2022 (6) TMI 328 - AT - Income Tax

Capital gain - Nature of land sold - agricultural land or capital asset u/s 2(14) - HELD THAT - As the land sold by the assessee was classified as agricultural land in the revenue records. The RTC filed by the assessee before us shows that the assessee raised crops of Ragi and Paddy in certain portion and other portion was temporarily kept idle on account of certain difficulties. Being so, the status of the land therefore remained as agricultural land since mandatory condition stipulated in the conversion order is not complied with and on this count, the CIT(Appeals) was not correct in holding that the land which is subject matter of sale is not agricultural land on the reason that the land was converted for non-agricultural purposes. In view of this, the sale of the impugned land is to be treated as exempt from capital gain in terms of section 2(14) r.w. sections 45 48 of the Act. Accordingly, this ground of the assessee is allowed.

Issues Involved:
1. Insufficient opportunity provided before passing the assessment order.
2. Erroneous assessment order and CIT(A)'s order.
3. Incorrect demand raised by the AO.
4. Classification of the property under Section 2(14) of the Act.
5. Use of the property for agricultural purposes.
6. Tax exemption for surplus from the sale of agricultural land.
7. Timing of the transfer post-conversion.
8. Additions made without appreciating the explanations.
9. Initiation of penalty proceedings under Section 271(1)(c).
10. Independence and interrelation of grounds of appeal.

Detailed Analysis:

1. Insufficient Opportunity Provided:
The appellant argued that the AO failed to provide sufficient opportunity before passing the assessment order under Section 143(3) of the Act. This procedural lapse was a significant point of contention, suggesting a violation of natural justice principles.

2. Erroneous Assessment Order and CIT(A)'s Order:
The appellant contended that both the assessment order and the CIT(A)'s order were erroneous in law and facts. The primary argument was that the land in question should not be classified as a capital asset under Section 2(14) of the Act because it was used for agricultural purposes and situated beyond the municipal limits.

3. Incorrect Demand Raised:
The AO raised a demand of Rs. 64,48,890, which the appellant claimed was erroneous. The appellant argued that the demand was based on incorrect assumptions regarding the nature of the land and its usage.

4. Classification of the Property:
The appellant maintained that the property did not fall within the meaning of Section 2(14) of the Act, arguing that it was agricultural land situated beyond 10 km from the nearest municipal limit. The AO, however, classified it as a capital asset because the land was converted for non-agricultural purposes before the sale.

5. Use of the Property for Agricultural Purposes:
The appellant asserted that the land was used for cultivation by family members and was classified as agricultural land in the revenue records. The appellant provided evidence of cultivation and agricultural income, which was declared and accepted by the department without any adverse findings.

6. Tax Exemption for Surplus from Sale:
The appellant argued that the surplus from the sale of agricultural land should be exempt from tax under Section 10(1) of the Act. The AO disagreed, stating that the land was converted for non-agricultural purposes before the sale, making it a capital asset subject to capital gains tax.

7. Timing of the Transfer Post-Conversion:
The appellant highlighted that the transfer was completed within two days of receiving the conversion order, leaving no time for the land to be used for non-agricultural purposes. This argument was used to support the claim that the land should still be considered agricultural.

8. Additions Made Without Appreciating Explanations:
The appellant contended that the AO made additions of Rs. 2,06,25,000 without properly considering the explanations provided. The appellant argued that the land was used for agricultural purposes until the date of transfer and that the conversion was solely to fetch a better price.

9. Initiation of Penalty Proceedings:
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act, arguing that the assessment itself was erroneous and that there was no concealment of income or furnishing of inaccurate particulars.

10. Independence and Interrelation of Grounds of Appeal:
The appellant submitted that each ground of appeal was independent and without prejudice to one another, indicating that the arguments should be considered both individually and collectively.

Tribunal's Findings:

- The Tribunal examined the evidence, including the revenue records and certificates from local authorities, which supported the appellant's claim that the land was used for agricultural purposes.
- The Tribunal referred to several judicial precedents, including decisions by the Karnataka High Court and ITAT Bangalore, which held that land used for agricultural purposes until the date of sale should not be classified as a capital asset, even if it was converted for non-agricultural purposes.
- The Tribunal noted that the land's classification as agricultural in the revenue records and the continued agricultural use until the sale supported the appellant's claim for exemption.
- The Tribunal found that the BMRDA was not a municipality or local authority as per Section 2(14)(iii)(a) of the Act, further supporting the appellant's case.
- The Tribunal directed the AO to delete the addition made under the head 'Capital Gains' on the sale of the agricultural land.

Conclusion:
The Tribunal allowed the appeal, holding that the land sold by the appellant was agricultural land and not a capital asset under Section 2(14) of the Act. Consequently, the surplus from the sale was exempt from capital gains tax, and the additions made by the AO were deleted. The Tribunal also quashed the initiation of penalty proceedings under Section 271(1)(c).

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