2017 (4) TMI 190 - HC - Income Tax

Nature of land - whether the Tribunal was justified in holding that 80% of the land is not an agricultural land and liable to capital gains tax? - Held that - The finding of facts so recored by the Tribunal itself confirms the position that the case of the assessees fall within the ambit of definition of agriculture as defined under the Code. The property requires to be treated as agricultural land and its activities are agricultural in nature. We are inclined to observe that the property in question cannot be treated as Capital Asset as contemplated under Section 2(14) (iii) of the Act. It is wrong to hold, in view of the facts and circumstances and the nature of agricultural land because of peculiar situation of the land near the sea side or stony side of the sea, that assessees are not doing any regular agriculture operation, this is also on the ground that they never shown agriculture income out of it. Any agriculture produce and products can be for personal use also. Therefore, taking overall view of the matter including the reports placed on record, which supports the case of the assessee and for the reasons so recorded above, we are inclined to allow these appeals.

Issues Involved:
1. Validity of initiation of reassessment proceedings under Section 147 read with Section 148 of the Income Tax Act.
2. Determination of whether the land in question qualifies as "agricultural land" under Section 2(14) of the Income Tax Act and is thus exempt from capital gains tax.
3. The correctness of the findings of the Income Tax Appellate Tribunal (ITAT) regarding the nature and use of the land.
4. The applicability of penalties under Section 271(1)(c) of the Income Tax Act for filing inaccurate particulars of income.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Reassessment Proceedings:
The appellants were served with a notice under Section 148 of the Income Tax Act, indicating that income had escaped assessment. The appellants responded by treating their original returns as compliant with the notice and requested the reasons for reopening the case. The Assessing Officer (AO) provided the reasons, and the appellants filed objections, which were subsequently rejected. The AO then passed an order denying the exemption on gains from the sale of agricultural land. The Commissioner of Income Tax (Appeals) [CIT(A)] did not address the jurisdictional ground on the validity of the reassessment proceedings but held the land as agricultural on merits. The ITAT upheld the validity of the reassessment proceedings, leading to the current appeals.

2. Determination of Agricultural Land:
The appellants argued that the land sold was agricultural and thus exempt from capital gains tax under Section 2(14) of the Income Tax Act. The CIT(A) supported this view, referencing the Bombay High Court judgments in CIT vs. Smt. Debbie Alemao and CIT vs. Minguel Chandra Pais, which held that land classified as agricultural in revenue records and used for agricultural purposes could not be subjected to capital gains tax. The ITAT, however, concluded that only a portion of the land was used for agricultural purposes based on an inspection report and held that the remaining land was not agricultural.

3. Findings of the ITAT:
The ITAT's inspection report noted the presence of various trees and concluded that approximately 20% of the land was used for agricultural purposes, while the remaining 80% was not. This finding was challenged as it did not consider the local laws and definitions under the Goa, Daman, and Diu Land Revenue Code, 1968, which broadly defines "agriculture" to include various activities like horticulture, dairy farming, and grazing. The High Court emphasized that the land should be treated as agricultural based on its historical use, classification in revenue records, and the inclusive definition under the local code.

4. Applicability of Penalties:
The AO had initiated penalty proceedings under Section 271(1)(c) for filing inaccurate particulars of income. The High Court found that the Department's approach was unsustainable as the land was indeed agricultural, and the appellants' claims were consistent with the local definitions and historical use of the land. Therefore, the demand and penalties imposed were quashed.

Conclusion:
The High Court allowed the appeals, holding that the land in question was agricultural and exempt from capital gains tax. The reassessment proceedings were deemed invalid, and the penalties were set aside. The judgment emphasized the need to respect local definitions and historical use of the land when determining its nature for tax purposes. The appeals were allowed with no costs, and the issue was answered in favor of the assessee.

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