Section 2(14) - recent circular - Capital gains – distance of rural agricultural land from municipal area for exemption- un-necessary litigation by revenue.

[DEV KUMAR KOTHARI]

Relevant links and references:

Section 2(14) (iii) of the Income-tax Act, 1961.

Section 11 of the General Clauses Act

The Circular No.3/2014, dt.24.1.2014

CIRCULAR NO. 17/2015 dt. 06.10.2015

The Commissioner of Income Tax Versus Nitish Rameshchandra Chordia, Smt. Maltibai R Kadu & Twelve others 2015 (4) TMI 227 -Other Citation: [2015] 374 ITR 531 (Bom. Nagpur Bench).

Commissioner of Income Tax vs. Satinder Pal Singh 2010 (1) TMI 752 - Punjab and Haryana High Court

DLF United Ltd. vs. Commissioner of Income Tax, 1995 (9) TMI 51 - DELHI High Court - was challenged by revenue , in S.L.P. (Civil) No...CC 1727-­1729/98 and the Hon'ble Apex Court found that there was no merit in the S.L.P. And it was accordingly dismissed on merits.

Un- necessary dispute was raised by revenue:

Vide the Finance Act, 2013 an amendment in section 2(14)(iii) of the Income-tax Act, 1961 was specifically made with effect from 01.04.2014 that is assessment year 2014-15. By this amendment item (b) was substituted to provide for different distances (2, 6 and 8 KM) , aerially measured from any municipal / cantonment limit.

The Circular No.3/2014, dt.24.1.2014 also stated that the amendment will be applicable form AY 2014-15.

However, as usual, tax authorities applied this amendment retrospectively in pending assessments of assessment year up to AY 2013-14, to which the amendment was not at all intended. Particularly so because the amendment was a substantive amendment which could bring many of plots of land within meaning of ‘capital asset’, which were not capital asset’ prior to the amendment.

Many Assessing Officers (AO) applied amendment retrospectively, many CIT(A) also considered it retrospective so assessee had to approach ITAT. IN cases where CIT(A) held amendment prospective, the revenue approached ITAT, though it should not have because in view of Circular No.3/2014, dt.24.1.2014 the amendment was prospective.

Where ITAT held amendment prospective, the revenue should have, in view of Circular No.3/2014, dt.24.1.2014 accepted the decision. However, revenue approached High Court, and Bombay High Court held that the amendment will not be applicable retrospectively.

Court must award costs in favour of assessee:

In such cases, particularly when proceedings have been started by taking a view contrary to Circular of CBDT, and tax payers have to suffer due to litigation, the Courts must be liberal in awarding costs in favour of assessee so that assessee get some reprieve and the tax authorities are also warned, that if they indulge in un-necessary litigation, they must compensate tax payers.

Recent circular- about no appeal, withdraw appeal but silent on other proceedings.

The Board has issued circular, stating that the judgment of Bombay High court has been accepted, therefore, the amendment will be applied from Assessment \year 2014-15 and not to earlier years. The Board has also directed that for earlier years, on this issue, appeal should not be filed, and pending appeals should be withdrawn.

Though circular admit that it is being a settled issue, however, it is restricted to issue of filing of appeals and withdrawal of departmental appeal on this issue.

Circular is silent about assessment and related issues:

The circular is silent about assessment and related issues.

Once the issue is considered as settled, directions should include matters for:

1. Rectification of assessment orders in light of settled legal position- if an addition has been made by the AO, by applying amendment retrospectively, the same should be rectified by AO himself to set at rest mistakes and in any case at least on application of assessee, rectification must be made immediately.
2. To drop any reassessment, revision or rectification proceedings started taking view that the amendment was retrospective.
3. Not making additions and assessment by considering amendment as retrospective,
4. Not restoring to reassessment or revision by treating amendment as retrospective.

The above directions are required to bring in clarity, that for all purposes, amendment is to be applicable from AY 2014-15 and not to earlier years and accordingly remedial measures can be taken so that un-necessary litigation does not take place and assesses are not harassed.

In nut shell, the Circular must clearly state that for all purposes, the issue is settled as to amendment being prospective, therefore, for period up to AY 2013-14 all proceedings taken based on amendment being retrospective, must be dropped/ closed and any action taken by adopting that view must be reversed by way of rectification.

The Circular is reproduced below with highlights added by author for analysis:

Circular - Income Tax

GOVERNMENT OF INDIA

MINISTRY OF FINANCE

DEPARTMENT OF REVENUE

CENTRAL BOARD OF DIRECT TAXES

CIRCULAR NO. 17/2015

New Delhi, Dated October 06, 2015

Subject:- Measurement of the distance for the purpose of section 2(14)(iii)(b) of the Income-tax Act for the period prior to Assessment year 2014-15

"Agricultural Land" is excluded from the definition of capital asset as per section 2(14)(iii) of the Income-tax Act based, inter-alia, on its proximity to a municipality or cantonment board. The method of measuring the distance of the said land from the municipality, has given rise to considerable litigation. Although, the amendment by the Finance Act 2013 w.e.f. 1.04.2014 prescribes the measurement of the distance to be taken aerially, ambiguity persists in respect of earlier periods.

2. The matter has been examined in light of judicial decisions on the subject. The Nagpur Bench of the Hon. Bombay High Court vide order dated 30.03.2015 in ITA 151 of 2013 in the case of Smt. Maltibai R Kadu has held that the amendment prescribing distance to be measured aerially, applies prospectively i.e. in relation to assessment year 2014-15 and subsequent assessment years. For the period prior to assessment year 2014-15, the High Court held that the distance between the municipal limit and the agricultural land is to be measured having regard to the shortest road distance. The said decision of the High Court has been accepted and the aforesaid disputed issue has not been further contested.

3. Being a settled issue, no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this issue before various Courts/ Tribunals may be withdrawn/ not pressed upon. This may be brought to the notice of all concerned.

[F. No. 279/Misc./140/2015-ITJ]

(D S Chaudhry)

CIT (A&J), CBDT,

New Delhi