2023 (3) TMI 1238 - AT - Income Tax

Eligibility of exemption u/s 2(14)(iii) - addition made in respect of Capital Gains earned on rural agriculture land - assessee contended that the land qualifies as agricultural land and assessee is eligible to claim exemption section 2(14)(iii) as the said land is a rural agriculture land and relevant documents like the sale deed, purchase deed, 7/12 extract, copy of certificate from Soyala Gram Panchayat stating that the population is below 10000 and distance from Ahmadabad Municipal Corporation is more than 8 km were submitted before the AO for his consideration - HELD THAT - In light of the facts of the instant case that the land had been shown as agricultural land in Revenue records, there was no application made for conversion of aforesaid agricultural land to non-agricultural land, the agriculture land under consideration was situated beyond 8 km from the municipal limits and further in light of the judicial precedents reproduced above, we are of the considered view that Ld. CIT(A) has not erred in facts and in law in holding that the assessee was eligible for claim of deduction u/s 2(14)(iii) of the Act on sale of aforesaid agricultural land. Disallowance of interest expense - AO observed that while these interest expenses were for the period March 2011 but the land in question was already sold on 10-01-2011. Therefore, these interest expenses are not related to the above land transaction - CIT(A) allowed the appeal of the assessee on the ground that the AO erred in facts in holding that the interest expenditure was paid after the date on which the aforesaid land was sold - HELD THAT - CIT(A) on appreciation of the facts of the case has observed that the assessee has been able to establish the nexus between interest paid on borrowed fund and the sale of land and accordingly the assessee in the instant set of facts was justified in claiming interest expenditure as interest paid on the purchase of said land against sale of land at Soyala Gam. CIT(A) on going through the relevant records has also satisfied itself that no portion of interest expenses were incurred after the date of sale of the aforesaid property. Accordingly, we do not find any infirmity in the order of Ld. CIT(A) so as to call for any interference. Appeal of the Department is dismissed.

Summary

Issues Involved:
1. Eligibility of exemption under section 2(14)(iii) of the Act for agricultural land.
2. Disallowance of interest expense of Rs. 47,72,054/-.

Summary:

Issue 1: Eligibility of exemption under section 2(14)(iii) of the Act:

The Department challenged the CIT(A)'s decision to treat the impugned land as agricultural land eligible for exemption under section 2(14)(iii) of the Act. The Assessing Officer (AO) had disallowed the exemption, arguing that no agricultural activity was carried out on the land, and thus it could not be classified as agricultural land. The CIT(A) allowed the exemption, noting that the land was beyond 8 km from the municipal limits, treated as a fixed asset in the books, and identified as agricultural land in revenue records. The Tribunal upheld the CIT(A)'s decision, stating that the land met the criteria of section 2(14)(iii) and was not a capital asset. The Tribunal cited several judicial precedents supporting the classification of the land as agricultural and exempt from capital gains tax.

Issue 2: Disallowance of interest expense of Rs. 47,72,054/-:

The Department also contested the CIT(A)'s decision to delete the disallowance of interest expenses. The AO had disallowed the interest expense, arguing that the interest payments were made after the land was sold and were not related to the land transaction. The CIT(A) found that only a portion of the interest expense (Rs. 9,70,718/-) was related to the period before the sale and was correctly claimed by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had established the nexus between the interest paid on borrowed funds and the sale of land, and no portion of the interest expenses was incurred after the sale date.

Conclusion:

The Tribunal dismissed the Department's appeal on both grounds and upheld the CIT(A)'s order allowing the exemption under section 2(14)(iii) and the interest expense claim. The cross-objection filed by the assessee was also dismissed as it primarily supported the CIT(A)'s observations.