2014 (9) TMI 3 - HC - Income Tax

Nature of land sold Agricultural or not Invocation of section 50C Exemption of LTCG - Whether the lands sold by the assessees are agricultural lands and whether they are entitled to the benefit of exemption from capital gains tax Held that - The lands are classified as agricultural lands in the revenue records and they are dry lands - the assessees have qualified under clause 11(1) since as per the adangal records, these lands were classified as agricultural lands and the assessees have also paid revenue kist, namely, revenue payment - the Tribunal has misconstrued the judgment of the Commissioner Of Income-Tax, Gujarat-II Versus Siddharth J. Desai 1981 (9) TMI 48 - GUJARAT High Court that all conditions should be satisfied, which is not a correct interpretation - once the Tribunal has accepted that the classification of lands as per the reveue records are agricultural lands, which are evidenced by the adangal and the letter of the Tahsildar and satisfies other conditions of Section 2(14) of the Income Tax Act, the Tribunal has misdirected itself. The plea of the Revenue that there was no agricultural operations prior to the date of sale is of no avail as the definition u/s 2(14) of the Income Tax Act has the answer to a plea raised - the lands are agricultural lands classified as dry lands, for which kist has been paid relying upon Commissioner of Income-tax V. Raja Benoy Kumar Sahas Roy 1957 (5) TMI 6 - SUPREME Court) - There was authority for the proposition that the expression agricultural land mentioned in Entry 21 of List II of the Seventh Schedule to the Government of India Act, 1935, should be interpreted in its wider significance as including lands which are used or are capable of being used for raising any valuable plants or trees or for any other purpose of husbandry - the Tribunal was not justified in rejecting the exemption Decided in favour of Assessee.

Issues Involved:

1. Classification of lands as agricultural lands.
2. Violation of principles of natural justice by the Assessing Officer.
3. Entitlement to exemption from capital gains tax under Section 2(14) of the Income Tax Act.
4. Application of tests laid down in CIT v. Siddharth J. Desai.

Detailed Analysis:

1. Classification of Lands as Agricultural Lands:

The appellants, mother and daughter, sold their agricultural lands and claimed exemption from tax on capital gains, asserting that the lands were agricultural. The Assessing Officer rejected their claim, stating that no evidence was provided to support the agricultural nature of the lands. An Inspector's report indicated that the lands were dry and no agricultural activities were observed. However, the Commissioner of Income Tax (Appeals) found that the lands were classified as agricultural in the revenue records and were certified by the Tahsildar as having casuarina crops, thus qualifying as agricultural lands. The Tribunal, however, disagreed, stating that the appellants could not prove the lands were used for agricultural purposes, and thus, denied the exemption.

2. Violation of Principles of Natural Justice by the Assessing Officer:

The appellants argued that the Assessing Officer violated principles of natural justice by not furnishing the Inspector's report and the Tahsildar's report to them before the assessment, thereby denying them an opportunity to rebut the findings. Additionally, the appellants were not given an opportunity to refer the matter under Section 50C of the Income Tax Act. This procedural lapse was highlighted as a significant issue.

3. Entitlement to Exemption from Capital Gains Tax under Section 2(14) of the Income Tax Act:

The primary legal question was whether the lands sold by the appellants were agricultural lands and thus exempt from capital gains tax under Section 2(14) of the Income Tax Act. The High Court observed that the lands were classified as agricultural in the revenue records and were situated outside the specified limits of any municipality or cantonment, thus satisfying the conditions for exemption under Section 2(14).

4. Application of Tests Laid Down in CIT v. Siddharth J. Desai:

The Tribunal relied on the decision in CIT v. Siddharth J. Desai, which laid down various tests to determine the agricultural nature of lands. The Tribunal concluded that the appellants did not satisfy most of these tests. However, the High Court noted that not all factors need to be present in a case for the land to qualify as agricultural. The High Court emphasized that the classification in revenue records and payment of land revenue were sufficient to consider the lands as agricultural, thereby misinterpreting the Gujarat High Court's decision.

Conclusion:

The High Court concluded that the Tribunal misdirected itself by requiring all conditions from the Siddharth J. Desai case to be satisfied. The High Court found that the lands were classified as agricultural in the revenue records and the appellants had paid land revenue, thus qualifying for the exemption under Section 2(14) of the Income Tax Act. The High Court set aside the Tribunal's order and allowed the appeals, granting the exemption from capital gains tax to the appellants. The procedural lapses by the Assessing Officer were also noted, reinforcing the appellants' entitlement to natural justice.

Final Order:

(i) The Tribunal was not justified in rejecting the exemption, and the questions of law were answered in favor of the appellants.
(ii) The Tribunal's order dated 11.4.2013 was set aside.
(iii) Both Tax Case (Appeals) were allowed, and no costs were imposed. Consequently, connected Miscellaneous Petitions were closed.

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