and District Harda as stated by ITO Investigation Bhopal in his report - HELD THAT - CIT has proceeded on the basis of verification of distance from the Google map and observed that the aerial distance of the land in question from the municipal limits of the Harda is 1 (one) km. It is pertinent to note that after the delimitation of the Municipal limits in the year 2016 the distance has taken by the Pr. CIT at the time of issuing show cause notice on January 2024 may not have given correct facts about distance of the land from the Municipal limits as exist in the year 2013. We further note that once the assesse has produced certificate issued by the Municipal Corporation to substantiate his claim that the land in question is situated outside the limit as prescribed u/s 2(14)(iii) then while invoking provisions of section 263 the Pr. CIT ought to have brought some tangible material on record to show that the said certificate issued by Municipal Corporation has not given correct facts on this point. Merely on the basis of the distance verified from the google map in the year 2024 would not amount to bring a tangible material to show that the alleged aerial distance as shown in the year 2024 was also aerial distance from the municipal limits as exist in the year 2013. Therefore ignoring this crucial point the distance taken by Pr. CIT in the year 2024 is certainly not reflecting the actual distance from the Municipal limits in the year 2013 specifically in view of the fact that the Municipal limits were modified/extended subsequently in the year 2016. Therefore once the AO has conducted an inquiry and accepted the claim based on the documentary evidences filed by the assesse showing the distance of the land in question from the Municipal limits is more than 2 km then the Pr. CIT at the time of exercising jurisdiction u/s 263 ought to have given conclusive finding that the order passed by the AO is unsustainable either in law or facts. Direction to the AO to re-examining the issue itself shows that the Pr. CIT was not sure about the correctness of the claim or view taken by the AO. This find of the Pr. CIT clearly shows that he has set aside the matters to the record of the AO for reexamination of the issue and to make de-novo assessment which means that the commissioner was also not certain about correctness of the claim of the assesse. This course of action on the part of the commissioner is not permissible when the AO has conducted inquiry and has taken view based on the material on record and therefore the only course available with the Pr. CIT u/s 263 was to give a conclusive finding that the view taken by the AO is not sustainable under the law. In case of CIT vs. Sunbeam Auto Ltd 2009 (9) TMI 633 - DELHI HIGH COURT while dealing an issue of lack of inquiry and inadequate inquiry has AO has conducted an inquiry and was satisfied with the supporting evidences produced by the assesse in response to notice u/s 142(1) then it is not necessary for the AO to give an elaborate finding on the issue. CIT while passing revision order cannot remand the matter back to the AO for fresh adjudication simply because he himself was not sure about correctness of the claim of the assessee. Accordingly when the order passed by the AO is not erroneous for want of inquiry then it is incumbent upon the Pr. CIT to give conclusive finding that the impugned order passed by the AO is not sustainable in law. Hence impugned order of the Pr. CIT passed u/s 263 is not sustainable and the same is liable to be set aside. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the Principal Commissioner of Income Tax (Pr. CIT) was justified in invoking the provisions of section 263 of the Income Tax Act, 1961, to set aside the assessment order passed by the Assessing Officer (AO) on the grounds that it was erroneous and prejudicial to the interests of the revenue.

2. Whether the agricultural land sold by the assessee qualifies as a capital asset under section 2(14)(iii) of the Income Tax Act, 1961, and thus liable to capital gains tax.

3. Whether the AO conducted a proper inquiry and verification of the facts and documentary evidence presented by the assessee during the reassessment proceedings.

ISSUE-WISE DETAILED ANALYSIS

1. Invocation of Section 263 by Pr. CIT

- Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the Pr. CIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The legal standard requires that both conditions must be satisfied for section 263 to be invoked.

- Court's Interpretation and Reasoning: The Tribunal emphasized that for an order to be considered erroneous, it must not be in accordance with the law, and for it to be prejudicial, it must result in a loss of revenue that is not legally permissible. The Tribunal referred to precedents, including Malabar Industrial Co. Ltd. v. CIT and CIT v. Sunbeam Auto Ltd., which distinguish between lack of inquiry and inadequate inquiry.

- Key Evidence and Findings: The Tribunal found that the AO had conducted inquiries during the reassessment proceedings, including issuing a notice under section 142(1) and considering the certificate from the Municipal Corporation.

- Application of Law to Facts: The Tribunal concluded that the AO's order was not erroneous as the AO had made inquiries and accepted the assessee's claim based on documentary evidence. The Pr. CIT's reliance on Google Maps to determine the distance of the land was not sufficient to establish that the AO's order was erroneous.

- Treatment of Competing Arguments: The Tribunal considered the Pr. CIT's argument that the AO's order was non-speaking and lacked inquiry but found that the AO had indeed conducted an inquiry and the Pr. CIT did not provide conclusive evidence to the contrary.

- Conclusions: The Tribunal held that the Pr. CIT's invocation of section 263 was not justified as the AO's order was neither erroneous nor prejudicial to the interests of the revenue.

2. Classification of Agricultural Land as Capital Asset

- Relevant Legal Framework and Precedents: Section 2(14)(iii) of the Income Tax Act defines a capital asset and provides exemptions for certain agricultural lands based on their distance from municipal limits.

- Court's Interpretation and Reasoning: The Tribunal noted that the distance of the land from the municipal limits must be considered as of the date of sale, not at the time of reassessment or subsequent inquiries.

- Key Evidence and Findings: The assessee provided a certificate from the Municipal Corporation stating that the land was situated beyond 2 km from the municipal limits at the time of sale. The Pr. CIT's reliance on Google Maps was deemed insufficient to counter this evidence.

- Application of Law to Facts: The Tribunal found that the AO had accepted the certificate as evidence that the land was not a capital asset under section 2(14)(iii), and thus, the capital gains tax was not applicable.

- Treatment of Competing Arguments: The Tribunal considered the Pr. CIT's argument regarding the distance but upheld the AO's reliance on the Municipal Corporation's certificate, noting the delimitation changes in 2016.

- Conclusions: The Tribunal concluded that the land did not qualify as a capital asset at the time of sale, and the AO's acceptance of the assessee's claim was justified.

SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The direction to the AO to re-examining the issue itself shows that the Pr. CIT was not sure about the correctness of the claim or view taken by the AO."

- Core Principles Established: The Tribunal reinforced the principle that an assessment order is not erroneous if the AO has conducted an inquiry and accepted the claim based on evidence, even if the Pr. CIT disagrees with the findings.

- Final Determinations on Each Issue: The Tribunal set aside the Pr. CIT's order under section 263, upholding the AO's original assessment order as neither erroneous nor prejudicial to the interests of the revenue. The appeals of the assessee were allowed.