2016 (5) TMI 322 - AT - Income Tax

Sale of capital asset within the meaning of section 2(14) - nature of land - sale of agricultural land - Held that - The reliance placed by the Assessing officer on the report of the Inspector of Income Tax to come to the conclusion that the land was not an agricultural land is misplaced. The Inspection was done by the Inspector after the transferee had constructed the building on the land. Even in the report of the Inspector, it is observed that there were some coconut trees on the land. Just because the transferee had not used the land for agricultural purposes, the land does not loose its character of being an agricultural land when the same is sold by the assessee. Moreover, the said inspection was done behind the back of the assessee and the assessee was not given any opportunity to rebut the same. In any case, it is settled law that evidence collected behind the back of the assessee can be used as evidence against the assessee. The nearness of the land to highway also does not alter the character of the land and appreciation in the price of land cannot be seen in isolation and if agricultural operations were carried out by the assessee, the appreciation in the price of land alone would not lead to the conclusion that the land is not an agricultural land. The objection of the Revenue that coconut plantation could not have been carried out on the soil which was present on the said land and the reliance placed on the letter of the Gram. Panchayat Secretary cannot be accepted in view of the clear report of the Village Officer. Thus, in view of the aforesaid, we hold that the land in question cannot be treated as capital asset u/s. 2(14) of the Act and therefore, capital gains cannot be assessed on the sale of the land. - Decided against revenue

Issues Involved:
1. Whether the land sold by the assessee can be treated as a capital asset within the meaning of section 2(14) of the Income Tax Act.
2. Whether the land sold by the assessee was agricultural land and thus exempt from capital gains tax.
3. The evidentiary value of the certificate from the Village Officer and other materials submitted by the assessee.
4. The relevance of the land's proximity to an industrial park and the use of the land by the transferee in determining its nature.

Issue-wise Detailed Analysis:

Issue 1: Whether the land sold by the assessee can be treated as a capital asset within the meaning of section 2(14) of the Income Tax Act.
The primary issue for consideration was whether the land sold by the assessee qualifies as a "capital asset" under section 2(14) of the Income Tax Act. The term "capital asset" excludes agricultural land situated in certain areas. The Tribunal noted that for capital gains to be levied under section 45 of the Act, the asset transferred must be a capital asset. The Tribunal concluded that the land in question did not fall within the exceptions listed under section 2(14)(iii) and thus needed to determine whether it was agricultural land.

Issue 2: Whether the land sold by the assessee was agricultural land and thus exempt from capital gains tax.
The Tribunal examined whether the land was used for agricultural purposes. The assessee argued that the land was used for coconut plantation and other agricultural activities, supported by a certificate from the Village Officer. The Tribunal found no reason to disbelieve the certificate, despite it being issued after the sale. The Tribunal also referenced the ITAT Cochin Bench's decision in the case of M.J. Joseph vs. Dy. CIT, which similarly relied on a Village Officer's certificate to establish agricultural use.

Issue 3: The evidentiary value of the certificate from the Village Officer and other materials submitted by the assessee.
The Tribunal placed significant weight on the certificate from the Village Officer, which stated that the land had been used for coconut plantation and other agricultural activities since 1981. The Tribunal noted that the State Government did not maintain records for cultivation, making the Village Officer's certificate a critical piece of evidence. The Tribunal also considered other materials such as the classification of the land by the State Government as agricultural land and the payment of agricultural taxes.

Issue 4: The relevance of the land's proximity to an industrial park and the use of the land by the transferee in determining its nature.
The Tribunal dismissed the Revenue's argument that the land's proximity to an industrial park and the subsequent commercial use by the transferee altered its agricultural nature. The Tribunal emphasized that the land's character as agricultural land should be determined based on its use at the time of sale, not its potential for future development or the transferee's use. The Tribunal also noted that the inspection by the Income Tax Inspector was conducted after the transferee had constructed buildings on the land, and thus, did not reflect the land's status at the time of sale.

Conclusion:
The Tribunal concluded that the land sold by the assessee was indeed agricultural land and not a capital asset within the meaning of section 2(14) of the Income Tax Act. Consequently, the sale was not liable for capital gains tax. The appeal by the Revenue was dismissed, and the order of the Ld. CIT(A) was upheld.

Final Judgment:
The appeal of the Revenue in I.T.A. No.456/Coch/2015 was dismissed, and it was held that the land in question cannot be treated as a capital asset under section 2(14) of the Act, thereby exempting it from capital gains tax.

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