2015 (7) TMI 104 - AT - Income Tax

Sale of agricultural land - distance of the agricultural land from the municipal limits of city - whether agricultural land in question is not a capital asset as per Section 2(14)(iii)(a) and (b) and surplus arising on sale of the same is not liable to tax - CIT(A) objected to assess the surplus amount on sale of agricultural land as business income - Held that - Distance of 8 kms. has to be measured through approach road and not by straight line distance on horizontal plane or crow s flight. Hence, this issue is decided in favour of the assessees. See CIT Vs. Satinder Pal Singh 2010 (1) TMI 752 - Punjab and Haryana High Court The land in question was shown as agricultural land in the revenue record. Whether there was any agricultural income or not, is not the moot question to decide the issue, however, the important factor is to be decided as to whether the character of the land is agriculture or not. Undisputedly, in the revenue record and as per the Patwari certificate, the land in question is agricultural land. Therefore, the sale consideration was not taxable on the sale of said land i.e. either on account of capital gain or on account of business income. Any consideration received out of sale of agricultural land, cannot be treated as business income for the purpose of capital gain or for the purpose of business income, whatever the case may be.- Decided in favour of assessee.

Issues Involved:
1. Classification of agricultural land as a capital asset under Section 2(14) of the Income Tax Act.
2. Measurement of distance from municipal limits for determining the nature of land.
3. Taxability of surplus from the sale of agricultural land as business income.

Detailed Analysis:

1. Classification of Agricultural Land as a Capital Asset:
The primary issue was whether the agricultural land sold by the assessees qualifies as a "capital asset" under Section 2(14) of the Income Tax Act. The assessees argued that the land in question was agricultural and not a capital asset, thus exempt from capital gains tax. They supported their claim with a certificate from the Patwari, stating that the land was beyond 8 km from the municipal limits. The Assessing Officer (AO) rejected this claim, arguing that the land was within 8 km of the municipal limits when measured as the crow flies, thus classifying it as a capital asset and subjecting it to tax.

2. Measurement of Distance from Municipal Limits:
The method of measuring the distance from municipal limits was a significant contention. The assessees contended that the distance should be measured by the approach road, while the AO and CIT(A) measured it as the crow flies. The CIT(A) supported the AO's method, citing that the legislative intent was to include lands with potential for urbanization and industrialization within the ambit of "capital assets." The CIT(A) relied on the Director of Town Planning's certificate, which measured the distance as the crow flies, confirming the land was within 1.30 km and 1.1 km from the municipal limits.

3. Taxability of Surplus as Business Income:
The CIT(A) also held that the surplus from the sale of the land should be treated as business income, as the land was sold to a builder, indicating a business transaction rather than a capital transaction. This was contested by the assessees, who argued that the land was agricultural and thus any surplus from its sale should not be treated as business income.

Tribunal's Findings:

Measurement of Distance:
The Tribunal referred to the Hon'ble Punjab and Haryana High Court's decision in the case of Satinder Pal Singh, which held that the distance should be measured by the approach road and not as the crow flies. This decision was consistently followed by various benches of the Tribunal across the country. The Tribunal found that the CIT(A)'s reliance on the crow flight method was incorrect and that the distance should be measured by the approach road, thereby supporting the assessees' claim that the land was beyond 8 km from the municipal limits.

Classification of Land:
The Tribunal concluded that the land in question was agricultural and not a capital asset, as it was situated beyond 8 km from the municipal limits when measured by the approach road. This conclusion was supported by the Patwari's certificate and the revenue records showing the land as agricultural.

Taxability of Surplus:
Since the land was classified as agricultural and not a capital asset, the Tribunal held that any surplus from its sale could not be taxed as business income. The Tribunal cited the Hon'ble Bombay High Court's decision in CIT Vs. Smt. Debbie Alemao, which held that land shown as agricultural in revenue records and not used for non-agricultural purposes should be treated as agricultural land, exempting the sale proceeds from capital gains tax.

Conclusion:
The Tribunal allowed the appeals of the assessees, holding that:
1. The land in question was agricultural and not a capital asset under Section 2(14) of the Income Tax Act.
2. The distance from the municipal limits should be measured by the approach road.
3. The surplus from the sale of the agricultural land should not be treated as business income.

The Tribunal directed the AO to allow consequential relief to the assessees regarding the charging of interest, which was deemed consequential in nature. The appeals were pronounced in favor of the assessees.

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